May 3, 2007

Can Your Company Compete Globally in Today's Capital Marketplace?

If you are a CFO who wants to attract and retain investors, now is the time to accelerate the development and use of XBRL.

by Liv A. Watson

Securities regulations protect investors worldwide by arming the public with information. When companies want to raise capital in the public markets they must open their books to the public. The U.S. Securities and Exchange Commission (SEC) demands that basic financial performance data and other information be filed electronically to an Internet portal. This information allows investors to evaluate an investment and judge whether to buy, hold or sell. Unfortunately, the SEC requires more than 800 different forms to be filed, many of which collect a wide range of overlapping data from companies. Although the SEC requires information in its filings to be accurate, it does not guarantee it (see table for definitions of SEC’s most frequently used terminology). So, even though the data is accessible, key information can be buried under pages of electronic documents leaving the task of analyzing the information manually-intensive, error-prone and inefficient.

Ten Most Frequently Used SEC Forms and Groups

S-*

Registration Statement (S) forms are used to register initial and secondary/follow-on public offerings (IPOs) of equity and debt (stocks or bonds)

424B

This is the form used for the prospectus required as supplement to the S-*
forms. It describes the business, its plans, its finances, and its offerings

10-K

The basic Annual Report form. The 10KSB form is used by small businesses; 20-F and 40-F by foreign governments

10-Q

The standard Quarterly Report form (small businesses use 10QSB)

8-K

Current Event reports must be filed to notify investors of any event or change that could impact shareholder value. The equivalent form, 6-K is if led by foreign companies

DEF

Annual Stockholders report, also known as a proxy statement. Any form beginning with DEF

14A

(“definitive”) contains information that was sent to shareholders about matters to be voted upon at an upcoming annual or special meeting. It also lets shareholders authorize designated persons (proxies) to place votes on their behalf if they don’t attend the meeting

13-D

Schedule 13 (and 14) forms are used to register any person or group purchasing more than 5 percent of a company’s equity securities

11-K

Special Annual Report form for employee stock purchase, savings, and similar plans

3,4,5

Form 3 identifies any director, officer or owners of more than 10 percent of a class of equities. Form 4 is used to report a change in beneficial ownership and Form 5 is the Annual Statement of the beneficial owners

Making this data easy to access, collect and analyze electronically protects the public and increases transparency of company behavior. This helps deter problems like insider trading and fraud that devastates the public confidence, eludes a company’s ability to capitalize and disables the capital markets (e.g. Enron, WorldCom).

Just as with Enron, WorldCom etc, corporations who refuse to use XBRL interactive data for their reporting processes risk dropping off the radar screens of investors in the capital marketplace due to cost, complexity of analysis and consumer mistrust of the reported data.

Outsource Your Company’s Message to the Marketplace

When CFOs furnish company financial documents using XBRL, they have more control of the way in which their company’s data are communicated to the marketplace. Much of today’s reported financial information is parsed and tagged by a third-party intermediary before it's sold to the analyst. In many cases this results in an abridged version of the company’s chart of accounts.

Why XBRL-Tagging Is Better

XBRL is designed to correct this problem by allowing CFOs to control how their own company data should be tagged and what is being communicated to the marketplace by the analysts. The smart intermediary will build intelligent applications on top of the XBRL information tapping into the analytical power of today’s computers to deliver enhanced decision support to the analyst. By providing financial information in XBRL, the smart CFO will stay in control of the information communicated so that it is not a third party who determines the company’s bottom-line messaging to the marketplace.

XBRL in Action

For the past three years, both the Shanghai and Shenzhen Stock Exchanges in China require all Chinese company data to be reported in XBRL. They have also converted historical data into XBRL allowing investors to answer the tough questions such as:

  • What are the Executive salaries?

  • What is the average competition?

  • Is this company a good M&A opportunity?

  • Who sits on the Board?

  • What is the benchmark for trend analysis? In the past six months, XBRL adoption and implementation has accelerated worldwide.

Accounting standards setters are taking an active role in XBRL taxonomy development. Other regulatory agencies such as the US SEC are acknowledging the important impact XBRL can have on their capital markets and funding taxonomy development.

Both stock exchanges in India went live in April with XBRL filing systems built by IRIS, while Taiwan and South Korea are expected to go live this summer. In Spain every company reports in XBRL. In short, any capital market that wants to attract investors is going to be driven to adopt XBRL as the de facto information standard. And therefore, if you are a CFO who wants to attract and retain investors, it’s time for you to take XBRL seriously.

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Liv Watson is an accountant and Vice President of Global Strategy for Norwalk, Connecticut-based EDGAR Online Inc. (NASDAQ: EDGR ) — a provider of global business and financial information.