FSN: XBRL given boost by SEC in IFRS to US-GAAP convergence announcement

XBRL given boost by SEC in IFRS to US-GAAP convergence announcement

10th December 2007
Last month, the SEC announced that it is to drop the requirement for foreign listed companies quoted on US exchanges to reconcile their IFRS financial statements to US-GAAP. But accompanying the announcement was the significant news that the first company to file IFRS financial statements with the SEC in XBRL format had done so in early November. In a further sign that XBRL is gaining momentum, this month sees the release of a full US-GAAP taxonomy in XBRL as part of a voluntary filing programme.

The news that the SEC has finally dropped the requirement for foreign issuers to drop IFRS to US-GAAP reconciliations will come as welcome news to many public companies listed on US exchanges. The decision reflects a growing recognition that IFRS is reaching maturity and that concerns surrounding its governance and development are evaporating. It also recognizes the increasing reality that US investors increasingly hold substantial investments in non-US companies.

But the milestone announcement was accompanied by another major push on XBRL (X tensible B usiness R eporting L angauge). The XBRL language 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 so that it is amenable to interactive reporting and analysis. It is widely seen as a vital tool in democratising financial information and making it more widely and instantly available.

Currently, electronic financial reporting for the majority of companies is limited to 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 most quoted company annual reports can easily run to more that 100 pages.

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 and the recently released US-GAAP taxonomy places the US on the same footing as the rest of the world.

The big question is whether XBRL filings will become compulsory. A voluntary filing programme in the US has made modest progress to date with around 60 companies taking part in the scheme, but the presence of a US-GAAP taxonomy should accelerate acceptance.

The SEC is being non-committal about mandating the use of XBRL, presumerably waiting to see the uptake and feedback on the US-GAAP taxonomy. Nevertheless it is encouraging the use of digital reporting, quaintly called “Interactive Data” by SEC Chairman Cox, by proposing to release pay details of executives at 500 top U.S. companies in XBRL format. Whether end users have the tools to analyse the XBRL data remains unclear.

To some observers the US appears to be in ‘catch up' mode as other jurisdiction around the world increasingly embrace and mandate the use of XBRL. However, as in many global matters US support is seen as vital to ensuring the future of the standard.

Mandatory implementation of US filings of XBRL could be as close as 2008 year ends, but much depends on progress in the next two months and how much companies groan about the cost and effort of understanding and implementing the new approach. One of the biggest stumbling blocks remains the lack of incentive for companies to get involved. Presently, most of the advantages of XBRL accrue to investors, banks, analysts and other users of financial statements. The downside for individual companies is the prospect of having to respond to these market participants in an indeterminate way.

But it is a ‘chicken and egg' situation. If more companies file XBRL data then this increases the available pool of competitor information in a form that is amenable to close analysis. Vendors of performance management systems, such as Business Objects and Oracle have begun to realize the benefits of integrating externally sourced XBRL data into mainstream financial reporting. Pushing this agenda could be just enough to tip the balance in XBRL's favour.

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