XBRL Makes Accounting the Hub for all Financial Data Destinations
In July 2008, the International Accounting Standards Committee (IASC) Foundation announced the release of the International Financial Reporting Standards (IFRS) Taxonomy 2008. With that announcement, the word ‘taxonomy’ enters the dictionary of every corporate treasurers worldwide. To enable electronic data exchange, XBRL taxonomies provide libraries of business terms and applying electronic tags to them. By separating structure from presentation, data becomes interactive. This makes content of financial reports instantly searchable and retrievable. It also provides easier filing, access to and comparison of financial data. In addition, it allows immediate downloading into spreadsheets and an unlimited number of software applications.
In general terms, taxonomy is information that is systematically defined and classified into ordered groups. For corporate treasurers, it means making the flow of financial data and transactions seamless. This not only applies to internal data systems, but also to external connections with business partners, regulatory authorities and customers. Taxonomy, therefore, appears to solve the problem of the data exchange between the wide varieties of systems used in data automation. Although many different data formats exist, a consistent terminology allows organisations to share information reliably and cost effectively.
The technological enabler in this process is XBRL, short for eXtensible Business Reporting Language, which solves the problem of data inconsistency. The IFRS Taxonomy 2008 is the first taxonomy to undergo an extensive external review by the XBRL Quality Review Team. This is comprised of experts from the preparer community, securities regulators, central banks, financial institutions and software companies.
In most current financial reporting systems data is created and stored in text format, and generally must be re-entered in order to be used in other applications or integrated into other reports. XBRL defines tags for individual items and hierarchies – an income statement with sections and subsections, for example – and these tagged items can be exchanged across networks, applications and platforms. This not only saves time, it is also fault tolerant as it keeps human interference in data transport to a minimum.
However, the main benefit of XBRL is that it allows delivery and reporting of information in a consistent format. This means it supports compliance with recent legislature such as the Sarbanes-Oxley Act (SOX) to ensure responsibility and accountability in corporate finance. A recent report by the Yankee Group points to XBRL as the up and coming common language for business reporting based on web services standards for SOX compliance in the financial industry.
Initially, XBRL was specifically developed for statutory-type reporting formats for financial data exchange, such as regulatory filings, financial statements and corporate reports. XBRL is also well-suited to formatting general business information. XBRL promotes the use of generic terms for business documents, such as ‘invoice’ or ‘order’. That enables integrated, consistent reporting of transactional data between corporate IT systems. This not only supports audit trailing, from invoices and other business documents to collections and reconciliation. It also provides the optimal basis for transparent management reports to, for example, support the decision making process and benchmarking.
Most corporate treasurers have become acquainted with XBRL. In many countries all over the world, XBRL is becoming mandatory. The US Federal Reserve Board, the Office of the Comptroller of the Currency, the SEC and the UK Inland Revenue and Customs authority have already adopted XBRL as standard for their reporting requirements. In the UK, XBRL-based reporting will be mandatory for corporate tax filings by 2010. Other XBRL projects are also underway in Belgium, Denmark, Germany, Italy, and Spain. The Netherlands Treasury Department has announced that several Dutch banks have joined its project to evaluate credit risk using XBRL data.
Taxonomy and XBRL provide standards for data exchange. Where is all this data coming from? Data warehouse reporting schemas are often rigid and too diverse to offer a reliable source. As XBRL was originally designed for financial data exchange, the corporate general ledger is the obvious centre of the data web. This means that the accounting system will provide the source administration all XBRL communication derives from.
XBRL certainly brings benefits. Because it digitises data and its attributes, it eliminates time consuming and laborious processes. Data formatting, reconciliation, and redundant data entry are just a few examples. XBRL data can be transformed by software or other mapping tools automatically. This increases flexibility, consistency, accuracy, and trust in data. However, it also places great importance on data quality. It, therefore, also puts an emphasis on the quality of the corporate accounting regime. After all, a slight mistake may have huge consequences.
Furthermore, preparing the corporate accounting system for XBRL-based reporting can be a costly operation. Often, data resides in outdated systems. Some accounting departments still trust the old pencil and paper technique. All this data, be it digital or paper, needs to be integrated from different sources into one shell application. Or it must be migrated to newly implemented applications that enable XBRL.
Those applications are on the rise, as is shown by XBRL mapping solutions recently introduced by Information Builders, Oracle, SAP and Microsoft, among others. That is a positive development as it will help the adoption of XBRL in the market space. However, the process of integrating, migrating and mapping data to XBRL standards can be a costly affair. When automated solutions are applied, multi-user licenses have to be purchased and often external business consultants and technical expertise are required. Although the benefits are substantial, the investment needed to transfer the data is considerable as well.
In addition to expensive end-user licenses, the proprietary software solutions need to be managed and maintained. This is mainly due to the fact that the XBRL reporting capabilities in these solutions need constant revision as XBRL taxonomies continue to evolve. While the XBRL ‘FR’ financial reporting standard has been around since 1999, a new definition for direct data mapping, called XBRL ‘GL’, is still in its infancy and is not yet established. The result is frequent software updates that may have to be deployed over various systems.
Corporate treasurers are inclined to leave all software headaches in the capable hands of IT departments. However, that does not relieve them of their responsibility. Most financial managers do not seek to expand their workload with systems management and maintenance. According to Gartner, a US-based market research firm specialised in research and consultancy within the technology industry, the solution to this challenge may lie in the Software as a Service (SaaS) model. In its recent ‘MarketScope for Core Financial Management Applications, 2008’, Gartner anticipates that SaaS vendors will start gaining more market share as their solutions mature and gain a wider customer base during the next two to five years.
Using financial software solutions in the SaaS model is a serious alternative to the existing client/server accounting solutions. The software is not purchased as corporate property, but used online in a subscription model. This means no software needs to be installed, managed or maintained. The service is available 24×7 from any Internet capable device. This frees financial managers to concentrate on the issues at hand.
Today’s online systems are secure, with data loss and failure rates a rarity. But there are other immediate benefits. Version control is a serious issue with desktop or client/server applications. It may not always be easy to assess if all systems are upgraded to the latest version of XBRL taxonomies. With SaaS applications, this question does not arise, as there is only one version of the application. Today’s Internet environment eliminates this problem because the technology is hidden from end users.
Another benefit is in staffing. As stated above, in order to transfer to XBRL-based reporting, in-house or external qualified expertise is often needed, but the cost is prohibitive. Using SaaS applications, the software provider takes on the data migration. This is their expertise, so they are able to do so at a total cost that is less than that incurred by employing a qualified person. In these situations, a service solution helps keep administration to a minimum while maximising the benefits of using business experts.
For many business organisations, the SaaS model may be the ultimate solution to comply with mandatory XBRL-based reporting. It also makes other benefits of XBRL available to them. XBRL might have been born from the financial world, but its potential in business intelligence is also significant. It makes business data available faster for analysis and reporting and in a flexible format. It also allows better service provision by exchanging data with customer and partner systems. This is how XBRL-based reporting can provide a huge return on investment.
Today, more than ever, it is essential that accounting is correct, consistent, up-to-date and accurate. Comprehensive automated accounting solutions are critical to allow expedient and secure data exchange. However, corporate treasurers often lack the time and expertise to add software management and maintenance to their vast job description. Accounting solutions offered in the subscription-based SaaS model may be the answer.