SEC Ponders: Is XBRL At Tipping Point

After seven years of fits and starts, the EXtensible Business Reporting Markup Language (XBRL) software code being developed by an accounting profession-led group, is raising the question of whether its has finally reached the “tipping point” of necessary market acceptance, according to the Securities and Exchange Commission’s (SEC’s) Chief Information Officer Corey Booth.

The SEC, which would clearly like to see XBRL become the standard reporting format for public companies, is grappling to determine if the programming code can ever make it over the tipping point and reach the critical mass of acceptance necessary to mandate its use. It laid the groundwork for wider acceptance last week when it cited the potential to implement XBRL into its Electronic Data Gathering, Analysis, and Retrieval system in the final version of its request for proposals (RFP) for new management of that so-called EDGAR database.

However, the RFP stops short of requiring the new manager to immediately implement XBRL because the SEC has not mandated companies to report in that format and it cannot consider such a mandate until XBRL passes the tipping point to reach acceptance by public companies. The SEC expects, by mid-summer, to replace an EDGAR management contract held over the past eight years by Northrup Grumman Corp.

“The question we (the SEC) and the XBRL community keep asking is how close are we to the tipping point. The fact that XBRL means you can use tagged and immediately accessible data to fill in the blanks in structured forms makes it appear XBRL is ready for prime time and ready for (wide) adoption,” Booth said.

XBRL- for several years hailed as the revolutionary next step for financial reporting – is the business report version of EXtensible Markup Language (XML) which codes individual items within documents so that they can be immediately accessed. XBRL makes it easier for reporting companies because data tagged for one report can be automatically retrieved and inputted into other documents, and it allows investors, analysts and regulators to instantaneously locate, collate and review the report data they require.

What may be an indication that XBRL has momentum to get over the hump comes from the banking industry, where a consortium of regulators, led by the Federal Deposit Insurance Corp. (FDIC), last October began requiring banks to use XBRL in filing their periodic call reports and other financial statements into a national repository.

XBRL has been under development since 1998 when the American Institute of CPAs pulled together a group of software, financial reporting and investment companies to pioneer the effort. The consortium has since evolved into a worldwide development effort known as XBRL international.

The clearest indication that XBRL is not about to go over the tipping point anytime soon for the general business community is the lack of public company buy-in. Only nine companies are reporting with XBRL-tagged reports even though the SEC a year ago began allowing companies to voluntarily use XBRL.

Booth noted the biggest hurdle to use may be the fact that XBRL is not a “one-click” operation. It takes several steps and layers of decision-making and there may not be enough demand for most companies to justify the move.

He also said that XBRL must overcome several technology hurdles. Most notably, he said that, while XBRL tags have been developed for all of the standard items on business reports, the technology does not naturally allow filers to report specially created items, such as a reserve for a specific and arcane type of liability.

“GAAP (Generally Accepted Accounting Principles) and the SEC both allow flexibility in reporting. We have to make sure that XBRL can offer that report flexibility and still have all the needed transparency (ability for users to instantaneously access specific data),” Booth said.

XBRL technology provides “extensions” that allow report preparers to list special items, but, according to Booth, technology has to be added to ensure that users can seamlessly access and decipher that extension data.

Widespread acceptance meanwhile is necessary for the SEC to consider mandating XBRL-based reporting. As Booth has noted, "For a mandatory program, we would need to feel there was critical mass, that it was going to be able to be done at acceptable cost and acceptable levels of effort, and that there is an acceptable body of knowledge and subject matter expertise out there that people could do that relatively easily,"

The Sarbanes-Oxley accounting reform law may contribute to the SEC’s fondness of XBRL because its section 408 requires the agency to increase its frequency of reviewing certain financial reports. Booth said the SEC has been meeting the 408 requirement without XBRL, but noted that the rule is “also about doing the reviews more efficiently and we see XBRL and other tagged data as ways to do it more efficiently in the future."

Meanwhile, the SEC has launched several information gathering initiatives. It is currently culling input from a Request for Information in which several technology companies that focused on XBRL late last year shared their ideas on what’s needed for widespread acceptance. On Jan. 11, the SEC launched a new program in which it’s offering incentives to companies who use XBRL to report and then inform commission staff about their experiences.

Booth is hopeful the banking industry’s XBRL initiative could spur some wider spread acceptance among all companies. Mike Bartell, chief information officer at the FDIC late last year boasted, “XBRL isn't just a good idea on paper; it is real and it works. Too much critical information today is buried or obscured by the massive volume of data that we all create and process. The longer it takes us to manage that data, the less responsive we are to the needs of industry and the public.”

In other signs of XBRL momentum last year, The Institute of Management Accountants (IMA) announced its support of widespread adoption of the technology , and France and the United Arab Emeritus joined a growing list of foreign countries with their own XBRL development initiatives.

By opening the door to implement XBRL into EDGAR, the SEC could give the technology even wider notoriety. EDGAR is the repository for approximately 700,000 filings submitted annually by public companies, corporate securities traders and investment companies.

“EDGAR and the disclosure program will continue to require significant levels of enhancement, continued modernization, and architectural redesign over the coming years, and this contract will provide support for these types of tasks,” says the RFP. The document further says modernization may be needed for reasons that include the “conversion of an increasing amount of filed information to structured, interactive formats, building on the XML and XBRL-based filing regimes already in place."

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