VideoTim Reason, CFO.com | US
April 27, 2006
- Taxonomy Extension Issue is Key [Part 3]
Every large, successful XBRL implementation that I know of in the world (including the FDIC call reports) uses non-customizable, fixed taxonomies, but being later to the game than the rest of the world could enable the SEC to make better use of XBRL specification capabilities and the market development of customizable industrial taxonomies so that the SEC and US companies do not need to be so tightly restricted. There is now a solution that bridges the gap between structure and customizability to meet all participant needs, it is just waiting for the SEC to pick it up. They know about it, but they need more input from investors and analysts (rather than just the accountants and technologists who developed XBRL) in order to fully understand and recognize their needs.
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What to do? Please get involved and let the SEC know that you, as a financial officer or financial analyst, respectively, do not want a fixed, non-customizable taxonomy or unrestricted corporate modifications. CFOs should note that since the current, unrestricted company extension, voluntary reporting program is not working, there is a chance that the SEC develops its own fixed taxonomy which would give much less flexibility to companies than a customizable industrial taxonomy solution. And the underlying calculation structure of a customizable industrial taxonomy solution should not be feared, but embraced, by CFOs as your investors and analysts will appreciate and reward the transparency with a lower risk premium for your securities. Please, do NOT make the jump to assuming that an underlying calculation structure for the main body of the financial statements means a ?standard chart of accounts? presentation or more disclosure requirements.
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Recent comments by political leaders such as Financial Services Committee Chair Rep. Baker, SEC Chairman Cox, and even Newt Gingrich suggest that they do not fully understand that XBRL will not allow for the automated and comparable analysis they speak of unless the SEC adopts much more structured taxonomies and implementation rules than are in use for the trial program. Chairman Cox and the SEC staff are trying very hard to do the right thing by CFOs, investors and financial analysts here, but there are not enough CFOs, investors and professional analysts providing the kind of input they need to design a successful implementation. To their credit, the SEC realizes this and has set up a series of Investor and Analyst Roundtables to solicit input from this community and is asking for even more feedback from any interested party via e-mail and web site. Please let them know that you support a "customizable industrial taxonomy" implementation by sending an e-mail to rule-comments@sec.gov and include the File Number 4-515 on the subject line.
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Interested parties can also join the nyssa-xbrl@yahoogroups.com financial community user?s group set up by the New York Society of Security Analyst's Improved Corporate Reporting Committee to investigate and comment on XBRL issues.
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Eric P. Linder, CFA
President, SavaNet, www.savanet.netPosted by Eric Linder | Apr 28, 2006 6:25 PM ET
- Taxonomy Extension Issue is Key [Part 2]
3) GAAP accounting rules and the presentation of GAAP-compliant financial statements are two different things. Yes, there are some GAAP rules that require the disclosure of groups of certain items that approach presentation requirements, but these are more prominent in more recent GAAP rules, such as those relating to stock options and post-employment benefits, and they are largely absent for the main body of financial statements-- this is where the SEC?s Regulation S-X presentation requirements kick in. While not a hard and fast line, for the main statements, you can generally think of the FASB GAAP rules as the principals which guide the calculation of revenue and expenses and assets and liabilities while Regulation S-X guides the presentation of such items in financial statement reports to the SEC. As an aside: the FASB has been working on a ?Financial Performance Reporting? project that might address some statement presentation issues such as defining operating and non-operating income (much like the cash flow statement) but this project has been going on for many years without much progress and it remains to be seen what it could result in.
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4) Taxonomy Development: As an active participant in the XBRL-US Domain committee which is developing the us-gaap taxonomies, I can fill people in on what is going on here. First of all, a tremendous amount of work has been done and there are now enough industrial taxonomies released to cover nearly all (90%?) of the public companies. The problem is that these taxonomies are incomplete and need to be further extended to include many more items (particularly in notes) and need to be better structured to account for the various levels of detail disclosure and groupings used by different companies. I can confirm that this editing process is very slow going, partly due to the extremely detailed nature of the work but mostly due to the fact that there are too few experienced people working on them and only part-time. The SEC and the FASB, who until now have mainly only provided comments, edits and references for taxonomy releases, have both been asked to contribute at least 2 experienced full-time people or money to the project by the XBRL-US steering committee but both have failed to respond to the call [so far, as I know of]. Now think about this: the whole country is being held up on this because these two organizations cannot come up with 4 people between them. There is talk, most notably from the AICPA, about handing taxonomy development over to the FASB or SEC, but the fact of the matter is that more resources are required and the same people should be working on them no matter what organization takes lead responsibility. The best solution is a new joint SEC-FASB-XBRL US group because if the FASB takes sole responsibility we will be waiting years because they are not known for their speed and XBRL taxonomies are a much bigger bear to tackle than their other slow-going projects. And since Chairman Cox has famously said he is thinking ?months, not years?, it would be much faster, and likely, for the SEC step up its role and also get more directly involved in taxonomy development.
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SavaNet is a strong supporter of the SEC and their leading role in supporting the XBRL standard is exceptional for a government agency. They are making all efforts to solicit input from and investor and analyst community, and SavaNet is working with them to develop and XBRL taxonomy implementation method that meets all participant requirements, but they need more input from our financial user community. One may quibble with them for, after a year of a trial program during which the issues had become evident, they chose to expend their efforts to encourage more filings to the same program rather than addresses the reasons for lack up uptake, but since they had been such a leader up until that point, it is hard to complain about this small setback in the implementation timetable.Posted by Eric Linder | Apr 28, 2006 6:22 PM ET
- Taxonomy Extension Issue is Key [Part 1]
It is great to see the critical key issue of how XBRL taxonomies are extended brought to light in this article by Tim Reason. XBRL is an extremely flexible architecture which can address many reporting issues at once, but this flexibility also means that XBRL taxonomy design and selected implementation method will be the crucial differences between the SEC reporting program being a once-in-a-lifetime breakthrough in reporting for investors and analysts with major knock on cost savings for the economy or just another government program with limited additional benefit to investors and the professional financial community. ?
For those who would like a review of these XBRL issues and the proposed solution of ?customizable industrial taxonomies? that meet the needs of investors, analysts, companies and the SEC, go to the AAO weblog at: http://www.accountingobserver.com/blog/2006/04/xbrl-information/ but here are a few important points in this article to clarify: ?
1) A successful SEC XBRL implementation does require a ?standard chart of accounts?, especially as one would perceive this term in a paper-based world. The flexibility and extensibility of the XBRL specification and detail of XBRL taxonomies puts many new arrows into the quiver to address the previously irreconcilable needs of investors and analysts to get information structured for detailed automatic and comparable analysis and of companies to present their financials results as they see best. It is just a question as to how these additional new capabilities are put to use. A ?customizable industrial taxonomy? solution (as opposed to the current SEC unrestricted company extension solution) makes use of XBRL presentation and label over-write capability in conjunction with well structured, hyper-detailed, industrial taxonomies with pre-categorized extensions to achieve both these needs. In short, there are so many items to choose from (including ?extensions?) which can be moved around with added custom labels and formatting that a company?s financial statements can appear almost identical to how they are presented today while still adhering to an ?invisible? fixed calculation metadata structure that is absolutely essential for automated and comparable analysis. And companies can still add extension item taxonomies for elements that fall outside the calculation relationships of the main body of the financial statements. ?
2) The use of a structured customizable industrial taxonomy does not require new disclosure regulation. A customizable industrial taxonomy solution can be successfully implemented without ANY changes to GAAP rules or SEC reporting regulations, BUT there are a few places in financial statements where the presentation options of SEC Regulation S-X (which was written decades ago for paper-based reporting) offer not completely reconcilable presentation options that should be addressed in the transition from paper-based to electronic reporting. It is not a matter of requiring more disclosure items, just tightening up the presentation guidelines of Regulation S-X as to how these items can be grouped together and whether they appear in notes or in the main statements. As a former senior Wall Street equity analyst, I had been oblivious to the fact that the format of the financial statements I received from companies was actually much more a result of SEC Regulation S-X than any GAAP rule, so I encourage any interested parties to read SEC Regulation S-X (Article 5). Yes, anything in Regulation S-X is a regulation, but even if it is edited to update from paper-based to electronic-based reporting (such as striking out the recurring phrase ?or in a note to the financial statements? which was likely due to paper size constraints) this is not ?new? regulation.Posted by Eric Linder | Apr 28, 2006 6:13 PM ET
