XBRL: let's talk about x

Apple. eBay. Google. XBRL. Yahoo! Can you spot the odd one out? In a world where brand strength can make the difference between success and failure, the eXtensible Business Reporting Language has a recognition level so low that most finance directors have never heard of it, and the rest have no idea what it is. But this is about to change. With regulatory authorities in the US, UK and other parts of Europe increasingly pushing its use, XBRL seems set to go mainstream, and you need to be prepared.

The level of preparation will vary between companies, industries and countries. The CFO of a publicly listed entity will probably need to know significantly more about XBRL than their counterpart in a private organisation; but even the FD of the smallest limited company will need some level of awareness.

Lord Carter of Coles has recommended that by 2010 corporation tax returns from all UK companies must be filed using XBRL. HM Revenue & Customs and Companies House have already launched some XBRL-based electronic filing systems and are keen to expand its use.

Pioneering for the future

Examples of regulatory authorities that have gone as far as mandating the use of XBRL are currently thin on the ground. US banking regulators such as the Federal Reserve and the Federal Deposit Insurance Corporation feature on a very short list of pioneers. But the US Securities and Exchange Commission has been running a voluntary XBRL filing programme for the past year, and stock exchanges in China, Japan, the Netherlands, Spain and other countries are already accepting XBRL submissions or developing XBRL systems. If this momentum continues, a few years from now, it could be the de facto standard for digital financial reporting.

An XBRL evangelist would say ‘about time’. Almost a decade has passed since the US CPA Charles Hoffman came up with the idea that led to XBRL, and it has lingered tantalisingly on the horizon ever since – for a variety of reasons. Despite being based on a theoretically simple concept, the development of XBRL has been complex and time consuming and the technology has become widely misunderstood.

‘Raising awareness is an issue,’ says Mike Willis, a partner at PricewaterhouseCoopers in the US, and founding chairman of XBRL International, the not-for-profit consortia of companies and agencies responsible for developing the technology.

‘XBRL isn’t a software application or a language,’ he explains, ‘it’s an enabler.’ Despite its misleading name, the eXtensible Business Reporting Language is a standard for the distribution and exchange of financial information that describes the data using XML-based tags. The tags work in a similar way to bar codes, but instead of making it easier to handle assets or manage the supply chain, XBRL makes it easier to handle different items of financial information.

At the moment, organisations have vast amounts of financial information locked up in corporate systems and spreadsheets, but when it leaves those, it generally leaves behind any context and integrity. Even within the originating organisation, this can make it difficult to determine whether the data is complete, or decide if it conforms to the necessary accounting standards; on the outside, meaningful and significant analysis ranges from impractical to well nigh impossible.

XBRL can change this. By assigning a tag to each individual data item, such as inventory or elements de stock, it becomes easier to identify, regardless of national and international differences in reporting standards, languages and terminology. Because the tag includes contextual information such as accounting period, company name, currency and so on, it is possible to identify, extract, exchange, manipulate and report on XBRL data, quickly and easily, even if it comes from a variety of sources.

So if XBRL is used to publish financial information, analysts, investors and regulators could all benefit from the increased transparency and usability of data that so many stakeholders are seeking.

End of the status quo

‘The way information is formatted today, in paper and electronic-paper form, it can take five or six hours to get information on five semiconductor companies to put it into an analytical application of any kind,’ says Mike Willis, a partner at PricewaterhouseCoopers in the US.

‘With XBRL, you can do it in 30 seconds.’ So it’s easy to understand why regulatory bodies from HMRC to the SEC are keen to exploit it. It’s a little more difficult to figure out why finance directors should be jumping for joy at the prospect of all and sundry ferreting around in their financial data, analysing and comparing it in ways that they can neither foresee nor control.

Fortunately, you have a little time to get used to the idea. So far, only a handful of software developers have built XBRL capabilities into their systems or created new products using the technology. CaseWare and Forbes have XBRL-enabled their accounts production packages; Cartesis software enables companies to self-tag data, generate XBRL documents, and import tagged data for activities such as benchmarking; some versions of Excel allow users to construct, publish, and analyse XBRL data; and Microsoft’s small business analytics application FRx will convert internal numeric data into XBRL. These suppliers are not alone, but most specialist software suppliers are in no rush to embrace XBRL – despite the push from regulators.

‘As a matter of principal, our members support electronic business reporting,’ says Dennis Keeling, chairman of Basda, the organisation that represents more than 250 of the world’s leading software developers.

Basda has been involved in some pioneering XML implementations, but XBRL presents more of a challenge. ‘Unlike standard XML messages, which can be mapped directly to the underlying software data model, XBRL requires a user interface so that organisations can map their unique general ledger charts of account to taxonomies,’ he explains.

It seems highly likely that this situation will be reconciled some time before XBRL use becomes mandatory, and finance directors have no choice but to source the software applications they need to comply. When and how remains to be seen, but if you want to be prepared for the inevitable, you will need to keep and eye on developments and watch this space – because XBRL looks suspiciously like the future of financial reporting.

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