Get to Grips with XBRL

With the US Securities and Exchange Commission’s ruling in February mandating the use of XBRL (eXtensible Business Reporting Language) for filings by corporations and mutual funds, along with the current global economic turmoil and the ensuing calls of the G20 nations for improved transparency, XBRL is being hailed by many as the solution for improving information exchange in financial reporting.

Yet despite this and the numerous successes in XBRL conversion around the world, there remains a considerable number of pessimists who, without the impetus of a jurisidictional mandate, are skeptical about the time and money required to understand and implement XBRL. This could be down to a fear of technical obscurity and rapacious resource consumption associated with XBRL and its implementation.

As a technology, XBRL was developed some ten years ago. It is a data-rich version of XML (eXtensible Markup Language) and like its most commonly-known sibling, HTML, XBRL involves the computerised tagging of data. However, XBRL sets itself apart through its structure and adaptability. This extensibility stems from XBRL’s data tags, which allow information to be transmitted in a variety of formats and through a host of tools. XBRL is also a licence-free standard and therefore independent from software and hardware. Furthermore, data tags can be created, adapted and applied to virtually all reporting needs. Though XBRL’s most recognised and common function is financial reporting, this is far from its only use; it can support all standard tasks involving both financial and non-financial business data.

There is irony in the fact that most end-users do not need to concern themselves with data tags and other technicalities but this is one of the main causes for concern surrounding XBRL. The technological aspects are the domain of developers, programmers and those involved in extracting the information contained within the data tags, not end-users. Their exposure to XBRL is generally limited to seeing its output on screen and on print-outs. Though I am not implying that the implementation of XBRL is an automated and overnight process, neither should it be a laborious time- and money-consuming affair, as some believe it to be. The calculated average cost and time required to implement XBRL for a typical US corporation is a few thousands dollars of out-of-pocket costs for software and filing agent services, and 70 hours to prepare filings in XBRL.

In contrast, the benefits can be substantial and are applicable to everyone in the financial information supply chain. The automated processing of financial data offers greater accuracy and speed (and therefore reduced cost) when collecting, storing, exchanging and analysing financial information. Issuers are able to swiftly compile financial reports with less chance of error, while preparers are able to make informed decisions as they have greater access to more timely and accurate data.

Users and regulators are able to spend less time gathering information, allowing for improved analysis. Furthermore, data tags can easily handle numerous languages, easing the burden of information translation, while descriptions within data tags allow for increased comparability. The time spent analysing a single financial statement could be reduced by 15% to 30%, without considering the improved accuracy of data.

There is a mood of trepidation surrounding XBRL, particularly over its implementation in the US. However, there are valuable lessons that can be learnt from the countries that are already undergoing or have undergone the transition to XBRL, such as Australia, Belgium, China, France, India, Italy, Japan, Poland and Spain. As a Belgian, it is a source of personal and national pride that all non-listed/non-financial companies in Belgium (around 235,000) have been filing in XBRL for almost two years, and without major disruption. In Japan, where XBRL filing was made mandatory in April 2008, over 3,000 listed Japanese companies have provided their periodic statements in XBRL format.

These are good examples of where the promise of improved financial information is being realised. In these countries the commitment and endorsement of high-level decision makers, the development of taxonomies and the availability of software solutions has resulted in XBRL becoming an accepted reality.

The results of a survey conducted in the US published in a paper by KPMG in February 2009 illustrates the current and widespread lack of XBRL awareness. In the survey 11% of corporations admitted to having no knowledge of XBRL, 44% admitted to only having just started researching the subject, while 79.2% did not have an XBRL expert on their financial-reporting team.

Get to grips

So how does an organisation start to reap the benefits of XBRL? The starting point is to embrace XBRL as a solution and not an enforced burden, and to get to grips with the fundamentals. Whether you choose to outsource or employ an in-house specialist, a thorough business (rather than technical) understanding of XBRL is essential to break the stigma of expense and dread associated with it, and for its implementation to succeed. Today, all major ERP vendors have made their solutions compatible with XBRL.

As the director for XBRL activities at the IASC Foundation, whose standard-setting body, the International Accounting Standards Board (IASB), is responsible for developing International Financial Reporting Standards (IFRSs), I am closely involved in the development and implementation of XBRL for international financial reporting.

We promote XBRL because we believe in the significant potential benefits it offers to a broad range of stakeholders and end-users. The IASC Foundation’s commitment is to provide IFRS in XBRL format, at the same time as the publication of the IFRS, hence the development and maintenance of the IFRS Taxonomy. At present, more than 100 countries worldwide either require or permit the use of IFRSs and few are doing so without also considering XBRL. It is no coincidence that the main anticipated benefit of Belgium switching to XBRL was to ease the transition to IFRS.

XBRL is rapidly becoming the standard for electronic reporting, one which is growing in global adoption (through initiatives such as Standard Business Reporting in Australia and the Netherlands) and which has real potential to improve user-access to financial information and to increase the range of users. Today, XBRL is integrated into the development of the IFRSs and is considered a means of easing IFRS conversion, understanding and implementation.

The combination of XBRL and IFRS seems an ideal partnership to provide the transparency and accuracy that the world’s financial markets are desperately seeking. However, in order to reap the many benefits that conversion can bring, corporations need to shed their fears and arm themselves with a sound understanding of XBRL and the tools and support to implement it. During the course of these preparations they will ultimately see that beyond the smoke and mystery, what at first appeared to be a beast is actually something far less frightening and much more manageable.

The opinions expressed are those of the author and do not necessarily reflect the views of the IASC Foundation.