Message

By John Turner
July, 2005

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 that the standard is finally coming of age. It's increasingly a tool that regulators and good governance strongly encourage. More and more market participants are learning what XBRL is and coming to a view that they should use it to their own competitive 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 involves an astonishing amount of manual effort. An awful lot of re-keying. Somewhat haphazard interpretation. This, 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 adoptors 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 coming up to speed, and accountants urge users to build review processes right into their implementations, there is little doubt that 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 that are unique to an individual company report can also be defined, and data that conforms to these custom definitions can be sent out to consumers. Equally entire managememt reporting frameworks, that might bear little relation to GAAP, can be captured and controlled using these definitions, or "taxonomies".

This sophistication means that 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 a very unwelcome additional layer of reporting for CFOs and controllers, already reeling from SOX and other new governance requirements.

"Not so," says Mike Willis, a Partner at PricewaterhouseCoopers LLP. "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 that, 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 data vendor rather than the reports that accounting departments sweat over.

These "template reports" summarise financial statements into a few dozen, or at best a few hundred concepts, inevitably making some value judgements about the way that particular pieces of information should be interpreted. While analysts want information in electronic form, the majority appear to rely on a combination of automated text parsers and offshore data-keying facilities. A small minority rekey 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 (including those differentiating facts that make up a company's unique service proposition) should be captured by organizations, and relayed to their stakeholders directly, is compelling. A quirk of the technology means that it is extremely simple for consumers not only to pick out EBITDA from thousands of concepts with a snap of the finger, but they can also 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 on 4 April, is the right candidate. The best place to start, according to Ernst & Young Principle, and Chairman of XBRL-US, Mr Paul Penler, is simple. It's the earnings release: "Less data and strong market interest".

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 that 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 are likely to be released over the summer and, given the level of technical leap-frogging that is currently going on, this will be a short-lived problem.

The second is more serious. According to Yossef Newman, a leading advocate of XBRL from Deloitte, 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 audit of the underlying accuracy and reliability of the 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 carrying out this kind of review have already been developed and are being closely examined both in the US and internationally.

The bottom line? XBRL is something that regulators and other market stakeholders will be pushing at relentlessly. Quite rightly. It makes their jobs simpler and more effective. This is one field, however, where there is a first-mover advantage. It will help enterprises grappling with complex internal reporting processes to enhance the consistency and quality of their data. Perhaps more noticeably, companies that publish their financial statements in XBRL will benefit in terms of higher levels of visibility and 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 the CEO of CoreFiling, a specialist business reporting joint venture of Business Wire and DecisionSoft. See http://www.corefiling.com/.