XBRL on the Inside?

In the middle of this month a new SEC rule will go into effect, allowing companies to voluntarily submit EDGAR filings in XBRL (eXtensible Business Reporting Language).  As the rule explains, the SEC is interested in “allowing registrants, the Commission and others to test and evaluate tagging technology.”

In a press release on the topic early last month, SEC Chairman William H. Donaldson said that “this initiative is part of the Commission’s broader effort to improve the quality of information available to investors and the marketplace. By working to enhance the Commission’s filing and disclosure process through the use of new data formats, including tagged data, the Commission can improve how content is organized and analyzed.”

What This Might Mean

The interesting thing about sending out financial reports tagged with XBRL is that you can analyze the reports automatically.  Rather than manually picking through the numbers, you can use software to compute values and ratios for things such as working capital, free cash flow, asset utilization, and so on.  You could then automate comparisons between companies, or could load data into spreadsheets for more detailed analysis.  Widespread use of XBRL could transform the financial marketplace, bringing new transparency.  An analogy might help bring the impact of all this into focus …

It used to be that, if you were buying something sold through specialized retailers … say, a really good camera or a high-end audio system … you did your product research by visiting lots of stores and reading lots of magazines.  It was even more difficult to get a transparent view into the pricing of such products.  All that changed with the advent of the Internet. On the Internet, buyers had access to professional reviews, discussions and evaluations by consumers who owned the products, and could find broadly available pricing information. Shopping “Bots” even automated the pricing comparisons. The result has been the emergence of a more competitive, more transparent marketplace.  XBRL has the potential to bring some of the same changes to the securities market.

Further, as Amey Stone suggested in a BusinessWeek article titled
“After Sarbanes-Oxley, XBRL?” the SEC’s interest in XBRL could make such possibilities more than theoretical.  She suggested that, “like many SEC voluntary programs, it’s likely to become mandatory if it’s successful.”

What’s In This for Public Companies?

All of this leaves open the question of why senior management should want to support this, short of someday finding that it turns into a requirement. Does XBRL do any good for the companies that use it?

It seems to me that the answer to that question depends on where the XBRL is being used.  Here is a diagram taken from the XBRL International website.  It shows that there are a number of very different ways to use XBRL:

The two kinds of applications on the right of this diagram are what the SEC is talking about. For these applications, it does appear that the benefit of XBRL is primarily for external users of financial information.  But, if XBRL were also used in the kinds of applications on the left side of this picture–aiding in the preparation of internal financial reports and in the translation from internal to external reports–there could be very substantial benefits from XBRL adoption.  I could also see applications to compliance and internal control initiatives.

Are any readers engaged in XBRL applications that would fall on in the left half of this diagram?  Is anyone thinking about it?  Does this seem like a good idea?  Send an e-mail or post some comments …