XBRL: increasing the power of financial reporting

Accountants aren�t widely thought of as pioneers, especially when it comes to technology, but with the development of XBRL, Lesley Meall believes that maybe they should be

The earliest known records of commerce are 5,000-year-old tax accounting records created by scribes, the Sumerian equivalent of today�s bookkeeper. Way back then, recording information on specially prepared clay was a groundbreaking activity. When General Electric became the proud possessor of the first business computer application in 1953, it was developed and installed by Arthur Andersen in a move that helped shape the profession and sewed the seeds of an entire industry. Then, during the 1970s, the profession helped jump-start the PC revolution with its rapid and enthusiastic uptake of VisiCalc, the first spreadsheet. Fast-forward 20 years and accountants were at it again, developing the digital language for the next generation of corporate financial communications: XBRL.

Despite its name, the eXtensible Business Markup Language is not a language but a standard for the distribution of financial information. In the time-honoured tradition of technology, the bits and bytes are rather complicated. But most finance professionals can forget about the detail as long as they know what XBRL does and how it does it. It�s based on the �lingua franca� of the Internet, XML, a system that uses �tags� to make it easier for computer applications to talk to each other. The tags work like bar codes. But instead of making it easier to handle asset management or manage retail sales, XBRL makes it easier to identify different items of financial information.

�XML is key to distributing information in the Internet age and XBRL will greatly increase the power of financial reporting,� asserts David Grigson, Reuters� chief financial officer. By defining a tag to describe an individual item such as inventory, varate, rimanenze, elements de stock, or investment foretag, XBRL makes it much easier to identify, regardless of national and international differences in reporting standards, language and terminology. Its potential is vast - and it was the brainchild of American accountant Charles Hoffman.

After graduating as a CPA, Hoffman discovered a flair for technology while working as an auditor at what was then Price Waterhouse. But it was his subsequent work at a smaller firm, developing an Intranet linking accounting and business systems, which won him the AICPA�s innovative user of technology award in 1997, and set him on the road to XBRL. It led to a meeting with AICPA director Wayne Harding who saw in Hoffman�s idea the potential to adapt XML to create XBRL as a means of streamlining accounting and financial reporting.

Since then, the idea has been developed by XBRL International, a consortia of more than 170 companies and agencies, ranging from firms such as PricewaterhouseCoopers through Microsoft and Reuters, to the AICPA in the US and numerous institutes in other countries. ACCA also runs courses on XBRL for its members. XBRL International and the local jurisdictions collaborate to produce standard specifications and dictionaries (called taxonomies) that anyone can freely license for use in applications (see www.xbrl.org for more details).

Fast-forward

By reporting financial information through the XBRL standard, investors, regulators, analysts and companies can benefit from increased transparency and usability of the information, and faster access. �The way information is formatted today, in paper and electronic-paper form, it would take five or six hours to get information on the five largest semiconductor companies and put it into an analytical application of any kind,� says Mike Willis, founding chairman of XBRL International and partner at PricewaterhouseCoopers in the US. �With XBRL, you could do it in 30 seconds.�

In the circumstances, uptake has been remarkably patchy. Morgan Stanley Dean Witter was the first company to submit its financial results (to the SEC) in XBRL in 2001, followed by Reuters in Q1 2002; and some other companies have since followed suit. DaimlerChrysler, Intel, Wacoal, a Kyoto-based fashion house, Microsoft and Novartis, the Swiss pharmaceutical group, are among a small group of companies publishing their results in an XBRL-compatible format. Vendors that have committed to XBRL-enabling their financial reporting applications include CaseWare, Creative Solutions, Hyperion, Microsoft, Oracle, SAP and Semansys; but the relatively small number of software suppliers embedding XBRL code in their systems has been one of the main barriers to its wider uptake.

Semansys has developed a number of software tools designed to make it easier to utilise the strengths of XBRL, by drawing appropriate data from multiple sources and facilitating the creation of multiple reporting structures. But, until recently, the XML-based tools required to exploit XBRL were not particularly user-friendly; another barrier to uptake.

Including XBRL in Microsoft Office would significantly speed up adoption. Rob Blake, group program manager at Microsoft, says it is unlikely to make its way into the next out-of-the box version of Office, though it might be offered as an add-on. Government bodies are being more proactive. In the UK, for example, the Inland Revenue will start a pilot scheme into on-line corporation tax filing in the autumn this year. �We aim to start using it for CT600s by end of 2003,� says a spokesman. �By the end of 2005 we hope to be using it for CT600s, accounts and computations.� According to Chris Rodgers, a partner at KPMG and chairman of the UK XBRL Working Group, Companies House is also interested. �It is looking at it, but has not yet committed,� he says.

Internet incentives

To encourage wider adoption, NASDAQ, PricewaterhouseCoopers and Microsoft launched (towards the end of 2002) a pilot program to demonstrate, to a range of potential users, the benefits of XBRL (see www.nasdaq.com/xbrl). It provides access to financial data from 21 NASDAQ-listed companies in the semiconductor industry. �We�ve tagged five years� worth of the companies� SEC filings for 10K annual reports and two years� worth of 10Q quarterly reports,� says Willis. This includes information on balance sheet, profit and loss, cash flow, changes in equity and some notes.

�XBRL is a significant step forward in improving the transparency to investors and quality of data from SEC filings,� comments John Delta, Vice President and general manager of NASDAQ.com. Although corporate disclosures are highly standardised, the process of retrieving and viewing that information from financial statements and comparing them with other companies is confusing, costly and time consuming. �You have a human being trying to read 100 pages of a document and the disclosure they�re looking for might be on page 76, so they have to read 75 pages to get there,� says Willis. �With an XBRL document, you can tell it what you want to see and it pulls it up immediately.�

It�s also much easier to compare like with like. As Delta comments: �Now, when I see revenues for different companies, I�ll know exactly what that means. It won�t be net revenue in some cases and gross revenue in others.� XBRL can also ease the process of turning transactional data into the digestible and meaningful performance data listed companies must produce to comply with legislation and regulation.

Because it streamlines the communication between disparate technologies, XBRL allows them to function in a more integrated way. By making it easier to collect, understand and analyse information from a variety of sources, it can help with developments such as Basel II, Sarbanes Oxley, and International Financial Reporting Standards. A taxonomy that models the primary financial statements that a commercial and industrial entity may use to report under international accounting standards, and one for explanatory disclosures and accounting policies, are available from XBRL International at www.xbrl.org. So, despite getting off to a slow start, XBRL could well emerge as the future of financial reporting.

Lesley Meall is a writer on business and technology issues.