The future of digital reporting seems more assured than at any time in the past. In increasing numbers, regulators around the world see the growing importance of electronic filing to support the workings of global capital markets and to protect investors. The interests of XBRL and IFRS are converging and voluntary submissions of XBRL based data are being encouraged by the SEC for Edgar filings and by the HMRC for corporation tax filings in the UK . 2006 will be a make or break year for XBRL.
XBRL or X tensible B usiness R eporting L angauge has been in existence since about 1999 and in very broad terms is the technology and process that describes the electronic tagging of financial data and is seen by most commentators as the key to bringing financial reporting into the 21 st century.
For most companies, the electronic publication of financial information begins and ends with the posting of their annual report and accounts as a pdf (Adobe Acrobat) document on their web site. Whilst these documents are extremely helpful in disseminating information quickly and accurately and at low cost to anybody who seeks to read them they are fundamentally inert. In other words, by and large there is nothing that an investor, fund manager, competitor, lobbyist or other stakeholder can do except to print out the information or re-key it into, say, a spreadsheet for further analysis. Not an easy task when one considers that most quoted company annual reports can easily run to more that 100 pages. Finding the specific information, even for an experienced accountant versed in modern day disclosures, can be a formidable task which is prone to error.
Earlier this month, Christopher Cox, chairman of the U.S. Securities and Exchange Commission(SEC) in an opening speech to the Practicing Law Institute, remarked, " Executives who have taken the time to double check the data that financial analysts following their companies are working with can sometimes get quite a shock. That's because some of them bear no resemblance to what the companies published. The truth is, too many CEOs have no idea what happens to their information after it leaves their control in the form of SEC-mandated financial statements. When they are asked, "Do you know where analysts get data on your companies to populate their valuation models?" they usually reply, "well, from our financial statements." Wrong answer. And then, their first reaction is surprise. That surprise turns to concern when they realize that the numbers the analysts are using in their valuation models can have an error rate of 28%, or higher still if the data in question comes from the footnotes," he said. Overcoming this kind of error, is one of the justifications that the SEC chairman uses for the importance of what he calls, in a quaintly old fashioned term, "interactive data".
However, Digital Reporting is not just about reducing errors in the final delivery of financial information; it is also about rendering financial data so that it can be extracted on a selective basis, safe in the knowledge that apparently similar information harvested from several sources is indeed the same. Take for example, the apparently simple task of extracting and comparing EBIT, (earnings before interest and taxation), as a single figure from the accounts of five different quoted companies in Europe . How does one know that they are the same?
This is where XBRL comes to the fore. It provides a common taxonomy or dictionary by which financial information can be described on a consistent basis. So for example there is an IFRS taxonomy which allows information to be tagged according IFRS definition. (It is very important to note that XBRL does not provide translation between one taxonomy and another, for example US-GAAP and IFRS simply by substituting the tags. Clearly, the underlying data has to be measured in accordance with the appropriate standard as well. Sometimes they will be equivalent but in many cases they will not.)
The tagging also describes for example, the company name, the accounting period, the currency and so on. Therefore, using appropriate tools, it should be possible to query, extract and report on XBRL data from a variety of sources to extract comparative information in a timely and consistent way . Development of relevant taxonomies has been a much more difficult task than most people imagined because it has unfortunately coincided with one of the most tumultuous periods in the development of accounting standards. For example, keeping XBRL taxonomies in step with IFRS has been especially demanding. However, IFRS and XBRL have matured in similar timeframes and now the two are joined at the hip through the very close co-operation of IASC Foundation (International accounting Standards Foundation) and XBRL International, the not for profit consortium of approximately 300 companies and agencies worldwide which governs the development of XBRL, promotes and supports its adoption.
Despite the huge task of managing the development of XBRL on a global basis with voluntary funding, it is an amazing achievement that at last XBRL is established as a major component of digital reporting. Understandably, companies have been slower to embrace the XBRL standard than regulators. Companies may need persuading that it is to their advantage that anybody can crawl all over their results, compare and analyse them in ways that they cannot foresee and control. Nevertheless, most will come to accept that if people are going to analyse their performance it is better that they should have access to information that is accurate, consistent and available on a timely basis.
Regulators, on the other hand, have seized on the opportunities presented by XBRL and electronic submission of data, to streamline and standardise their data collection processes as well as provide an invaluable store of information which can be analysed at will. The SEC's decision in 2004 to encourage the electronic filing of Edgar submissions using XBRL tagging was a turning point. The current SEC chairman is an enthusiast of "interactive data" and sees it as the way forward. His 'patronage' of digital reporting is causing other regulators around the world to take note. In the UK, this month, HM Revenue and Customs (HMRC) announced the launch of a service for company tax filings in XBRL and follows hard on the heels of the start of filing a few weeks ago of accounts in XBRL to Companies House. The Companies House system currently covers audit exempt accounts, but both it and HMRC are looking to expand the scope of accounts filed in XBRL in due course.
But XBRL is not out of the woods yet. 2006 is a critical year because it will expose the true ease with which both companies and regulators can use XBRL submissions. The popularity of the voluntary submission schemes remains to be seen and there is the significant task in educating the broader market and making the software tools available to ensure that progress is smooth. Nevertheless, XBRL is now firmly established as the most promising technology for the exchange of financial data. The rest is up to us!
