XBRL the standard for electronic reporting of financial statements is gathering steam. Last month saw the release of the complete 2008 IFRS taxonomy in XBRL as well as the Securities and Exchange Commission (SEC) hosting an international roundtable on Interactive Data. All of this follows hard on the heels of the SEC’s requiring all U.S. companies to provide financial information using XBRL beginning next year for the largest companies, and within three years for all public companies. But with the US heading for recession, doubts about audit requirements and implementation costs, could XBRL face a sudden wall of opposition? Gary Simon FSN’s managing editor looks at the issues.
Financial reporting in XBRL, which the SEC sometimes refers to as interactive data format relies on computer “tags” that function like bar codes to identify each item on an income statement or balance sheet. With every number individually labeled, investors, analysts, financial journalists and others can easily use the information within spreadsheets and analytical software. According to the SEC, “The ease of producing analysis is expected to generate many free and low-cost new services to investors on the Internet once most companies’ financial information is reported this way.”
XBRL is no longer a theory or experiment. A number of countries require public companies to provide their financial reports in interactive data, for example, China, Japan, Korea, Singapore and Spain. Others, including the United States, are proposing to require it. Still others are currently considering it. The Securities and Exchange Commission proposed on May 14, 2008, to require U.S. reporting companies to provide their financial statements and footnotes in interactive data starting, for large companies, with reporting periods ending on or after Dec. 15, 2008.
The latest SEC international roundtable last month, which has yet to report its findings, was intended to discuss the experience in countries that have already adopted interactive data; the views of countries currently considering adopting interactive data; and the perspectives from analysts and users of financial information about how best to take advantage of the capabilities of interactive data. Participants in the Roundtable included the ‘great and the good’ from the XBRL circuit around the world.
Few doubt that interactive data in some shape of form is inevitable. In a world used to getting the information it needs for free, at internet speed, the idea of electronic financial statements on tap is compelling. Regulators and investors benefit enormously from the automation as information is presented electronically wrapped, in codified tags, ready for manipulation in whatever software tools are about to burst onto the market.
Fund managers, regulators and investors are the winners in a battle that has waged for more than a decade although there is little evidence to prove that individual investors will actually be bothered to take advantage of XBRL to undertake detailed comparative analysis of financial results before making investment decisions.
If the regulators, stock exchanges and fund managers are the winners then who are the losers? Potentially, it’s the large corporates that have to accommodate XBRL, tag their financial statements, change processes and bear the cost of the changes. Tagging financial statements is not a trivial matter and presently the market is not awash with helpful software tools that support taxonomies and tagging.
Often the tools are standalone pieces of software that allow the matching of tags to financial statements rather than tightly integrated solutions. Whilst consolidation system vendors proclaim an ability to hold XBRL taxonomies (the dictionaries used to translate items in financial statements) and generate XBRL data, who is going to ensure that the taxonomies are the latest version, that the tagging has been done correctly and that the output is generated completely and accurately. Taxonomies are constantly on the move because the underlying financial reporting standards are also on the move. Companies will have to introduce new processes to control XBRL tagging in the so called, ‘Last Mile’ of group financial reporting, an area that is already technically fragile and susceptible to error.
The burden for all of this innovation falls squarely on companies. In effect there has been an inequitable shift of responsibility and burden from the regulators to the companies. With businesses now more cost conscious than ever can the SEC expect a backlash?
Raw cost of production is not the only concern. Another issue looming large on the horizon is the auditability of XBRL statements. At the moment all parties are dancing around the handbags and not facing up to the reality that if XBRL statements are to hold sway in the markets then the investing public will need more than a passing comment on the robustness and integrity of XBRL statements and their derivatives. Auditors will eventually have to roll up their sleeves and verify the veracity of the XBRL tagging and this will come with a tag all of its own – cost.
Of course if XBRL is successful then companies will become victims of that success. The ability of the investing public to compare results between companies, slice and dice earnings automatically and drill down to their heart’s content conjures up images of long lists of questions for finance and investor relations departments. XBRL could keep companies permanently on their toes. Perhaps that is not a bad outcome in the spirit of accountability, openness and transparency but once again it comes at a price and it is companies that will have to dig deep into their pockets.
Is there a bright side to all of this? The simple answer is “Yes” because companies will not only be contributors of XBRL data but also beneficiaries. Just like any investor, any company will be able to obtain tagged financial statements, derive key rations and compare performance. Such analyses may have been impractical on a manual basis and certainly costly and time consuming to prepare.
Change is always accompanied by uncertainty and there will always be those that prefer to carry on with what they know rather than plot a new course. With recession looming in major economies the mutterings about the cost of XBRL will grow – but the accounting community must not allow the drive for process efficiency and automation of reporting to be derailed. XBRL is the first step on the road to real-time reporting, it has its imperfections but the initiative must not be strangled at birth.
