Business Finance magazine recently reported that the Securities and Exchange Commission (SEC) will require that the largest 500 or so companies (by market capitalization) begin to use XBRL by the end of the year with full compliance by 2010.

Extensible Business Reporting Language (XBRL) is a new computer language for the electronic communication of business and financial data. It was developed by an international consortium for open source use for global financial reporting. The hope is to be able to easily access and analyze the written commentary in public filings about the company and its finances. The unstated assumption is that current financial reporting ignores many of the important aspects of business so what a management team says is of growing importance.

But I question whether the information that XBRL and its builders assume is there, really is. That’s because companies are only required to report within the parameters of current accounting practices which were optimized to report on the results and strength of tangibles-heavy industrial companies. These practices do not help much when it comes to reporting on the results and strength of intangibles-heavy companies fueled by knowledge, people, processes, IT and networked business models where key parts of a business may be the responsibility of an external partner.

The importance of this kind of intangibles information was demonstrated by an experiment that was described recently on The PWC Corporate Reporting blog. The experiment involved creating two versions of an annual report of a Danish company, Coloplast. One report included all the standard information in an annual report plus an additional presentation on intellectual capital, covering areas such as people, processes, information technology, branding, customers and external networks. The other report removed all this data and just delivered the financial information required by regulations.

Two groups of analysts reviewed the different reports. The conclusions were striking. The full report (including the intangibles information) inspired 60% of the first group of analysts to recommend a buy while the modified report inspired 80% of the second group to give the stock a “sell” recommendation. Most American companies do not provide information on their intellectual capital such as that included in the expanded Coloplast report. One has to wonder how much money they are leaving on the table.

XBRL cannot highlight information that is not there. It is a step in the right direction. But it is far from a cure all. Its true promise will not come until the information reported by companies touches on critical intangibles.