This article was first published in the March 2013 International edition of Accounting and Business magazine.
Most readers will be familiar with XBRL or ‘eXtensible Business Reporting Language’. Developed by XBRL International, XBRL is an information technology/knowledge management taxonomy for financial information, not unlike bar coding. It is a method by which companies take the financial information now reported in a static format and make it interactive.
For external users like investors, analysts, bankers, auditors, tax agencies, academics and reporting authorities, XBRL allows financial information to be extracted from the financials and compared instantaneously, potentially saving considerable time, while creating a level playing field in terms of information access.
The XBRL taxonomy enables unique identifying tags to be applied to items of financial data such as ‘net profit’, not unlike other bar coded information. The tags provide a range of information about the item, such as whether it is a monetary item, percentage or fraction. XBRL can show how items are related to one another and can also identify whether they fall into particular groupings for internal analytical purposes. It allows handling of business data by computer software. Such information is converted into XBRL by mapping processes or information generated in XBRL by software. It can then be searched, selected, exchanged or analysed by computer, or published for ordinary viewing.
Ultimately, XBRL is a tool for collecting data in the financial information supply chain, which is often criticised as being unreliable and remarkably error prone. Mike Willis, chairman emeritus of XBRL International notes that standardised reporting in this way will help eliminate the problem of ‘limited access…created by a range of propriety information silos, manual report assembly processes, and disclosures reported in content specific documents’.
Currently XBRL taxonomies exist for many types of reporting including US generally accepted accounting practices (GAAP), International Financial Reporting Standards (IFRS), integrated reporting and sustainability reporting, and its use in filing annual and interim reports with securities regulators is gaining ground around the world.
XBRL International reports that the business reporting standard is either currently mandated or voluntarily used in regulatory filing programs in more than 25 countries. For example, in 2009, the US Securities and Exchange Commission (SEC) issued final rules that required companies filing with the SEC, including inter-listed companies, to provide periodic financial statement information in XBRL format. This began for fiscal periods ending on or after 15 June 2009 for larger companies and was phased in during 2010 and 2011 for all other SEC reporting companies. Under the new rules, XBRL tagging is required for financial statements, notes and financial schedules. Each company is also required to provide the same information on its corporate website that it files with the SEC.
Similarly, legislation which came into force on 1 January 2010 in the UK made it compulsory for companies to send their company tax returns to Her Majesty’s Revenue and Customs (HMRC) online using XBRL for accounts and computations. In conjunction with HMRC, Companies House also accepts company accounts in XBRL format.
For corporates, HMRC cites several possible benefits to incorporating XBRL into their financial systems and management process. For example, it notes that by upgrading systems to utilise XBRL, companies can streamline and automate their methods for collecting, assembling, monitoring and reporting business data across their whole operation. In this way, they should be able to integrate disparate data systems. They can also turn internal management reporting and external reporting into processes that are fast, efficient and cost-effective.
According to XBRL International, by using XBRL, data from different company divisions with different accounting systems can be assembled quickly, cheaply and efficiently if the sources of information have been upgraded to use XBRL. Once data is gathered in XBRL, different types of reports using varying subsets of the data can be produced with minimum effort. A company finance division could quickly and reliably generate internal management reports, financial statements for publication, tax and other regulatory filings, as well as credit reports for lenders. Not only can data handling be automated, removing time-consuming, error-prone processes, but the data can be checked by software for accuracy. XBRL International also suggests that ‘small businesses can benefit alongside large ones by standardising and simplifying their assembly and filing of information to the authorities’.
Jury still out
While this all sounds good, the issue to date has been whether or not XBRL has delivered on its promises. For companies like Wacoal, an apparel manufacturer and marketer based in Kyoto, Japan and one of the first companies to build XBRL into its financial information system environment, early reports show that with the full integration of XBRL, the results were on the upside. Prior to using XBRL, information systems at the company were ad hoc, with no ability for consolidated accounting management.
Integrating XBRL throughout the legacy systems involved linking together 32 independent systems and platforms. The intent was to ultimately streamline financial management systems and as a result achieve real-time cash management, provide decision support to managerial accounting systems, reduce indirect costs and to integrate accounting systems that conform to worldwide standards.
The new system provided the backbone for consolidated financial reporting of 36 subsidiaries, shortened month-end closing time by two days, and provided a real-time environment for gathering financial performance information from purchasing, sales, materials, workflow and inventory. Management could then receive interim financial data, improved data and compatible information from other sources.
However, other reports show that companies are slow to build XBRL technology into their financial management information systems, and those that still tag data after the fact as an add-on are not generally pleased. A September 2012 survey by Financial Executives International shows that many US companies are frustrated with the XBRL filing process itself and that the benefits were questionable. More specifically, XBRL was reported as one of the biggest bottlenecks in the SEC reporting function, with 55% of large accelerated filers saying that it slowed their filing process.
The top three most challenging aspects of XBRL were the final review and validation process (62% of large accelerated filers) mapping/tag selection (42%) and the internal team’s level of competency (32%). The most commonly cited concern in general was around the costs versus the benefits of XBRL filing, with 45% of large accelerated filers indicating that the cost-benefit proposition in general was an issue. This increased to roughly 50% among non-accelerated filers and 68% among smaller reporting companies.
These sentiments were echoed at a recent Financial Executives International Conference in New York, where senior finance executives questioned the value proposition of filing using the XBRL taxonomy.
According to Nick Cyprus, controller and chief accounting officer at GM with respect to XBRL filing, ‘This is something we need to comply with. This isn’t something we find useful.’ Similarly, Stephen J Cosgrove, corporate controller and chief accounting officer at Johnson & Johnson, says: ‘The regulators thought that most companies would eventually use this data tagging internally. But we see absolutely no use for it. It’s just redundant to what we already have.’
At the same time, for many, adopting XBRL has meant not only an increase in resource requirements typically within the finance function, but has also brought additional audit expense to the table. According to the same FEI study, 13% of large accelerated filers expect to engage an external accounting firm to review their XBRL filings for 2013. Although there is no audit requirement yet, this also remains a concern. Surely adding a layer of examination to the audit of internal controls over financial reporting will add complexity and hence cost to the process? Mike Willis of XBRL International suggests that it doesn’t: ‘The level of rigour here is very similar to the level of rigour without XBRL. If you think of it, in a paper-based reporting process, we have to manually make these same kind of assessments anyway.’ Furthermore, he adds, ‘By standardising the business reporting supply chain through XBRL the process will eventually become more efficient, not more complicated.’
So given the debate over the value of XBRL to companies, what is its future use beyond compliance and ad-hoc tagging of data? According to Willis, the main bang for the buck will come when companies follow the example of Wacoal and integrate XBRL into the financial information systems throughout the organisation: ‘Only when you automate the financial data using standardised data tagging will you begin to see the benefit of the availability of seamless financial information throughout companies.’
Ramona Dzinkowski is an economist and business journalist