From obligation to opportunity

Promising. Interesting. The future. A revolution. It’s in these terms that XBRL, the extensible business reporting language, has been described for more than five years. Recent events mean the standard is finally coming of age and is increasingly a tool that regulators and proponents of good governance strongly encourage. More and more, market participants are learning what XBRL is and coming to see that they should use it to their own advantage, rather than treat it merely as a looming obligation. 

It’s difficult to escape the fact that the preparation, dissemination, consumption and analysis of financial statements and other business performance metrics involve an astonishing amount of manual effort. This is despite the incredible investment that companies make in their reporting in terms of payroll, policies and information technology, not to mention external review and audit. 

Some of these problems seem to be almost background noise for corporates that have spent the last couple of years firefighting compliance and investor relations issues. XBRL experts point out that fixing the inefficiencies and inconsistencies associated with report production inside the enterprise as well as report exchange between organizations is the technology’s sweet spot. Increasingly, early adopters are coming to the conclusion that the standard is the platform on which both compliance and report disclosure should be based. While the tools available are still getting up to speed, and accountants urge users to build review processes right into their implementations, there is little doubt this is a quiet revolution. 

Why? XBRL is a tagging technology. It makes it possible to define reporting concepts and then exchange information that conforms to those definitions. The twist is a feature akin to adding your own pages to a dictionary. While the vast majority of concepts are defined in a collaborative manner for official reporting frameworks such as US Gaap, the small proportion of concepts unique to an individual company report can also be defined, and data that conform to these custom definitions can be sent out to consumers. Equally, entire management reporting frameworks, which might bear little relation to Gaap, can be captured and controlled using these definitions or taxonomies. 

Cost burden or communication boom?

This sophistication means XBRL provides the only sensible way to automate the process of performance information exchange, making analysis by regulators and markets alike a dramatically faster, more efficient and more accurate process. What looks like nirvana for Wall Street and Washington also looks uncomfortably like an unwelcome additional layer of reporting for CFOs and controllers, already reeling from Sarbanes-Oxley and other new governance requirements. 

‘Not so,’ says Mike Willis, a partner at PricewaterhouseCoopers. ‘In addition to lowering the costs associated with report preparation, XBRL tagging by corporates will allow companies to communicate directly with their analysts rather than relying on intermediaries to tag their critical reporting concepts.’ Willis cites the example of clients who, on examining the business case for XBRL, discovered that much of the analysis conducted on their company is carried out using data purchased from a third-party vendor rather than the reports that accounting departments sweat over. 

These ‘template reports’ summarize financial statements into a few dozen, or at best a few hundred, concepts, inevitably making some value judgments about how particular pieces of information should be interpreted. While analysts want information in electronic form, most appear to rely on a combination of automated text parsers and offshore data-keying facilities. A small minority rekeys entire financial statements into spreadsheets. 

Faced with this rather ominous filter between company reports and company analysts, it’s hardly surprising, says Willis, that one Fortune 50 director rapidly came to the conclusion that ‘if anyone is going to tag my reports, it should be me.’ 

Clearly, the idea that financial facts should be captured by organizations and relayed to their stakeholders directly is compelling. A quirk of the technology means it is extremely simple for researchers not only to pick out Ebitda from thousands of concepts at the snap of a finger, but also to filter their analysis on the specific concepts that the reporting organization has itself added to the standard Gaap framework. This makes it easy to target investor relations and corporate governance messages. 

In Europe there are any number of XBRL initiatives that allow companies to experiment with the technology. In the US the SEC’s XBRL voluntary filing program, launched in April, is a good way for companies to get their feet wet. The best place to start, according to Paul Penler, principal of Ernst & Young and chairman of XBRL-US, is simple: it’s the earnings release. ‘Less data and strong market interest,’ he stresses. 

Issue of trust

Of course, this is a rapidly developing but still young environment, and there are two issues in particular that companies should be aware of. The first is that the tools to make all of this work are still pretty green. Accounting is complex. The sheer number of accounting concepts the profession has developed over several centuries makes software development a challenge. To date, too many vendors seem to have done their work from the point of view of the technical aficionado, and too few – so far – from the perspective of the company executive. The good news is that a rash of new tools is likely to be released over the summer and, given the level of technical leapfrogging going on, this should be a short-lived problem. 

The second is more serious. According to Yossef Newman, a leading advocate of XBRL from Deloitte & Touche LLP, companies must consider the trust issues associated with the gradual shifting of investment decision-making from a paper-based paradigm to an electronic one. This is all about assurance around the data, above and beyond traditional auditing of the underlying accuracy and reliability of financial information. For Newman, this has to include questions such as, ‘Was an appropriate taxonomy used in producing the XBRL data and do the specific tags used to mark up the data accurately reflect the underlying financial information?’ 

He is at pains to point out that the techniques for this kind of review have already been developed and are being closely examined both in the US and internationally. 

XBRL is something regulators and other market stakeholders will, quite rightly, be pushing relentlessly. It makes their jobs simpler and more effective. It will help enterprises grappling with complex internal reporting processes to enhance the consistency and quality of their data. And, perhaps more noticeably, companies that publish their financial statements in XBRL will benefit in terms of higher levels of visibility and more targeted messaging.
 
Over time, given widespread software implementation and the introduction of data assurance, XBRL-based electronic filing data will become the disclosure of primary interest for investment decision-making.

John Turner is CEO of CoreFiling, a specialist business reporting joint venture of Business Wire and DecisionSoft.