Updated: May 3, 2013 12:14PM
Originally published: October 9, 2006
The Securities and Exchange Commission is creating a new financial “language” that is designed to provide individual investors with an advantage previously available only to securities analysts and huge firms. Coming soon: All corporations will report their financial information in a format called XBRL. You don’t have to understand the technology to reap the benefits.
This new reporting format will make all data interactive. That means anyone can go online and easily find and make comparisons of all the data that’s been filed -- including financial reports, footnotes and management’s discussion of the company’s prospects.
I got a close-up view of the potential benefits for investors when I was asked to moderate a panel at SEC headquarters in Washington, D.C. last week. The project is being accelerated by SEC Chairman Christopher Cox, who says, “We are on a campaign to liberate business and financial information that is now filed at the SEC, but is currently trapped inside dense documents.”
Updating EdgarThe SEC currently makes its required company filing data available on its Web site, www.SEC.gov. The database for all that information is called Edgar, an acronym established about 20 years ago when filings such as 10K reports and quarterly 10Q reports first went online. But except for securities analysts, few individuals would dare wade through all the posted material.
Soon that old database will be replaced by the new XBRL system, where every piece of information will be tagged to create an easily searchable database. Numbers such as for “net income,” “operating income” and “current liabilities” will pop up on request -- for one company or for many companies. Interactive data will be used globally, and is already being tested and used from Shanghai to Spain.
The first step was to create a dictionary or taxonomy of the terms that will be used. The SEC has announced new funding for the consortium that is building this dictionary to get the project finished in the coming months. The process involves creating standard categories, which are based on Generally Accepted Accounting Principles, but also are flexible enough to include different statistics reported by manufacturing or financial companies.
About a dozen companies are already filing their required reports in XBRL, as well as the traditional formats. They include big names such as General Electric, Ford, Dow Chemical, R.R. Donnelley & Sons, Xerox and PepsiCo.
PepsiCo CEO Indra Nooyi told the SEC audience -- a group of accountants, lawyers, technology developers and corporate officers -- that PepsiCo volunteered for the test group because the company is “fanatic for accurate, timely, transparent and effective financial reporting.” She also noted that the process has been “intuitive, painless and inexpensive,” costing only an extra $5,000 to do the XBRL coding in the first year, and only a few hundred dollars in the most recent quarter.
Once the dictionary of terms is completed in coming months, the SEC is expected to require all companies to report in this new searchable format. When that time arrives, the traditional forms that companies use to submit their information may be greatly simplified, and repetition eliminated. People searching for information won’t need to know which form was used to report it.
Special readers requiredBecause of the special coding format of the new language, users will require special reader software. The SEC will have two of those readers on its site for downloading. Panelists demonstrated some of the uses of the new technology, which is based on an open software standard format, meaning that companies that want to make and market software for analyzing XBRL data don’t have to pay anyone a royalty.
In the history of the securities industry there have been some watershed events. The Securities Exchange Act of 1934 created the SEC, and reporting requirements. “May Day” in 1976 deregulated commissions and changed the brokerage business. The switch to decimals in 2001 narrowed spreads and enhanced the incentive to use electronic trading. And the new XBRL interactive data era will be another one of those dramatic, landscape-changing events for the securities industry and investors. That’s The Savage Truth.
Terry Savage is a registered investment adviser.