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The United States Securities and Exchange Commission (SEC) has announced that it will require the largest companies whose fiscal years end on or after Dec. 15, 2008, to tag their financial statements and footnotes using eXtensible Business Reporting Language (XBRL). Senior finance executives and the individuals who will be responsible for carrying out the task probably are wondering where to start. Ventana Research has investigated some of the tagging tools and worked through the tagging process. We believe that learning how to use the tools and go through the tagging process will not be especially time-consuming. Nonetheless, time is of the essence, so we advise these companies to begin addressing this requirement immediately. Here are the first three steps your company should take.

First, evaluate the available tagging tools right now so that users have time to become fully proficient before the end of this year. While companies can outsource the tagging process to third parties, we believe this will not be cost-effective over the intermediate or long term, nor is it warranted given our assessment – based on our test of the time required to tag a variety of companies’ financial statements – that there is sufficient time available to prepare.

Second, those responsible for public reporting should reach out immediately to peers in companies that are in the same or a similar industry and form a working group to resolve issues of how specific items on the financial statements and footnotes will map to the U.S. generally accepted accounting principles (GAAP) taxonomy. Membership in this group should not be confined to the limited number of companies with an immediate XBRL filing requirement. While many captions will be identical to those in the taxonomy (such as “accounts payable”) or at least very close, it is likely that there will be some ambiguity and that other captions are not in the taxonomy at all. Discussing these issues with peers in similar companies will make the process much less stressful and produce the desirable and necessary result of minimizing the number of custom tags. Even when a company has to create a custom tag because there is nothing suitable in the taxonomy, it will have to be the same custom tag that its competitors use. We believe the SEC and securities analysts will urge companies to use the smallest possible number of unique XBRL tags.

Third, arrange for monthly status updates with your external auditors. One reason for this is to be sure that the interested parties in your company stay current on their approach to XBRL and how they plan to assess your tags. Another is simply to keep them informed of what you are doing. The more dialogue that takes place before the audit, the less that will have to take place during it.

Related Research Notes:
SEC Formally Proposes XBRL Reporting
Largest Companies Would Have To Tag Filings for Calendar Year 2008

Tagging Financial Statements with XBRL Benefits Everyone
Test shows use of technology is straightforward, inexpensive and quick

XBRL Tracks the Double Bottom Line
Socially responsible example shows standardized format is useful for more than regulatory reporting