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U.S. Financial Reporting Gets Major Upgrade
XBRL is to accounting what the Internet is to communication

By Roy Maurer  7/30/2009
 
 

The process of reporting, storing and sharing financial information has begun a significant transformation toward an eagerly awaited national U.S. standard that promises greater transparency, accountability and oversight of the capital markets.

Just as the Internet, PDFs and e-mail have transformed communications over the past 15 years, XBRL is a mainstream technology that can bring quality, consistency and interoperability to what is now a patchwork of proprietary data formats.

XBRL, or eXtensible Business Reporting Language, is an open-source programming language that structures how data are to be stored, referenced and used. The U.S. Securities and Exchange Commission (SEC) has approved a final rule mandating the use of XBRL for all public-company reporting. Some companies were required to start complying in June 2009.

“XBRL provides accounting concepts, validation, historical comparison and extensibility,” Philip Moyer, CEO of Edgar Online and a board member of XBRL US, told SHRM Online in a telephone interview. “I tell people it’s like 1993 and the Internet has just been opened up for commercial usage,” he said.

How It Works

Investors and analysts are faced with increased pressure to analyze more companies and provide better, more-detailed analysis, while regulators are being charged with ramping up oversight—all more quickly and efficiently. XBRL tags electronic data with identification code that stays with the data as it moves, providing a mechanism for electronically producing data and moving it across disparate systems. The addition of standardized, machine-readable data tags and taxonomies, similar in concept to bar codes used to identify products, will allow investors, analysts and regulators to download XBRL financial data directly into spreadsheets and models, and then apply software to comb through reports instantly and identify the most critical information and figures.

“The concept of comparability is huge. XBRL makes for much easier and timely comparisons between companies,” Moyer said. While it has been difficult for investors to compare the financials between companies because of different reporting styles and formats, XBRL will standardize the format in which data is reported. The technology allows search engines to parse very detailed information—more than 16,000 specific data elements are tagged individually—to serve investors and analysts.

The XML-based format uses tags similar to those used in HTML, making it possible to move, display and analyze huge sets of financial and business data across different platforms and software applications, allowing greater accessibility to financial statements and the ability to analyze that data faster and more accurately.

“Instead of everyone having to sit and hand-type the important data elements into their own spreadsheets, the data can immediately flow into their financial models, so analysts don’t have to spend all their time rekeying,” Moyer said.

The standard will limit the expense investors must make when they wade through thousands of pages of documents manually when searching for information.

The ability to carry out oversight will be upgraded as well. Using XBRL, regulators will know instantly if a company’s filing is missing any key information because the software will identify automatically what’s missing when corporations electronically file documents. Previously, regulators had to check files manually to find missing information, and with “roughly 3,500 people in enforcement at the SEC, they had to try to look at 12,000 publicly traded companies, 128,000 mortgage-backed securities, 10,000 mutual funds and 8,000 hedge funds. Regulators were simply outgunned,” said Moyer.

New Era for Financial Reporting

The interactive data format will improve “company and government transparency and usher in a new era of corporate governance and investor protection,” David Colgren of Edgar Online Media Relations stated in a news release. Key improvements include:

·         Improved accuracy. XBRL eliminates rekeying errors and misclassifications by third parties. Tags with established definitions remove ambiguity as to what a data point represents, translating into more accurate analytics.

·         Granular, comprehensive information. With XBRL, company data is defined using an agreed-upon standard so that comparing companies is dramatically easier and more accurate. While companies have the ability to create company-specific elements (called extensions) for a very unique reporting situation, the set of terms available has been created to be extremely comprehensive.

·         Easier analysis. Specific data can be sought and extracted from lengthy reports. XBRL allows more time spent on producing richer analysis and less on data collection and manipulation.

·         Faster data handling. Data is accessible as soon as filings are released.

·         Global coverage. With consortium participants in all major capital markets, XBRL will support reporting in developed and emerging markets. Business information can be translated into multiple languages by data consumers around the globe. The reporting standard allows data to be reused and repurposed readily. Once created, a financial or business report can be used to create many documents in different formats—HTML, ASCII text, Microsoft Word or Excel—with no loss of accuracy or integrity, according to XBRL US.

Government Mandate Will Be Phased In

U.S. banks are already required to disclose information to the Federal Deposit Insurance Corp. in XBRL format. The SEC voted 4-1 in December 2008 to require that all U.S. companies use XBRL eventually to file financial reports.

In the first year of implementation, U.S. and foreign filers that file using U.S. Generally Accepted Accounting Principles (US GAAP) and have a public float of $5 billion or greater are required to provide financial statements in XBRL format beginning with fiscal periods ending on or after Dec. 15, 2008. The phase-in began in the summer of 2009; the largest 500 companies in the country started using it on June 15.

In the second year, all other large accelerated filers reporting in US GAAP are required to comply with the proposed rules beginning with fiscal periods ending on or after Dec. 15, 2009 (approximately 1,300 companies).

Finally, in the third year, XBRL reporting will become mandatory for all remaining companies that file in US GAAP and all foreign private issuers who file using International Foreign Reporting Standards, beginning with fiscal periods ending on or after Dec. 15, 2010.

In another usage of the technology, the proposed Government Information Transparency Act, introduced May 14, 2009, by Rep. Darrell Issa, R-Calif., would require the government to use XBRL to track disbursements from the Troubled Asset Relief Program (TARP) and would require that the collected information be made available for public access.

“The technology exists to create real transparency that would allow us to track TARP dollars and value toxic assets,” said Issa, ranking member of the House Oversight and Government Reform Committee. “This legislation offers more than the promise of change and transparency; it is a substantive plan to implement it.”

Even though there have been some who have fought the XBRL mandate, citing the costs it will bring to the industry, “wanting less transparency is not playing well on Capitol Hill,” said Moyer.

Late to the Party

The XBRL reporting standard is already mandated or used in regulatory filing programs in many capital markets, including Australia, Belgium, Canada, China, Denmark, France, Germany, India, Israel, Japan, Korea, the Netherlands, Singapore, Spain, Sweden, Thailand and the United Kingdom. China, Japan and several European nations have mandated its use across all government agency reporting. The XBRL Consortium is composed of 600 of the world’s leading accounting/audit, technology, Internet, stock exchange and financial service companies and regulators supporting XBRL.

One reason for its late implementation in the U.S. is the complexity of financial reports when compared to emerging economies such as China, which uses simpler documents, according to Investor’s Business Daily.

Another reason for the lag time is that XBRL business software is in a nascent stage. Many U.S. companies have been waiting until it’s available. Software companies, including UBmatrix, Germany’s SAP, Microsoft and Oracle, are working on XBRL software to fill this need.

Roy Maurer is a staff writer for SHRM.

 

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