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Archive for August, 2008

The SEC’s IDEA: What to do…

August 29, 2008 17:25 by

So far, I’ve attempted to suggest that the SEC’s new IDEA system will be the logical continuation of disclosure-based regulation, taking into account the capabilities of rather more modern technology than the "paper under glass" arrangements that today’s EDGAR system (and the majority of other disclosure systems in use around the world) utilise ie: ASCII, HTML and PDF. It’s logical, but disruptive in a slow and steady kind of way. Yesterday, we went through some trends that follow from the IDEA platform, including the inevitable pressure, market as well as regulatory based, for additional markup; the way that markup will probably find its way onto web sites; the possibilities that a SOA platform like the IDEA one provides for new applications, public and private; and the importance of XBRL extensions.

So what? Well, here are a few suggestions for preparers, as well as for consumers of various sorts.

Issuers and Preparers

It will take time for the SEC’s new approach to take hold. File all of this as "Important, but not yet Urgent".

  1. Make tagging a robust process

    If you are thinking, today, in terms of tagging the financials and hoping that no-one much will look at them in that format, think again. There will be more and more requirements to tag corporate performance information. This means that companies should be talking with their BI and performance reporting vendors, to work out how they can incorporate the process of tagging into the close and into the normal reporting processes. You’ll quickly discover that they are mostly still in the development stages, but they will appreciate your input and statement of requirements. Think about whether you want your auditors involved (at this stage it is not mandatory, but that will change), and start talking to them about what they would do and how it will help your reporting. At present there are a very small number of shops looking at the way that XBRL can become an asset to enterprise reporting. But they are clearly on the right path.

  2. Review the way that your peers are reporting in XBRL

    Companies will want to make sure that their XBRL-based disclosures conform to industry norms (if they don’t want to get complaints from analysts and investors, that is). This will be a balancing act. Every company wants to be as comparable as is necessary, and no more. Inside industry bodies, or just informally, examine the way that others are using XBRL and which tags are being used in specific circumstances. There will be various industry-specific disclosures that are probably not in the official taxonomies – suggest that they get added. There will be other situations in which it makes sense to create industry extensions – agreed sets of industry tags that might involve non-GAAP concepts,or be too specialised to be incorporated into the official GAAP framework. These kinds of horizontal extensions can be referenced by members of that industry inside their instance documents. Hopefully, XBRL-US will act as an independent broker to make this kind of collaboration work in the US. Internationally the EBR consortium, working together with a number of other similar groups around the world, are also keen to help.

  3. Start discussing your tagging decisions with your analysts.

    Honestly, if you speak to your analysts today, more than half of them are likely to look at you with a puzzled look. However, that is changing quickly, and investment firms of all sorts are either making plans to use XBRL internally, or working with (or waiting for) their market data providers to fill the channel. As soon as their own systems are up to speed (unlikely to be before the middle of 2009) they will start providing you feedback. Get on the front foot. Be specific.

  4. Treat your extension taxonomy as a corporate asset

    Your extension taxonomies tell the world the things that are different about you. IDEA and similar platforms in other countries will make that information very accessible to analysts and investors, so think it through yourselves. Having well thought out, consistent and complete extension taxonomies will become a crucial part of external reporting.

Infomediaries and Portals

IDEA is either a big new opportunity or a big new threat, depending on the way you view things. In contrast to the preparers, this is both urgent and important.

  1. Add value

    This is too obvious to dwell on really. If the data that, today, is difficult to obtain and organise is suddenly freely available, infomediaries that are in that business today need to move upstream, or ensure that they can add still-difficult-to-access data to the freely available sort. Those in the business already know that, although many, over the years, have vacillated about what to do in this field.

  2. Gear up

    You need to be able to consume XBRL metadata and data and incorporate it into your systems. Generically. By which I mean: make sure that your infrastructure can handle lots of different taxonomies. We’ve seen a few that hard code dependencies to specific taxonomies or worse, specific versions of taxonomies. Think bigger. Think in terms of being able to consume XBRL messages from lots of (hopefully interoperable) services around the world, not just IDEA. That means APIs, quite possibly XML databases, and mapping and cross-mapping mechanisms. Y’all shout out if you need help now.

  3. Give as well as receive

    Services like IDEA will be the catalyst for a lot of applications that can consume XBRL. Some of them will be owned by your clients. Others your partners. Start considering delivering some of your offerings in the same format, via complimentary services.

Investment Houses

  1. Get your hands dirty

    This interactive doodah, XRB..XBRL stuff is here to stay. If your investment technology group doesn’t understand it and in some detail, then you’ll need to get them to learn. Not just them either. Your analysis teams need to understand the idea of markup, the tricks, the traps, the common errors. The ways that, if they were so inclined, a company might seek to use the technology to be less comparable. You’ll want ways to classify extension concepts that issuers publish. Relevant? Only interesting in terms of a company timeseries? Useful and needs to be mapped somewhere else? You’ll need the wherewithal to instantly transform the layout and calculation decisions contained in a company’s filing into your own, preferred view.

    And (sorry) you’ll need to be patient, as corporate finance functions and their providers come to grips with what they need to do, what works and what doesn’t. But don’t fall behind. This is a curve you want to get out in front of. The SEC’s proposed rule calls for XBRL versions of accounts to be filed as exhibits concurrent with the EDGAR text versions.

    The only way to learn this stuff is to do it. Technologists that want to get up to speed very quickly can do so by participating in one of the technical or best practice working groups of the consortium.

  2. Develop a feedback loop

    Analysts and Investors that are consuming XBRL documents will need to develop ways to provide feedback to companies that are publishing them. Be nice people! Everyone has a learning curve here. You’ll be very well placed to point out inconsistencies in markup and extension decisions. No doubt you’ll be listened to.

So there you go. Free advice. You all know what that’s worth.

On a serious note, although dressed up as PR and even though nothing really new was announced by the SEC, count me, at least, as one observer who thinks that the regulator has come up with a very important IDEA.

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The SEC’s IDEA: Reading the tea leaves…

August 28, 2008 17:23 by

Yesterday, I said that the SEC is probably onto something with its IDEA announcement. They are moving, in a very public, very clear and pretty determined manner towards a new era for disclosure based regulation. It’s interesting to see the number of articles that take a very different, rather more skeptical view. The adversarial nature of the relationship between companies, lawyers and the Commission clearly isn’t going to disappear any time soon. But if you take the broad view, then the IDEA announcement is more than mere marketing (although it is that too). It’s a stake in the ground about the way that disclosure-based regulation will work for the next decade or two.

And it’s more of the same, just in electronic form.

More of the same with a vengeance, that is. Changing the focus of disclosure onto the internet will have significant repercussions for many of today’s actors. Here are a few fuzzy predictions.

  1. If it moves, tag it

    XBRL, or interactive data, involves wrapping definitions around information, with XML tags, or (strictly) elements. The information can be a single number, a paragraph of text, a picture or chart, or any combination of these.

    IDEA will drive the SEC and every other regulator, to require information to be marked up in this way. Today the focus is on financial statements. In five years’ time, it will likely include a much wider range of information, including prospectus documents and proxy statements covering information like compensation and related party dealings. Regulators will undoubtedly extend their requirements to also cover specialist disclosures such as those made about Oil and Gas reserves, pharmaceutical approvals, lending covenants and risk transfers. They won’t necessarily be asking for more information. But there will be an ongoing balancing act, not to mention conflict, between questions about liability and the burden that additional structured disclosures impose on Issuers on the one hand, with the utility that such structured information provides to the market overall on the other. Presumably, given recent market turmoil and the opaque nature of a range of financial instruments, the playing field is going to be tilted towards disclosure for quite some time.

  2. Market markup

    Those tags are going to end up everywhere. Markets will rely on them and ask for more. Where? Earnings releases for a start. Macro-economic data. Yes, governments themselves will need to get down and dirty mapping their own statistical disclosures to appropriate tags. Industry and corporate metrics: national and regional car sales, home loan approvals, airline miles flown. If you compile valuable information and today distribute it in a press release or on a web site in text, PDF, HTML or even Excel format today, you’ll be doing the same thing, but in XBRL tomorrow.

    Even the markets themselves will get in on the act, as research information (especially estimates) that are today distributed to investors and analysts in PDF and HTML will get tagged and shipped out as interactive data, for use and assimilation into other people’s systems, models and ideas.

  3. Joined-up thinking

    The architecture of the IDEA system, and many other, similar ones around the world will be service oriented, or SOA, based. This is a relatively new way of designing computer systems, but it gives rise to new capabilities as it is much easier for people to build on them. SOA allows so called "mash-ups" of information to be put together, using different data sources and different services that act on that information. Other countries will certainly develop similar systems. Expect, therefore, for infomediaries like ThomsonReuters, and FactSet, to facilitate the comparison of disclosures made by the same company in different countries, as well as international industry and peer comparisons that will make your head spin. They’ll be well placed to do that because they are good at making judgements about the comparability of different accounting rules across international boundaries. But expect others, including ratings agencies, new start-up players and the regulators themselves, to get in on the act.

  4. A galaxy of applications

    The free provision of company and mutual fund performance data and metadata in a searchable, organised format will greatly improve the capability of investors and other stakeholders to better understand different securities.

    Whether it is:

    • MSN Money, providing automated peer comparison tables to retail investors;
    • A large hedge fund looking for arbitrage opportunities; or
    • the SEC itself, sniffing through corporate filings, looking for anomalies and compliance violations or the illegitimate resurrection of a business following investor fraud;

    the scope and variety of applications are difficult to attempt to define.

    Some applications will be private, for the use of the SEC. Others will be private for the use of financial institutions, and trading houses. Others will be open to the world. Some will mash up information from multiple sources and some will, in turn, allow others to use (for free or for a fee) the information that they produce.

    There are some clear commonalities though. The IDEA platform will need to scale to service lots of different users of lots of different applications. Local staging, storage and transformation of data, including information unique to specific companies, will be the main technical challenge for application builders.

  5. One document. Different views.

    One aspect of XBRL that has a lot of people stumped is how to view it. Issuers are concerned about the way that the SEC viewer applications will represent their disclosures on a web page or in Excel. Here comes the XBRL consortium to the rescue. The Inline XBRL (iXBRL) specification lets you create a web page that looks and feels exactly the way you want it to, but that contains XBRL markup wrapped around every relevant fact. The markup is not generally visible to a human being, but can be immediately consumed by computers. One document, two different views. Inline XBRL lets preparers format their documents the way that they want to, including in a way that looks exactly like today’s regulatory filings. At the same time, the content that the regulators require, or the markets demand, must be machine readable and it is right there in the document. Next to all the tags that people are already familiar with, like <bold> and <italics> are some new ones that say <cash> and <AccountingPolicies>.

    IDEA and its counterpart services run by other securities regulators, companies registrars and exchanges will almost certainly receive and republish entire iXBRL documents that can be read by humans and computers alike, rather than just getting the raw, computer-readable information contained in an XBRL data document. This is important for any number of reasons, including one very good one: because the filings will just be web pages containing some specialised, if hidden, tags they will be searchable via ubiquitous systems like Google. Architected correctly, it will also keep the costs down.

  6. Metadata matters

    The important thing about XBRL is the X. It stands for extensible, an ugly, if descriptive word. XBRL has three layers:

    • A specification. Think of it as the alphabet and rules of grammar;
    • Taxonomies. These are loose-leaf dictionaries of terms that define specific concepts, using the alphabet set out in the specification and obeying its rules of grammar; and
    • Instance, or data documents, that use the words in the dictionary to communicate performance reports.

    Notice that taxonomies are "loose leaf" dictionaries. If the dictionary contains a suitable word, you need to use it. If it doesn’t, you need to add a new page to the dictionary, containing your new word and its definition. This is the idea of extensibility.

    Companies will use and no doubt abuse the idea of extensibility in XBRL for a year or two. It will settle down before long. All the extensions that apply to specific companies will need to be catalogued and referenced appropriately. Doing so will ensure the operation of the analytical "electronic applications" that will form part of IDEA, as well as external applications such as those run by portals like Yahoo Finance and Microsoft Money.

    Just as importantly, companies will need to treat their own extensions as an important corporate asset. They are very public statements about specific and important aspects of corporate disclosure.

What should actors on the disclosure stage be doing? Tomorrow there will be a few suggestions.

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What’s the big IDEA?

August 27, 2008 17:21 by

Last week the SEC announced plans to replace its EDGAR system for electronically filing financial disclosures with a new one. The replacement, called "IDEA" will use interactive data to power a range of electronic applications, some to be provided by the SEC, others by the private sector. The Commission says that it will be working quite quickly but that it will take five years to bed down. What will it look like? What should preparers and users expect? What are the challenges? Where are the opportunities? Over the next few days I’ll provide a few half-educated guesses.

Today though, a little history. Financial crises are soon followed by new types of regulation. It was the Wall Street crash of 1929 and resulting Great Depression that gave rise to the disclosure based regime that is widely (although not universally) used around the world.

In 1933, President Franklin D Roosevelt, in announcing the formation of the SEC’s immediate predecessor, set out a new way of thinking about regulation. Prior to the creation of the SEC, the regulators themselves examined drafts of company public statements. They were attempting to judge their veracity and reliability. There was a significant onus on the government itself to ensure that scams, rumours and plain bad information were not publicised and traded on. The crash brought about a rethink.

In signing the 1933 legislation into law, Roosevelt introduced the idea of corporate transparency. He said:

“Of course, Federal Government cannot and should not take any action which might be construed as approving or guaranteeing that newly issued securities are sound in the sense that their value will be maintained or that the properties which they represent will earn a profit.

There is, however, an obligation upon us to insist that every issue of new securities to be sold in interstate commerce shall be accompanied by full publicity and information, and that no essentially important element attending the issue shall be concealed from the buying public.

This proposal adds to the ancient rule of caveat emptor, the further doctrine "let the seller also beware." It puts the burden of telling the whole truth on the seller. It should give impetus to honest dealing in securities and thereby bring back public confidence.”

(See H.R.Rep. No. 85, 73 Congress, First Session 2 (1933) for the quote and the Financial History of the United States for a fascinating insight into the pressures, for and against, the new approach that Congress weighed up.)

Since the formation of the SEC, the US, and the majority of other securities markets, have relied on a positive obligation on those seeking investment from the public to provide honest statements about their businesses and not to omit material information from such statements. These obligations are backed by lawyers and their investor clients that are willing to enforce them (the obligation is to show that nothing material has been omitted, which is difficult to prove) and by the markets themselves – stocks that seem to lack full transparency tend to be punished in terms of growth and valuation as a multiple of earnings.

Transparency (mostly) works. The fact that the Commission is concentrating on the use of technology to improve a proven recipe, rather than throwing out the current system should be welcome. The regulatory tide has not yet risen too high, despite some of the wilder pressures that these agencies are under, given the impact of the current credit crunch.

So, at a macro level, the IDEA announcement is merely reinforcing disclosure-based securities regulation.

We should also take away the fact that XBRL and the idea of structured, computer readable performance reporting is now completely embedded within the SEC. Anyone that has been hoping, or betting, for something else, should think again.

The fact that IDEA is being presented as a platform is also important. Infomediaries, portals and investment houses of all sorts should be thinking about how to incorporate the use of the platform into their development plans.

It would be particularly surprising if the SEC was the only securities regulator, companies registrar or exchange around the world that came to the conclusion that a platform of the sort described last week is the right IDEA for the future of disclosure-based regulation.

Tomorrow, a few predictions through a cloudy crystal ball.

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