The eXtensible Business Reporting Language (XBRL) is finally set to go mainstream, but why has something with so much potential taken so long to catch on? FSN contributing editor Lesley Meall analyses the not so brief history of XBRL.
Financial reporting has slowly but surely become more international, as the Generally Accepted Accounting Principles (GAAP) of the world grow ever closer to International Financial Reporting Standards (IFRS), and these are allowed or mandated for statutory reporting in an increasing number of national jurisdictions. But as many accountants will be aware, the development of standards has been a long and complex process, the associated terminology has caused some confusion, and national differences in interpretation and adoption have not led to the universally uniform standards that provided the initial impetus for International Accounting Standards, or delivered the transparency and usability of financial information that they promised. So it is with the eXtensible Business Reporting Language better known as XBRL.
In 1998, when the American CPA Charles Hoffman came up with the idea that led to XBRL, a consequential revolution in financial reporting seemed but a hop, skip and a jump away. After all, as XBRL evangelists were more than happy to point out, it had the potential to deliver some significant and impressive benefits.
Because XBRL makes it easier to electronically communicate business and finance-related data (on which more, later), it could offer cost savings, greater efficiency, and improve the accuracy and reliability of the related processes for all those involved in supplying or using financial data. In theory, XBRL could make it easier for anyone interested to analyse, publish, use, re-use and exchange finance-related information, regardless of differences in reporting standards, languages and terminology. In theory, it could improve the usability and transparency of annual reports, financial statements, tax filings, and more, for accountants, analysts, competitors, investors, regulators and other stakeholders. In theory, it could have helped to prevent the banking crisis. But crossing the chasm between theory and reality has not been easy.
The journey from one conceptually simple idea to myriad interpretations and applications has been a long, complex and costly one, and some of the reasons are common to IFRS and XBRL. Consensus, for example, is all very well when you are reading a dictionary definition, but decisions can be difficult to reach when made by a committee, and the development of these ‘standards’ demanded the commitment, involvement and agreement of myriad committees. Some of these were set up by specialist not-for-profit consortia, some involved bodies representing the finance profession, some involved national and regional regulators, and some brought together representatives from numerous stakeholder groups, so their co-ordination and management was almost as challenging as developing the necessary taxonomies.
Which brings us on to another barrier between the theory and its realisation: the terminology used to describe the technology. Despite being dubbed the eXtensible Business Reporting Language, XBRL is not a ‘language’ per se, as most of us would understand this term of reference. XBRL is a standard for the electronic distribution and exchange of business and financial information: it describes this information using metadata ‘tags’ that work like bar codes, and it defines each of these using a number of ‘dictionaries’ called taxonomies. And while none of this will come as a surprise (or be much of a barrier) to those who are familiar with XML (the extensible Markup Language which is the basis of XBRL), it can all be rather confusing and off-putting for lesser mortals.
Undermined by diversity
Even so, if the XBRL ‘standard’ had led to a single or small number of taxonomies, it might have caught on some years ago, but there are many, many, ‘reporting-area specific hierarchical taxonomies’. Companies, industries, statutory regulators, and even national accounting bodies have opted to each develop their own taxonomy, designed to meet their ‘unique’ needs and reflect their particular rules, regulations, and practices (as has XBRL International, the non-profit consortium behind the development of the XBRL standard). As a result, there are approaching 30 ‘approved’ taxonomies and dozens of ‘acknowledged’ taxonomies (as you will see if you take a quick look at the list at XBRL International), and the resulting diversity has helped to undermine the clarity promised by XBRL – and done wonders to slow its uptake.
In part, this is also a consequence of the length of time these taxonomies have taken to develop, but their diversity has also made complexity an issue, and until recently, this has discouraged all but a few innovative and specialised software developers from using XBRL as the basis for product development or enhancement. As the plain speaking representative of a software developer once enlighteningly explained: “Although standard XML messages 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 accounts to the many and varied taxonomies,” which translates as: there are way too many taxonomies, they are way too complex, and exploiting them is way too expensive.
Whilst all of this (and more) has retarded the development of software products with XBRL embedded, and restricted commercial uptake to the most enthusiastic and far-sighted businesses and industries, it has not blinded regulators to XBRL’s potential (to reduce administration), and over the past few years they have emerged as the driving force behind widespread adoption. Many stock exchanges already accept (or require) XBRL submissions, or are developing XBRL systems, in countries including Canada, China, Japan, the Netherlands, and Spain; the financial services industry has also been an early adopter through the Federal Deposit Insurance Corporation (FDIC) in the United States, the Committee of European Banking Supervisors (CEBS) and the Australian Prudential Regulation Authority (APRA).
But it is the adoption of XBRL for statutory reporting, by government regulators, that is finally bringing XBRL (and its potential benefits to the masses). The Dutch government was among the first to explore XBRL with businesses, and it has since developed an ‘electronic infrastructure’ that supports the streamlining and simplification of information exchange (and submission) between businesses and the Tax Office, Central Bureau of Statistics, Chamber of Commerce and several banks. Following the Netherlands’ lead, regulators in Australia have also collaborated across agencies and to develop a single set of definitions and language for the statutory information reported by business to government, using XBRL as the basis, and in July 2010 it was ‘rebranded’ and launched as Standard Business Reporting.
There are many other similar initiatives across the world, some of them voluntary, some mandatory, and the UK government will shortly join the party. Online electronic filing using XBRL will be mandatory for UK company accounts and Corporation Tax returns delivered on or after 1 April 2011, for accounting periods ending on or after 1 April 2010 (companies must also make Corporation Tax payments electronically from this date), as this guide from HM Revenue & Customs explains.
This has given developers of specialist software and systems (for final accounts production, taxation software, financial reporting and other affected areas) an impetus to embed XBRL in their products, as many of them face a stark choice between doing this, or not doing this and losing their customers to those who do, but because HMRC has chosen to use Inline XBRL (iXBRL, which it developed along with the XBRL specialists CoreFiling,) the transition has been made easier for software providers and accountants and their clients, as iXBRL allows for structured, machine-readable data inside a human-readable rendering of the data.
Seeing is believing
One of the great strengths of XBRL is that it can automatically be transmitted from machine to machine, and during its relatively brief history there has been a long running debate about whether it would ever need to be ‘rendered’ so that it can easily be read and understood by humans (and some interested parties are still in debate about the best way to do this). But HMRC has taken a lead on this with iXBRL (and there are signs that other jurisdictions, such as the United States, may follow suit and also adopt it). As iXBRL allows for the production of XBRL tagged documents whilst also preserving the formatting, order and visual presentation of the information they contain, users of compatible software and services – such as advisers and their clients – can validate information by reading a familiar-looking document.
Although affected taxpayers and agents in the UK have little choice about adopting XBRL where its use is mandatory, iXBRL takes some of the pain from the process, and it also takes some of the pain from the transition process for software developers (if you want to know more about how and why, take a look here), by making it less complicated than it might otherwise be to modify their existing software and its reporting capabilities. So it looks as if widespread uptake is now the hop skip and a jump away that evangelists were hoping for 12 years ago, when the CPA Charles Hoffman originally had his very good idea – even if things haven’t worked out in the way that many initially anticipated.
Because of the many benefits that XBRL could potentially bring to the world’s largest organisations (from economies of scale to a positive impact on their relationship with the financial markets), ‘big business’ was expected to be behind the main (and relatively rapid) drive for adoption. Instead, widespread XBRL uptake has taken a long and winding road, and arrived as part of a broad and fundamental international pattern of regulatory reform. All of which brings us back to where we started, with a world in which the rules and practices of financial reporting are increasingly international, and the promise of increased transparency and usability of financial information hovers tantalisingly on the horizon – and if you want to learn more about the possibilities, the FSN iXBRL and Financial Close Conference on 4 November could be a good place to begin.
