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International Business MachinesMark Lennihan

On Thursday IBM Corp. announced it closed its acquisition of Clarity Systems, officially making the Toronto-based firm an 'IBM Company.' That's a big step for Clarity, which currently employs about 400 people, because it adds more credibility to its name.

However, the firm may not have needed the help. Clarity already boasts British Airways as one of its clients and it was on the verge of taking off, which is probably why IBM stepped in to buy it now.

But the big question is what exactly does Clarity Systems do? In short, it has software that works with what is known as XBRL, or Extensible Business Reporting Language. Don't get bogged down in the terminology. Clarity's software simply uses this coding to make it easier for companies to report their finances.

Here's how it works. Rather than reading financial info as a block of text, XBRL tags each number to make it readable. Gross profit has its own tag, as does net income. Because of this, different pieces of software can read the tags and work with the data, eliminating the need to re-enter any numbers.

This language is especially important right now because the Securities and Exchange Commission recently mandated that U.S. firms must report their financial statements in XBRL. Half way through 2010, the largest firms listed in America already have to report in XBRL and by the middle of 2012 all domestic and foreign companies that are publicly traded in the U.S. will be required to as well. These firms will also have to use a complex tagging system that includes footnotes in their financial statements.

In short, a lot of firms are going to need software to report every single quarter, and Clarity already has what they need.

Financial terms of IBM's purchase weren't disclosed, but the deal is part of a string of recent acquisitions. IBM's recent purchases include SPSS Inc., Openpages and Cognos, a former Ottawa tech company.

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