The XBRL Opportunity for Financial Reporting

XBRL is an open standard that supports information modeling and the expression of semantic meaning required for business reporting. XBRL is XML-based and uses technologies such as XML Schema, Xlink, XPath and Namespaces to articulate this semantic meaning. XBRL consists of an instance document, containing primarily the business facts being reported, and a collection of taxonomies (called a discoverable taxonomy set (DTS)), which define metadata about these facts, such as what the facts mean and how they relate to one another. XBRL is extensible, meaning that the terms available for use can be customised so that companies using XBRL can create their own elements (extensions) to describe a unique reporting situation. XBRL is not an accounting standard and will not change what is reported, only how it’s reported. The XML tagging makes the information in a business report is computer readable and can be more easily extracted, searched and analysed by users of that information.

XBRL – Mandate and Status

With regards to the SEC rules which are to be adopted by first quarter 2009, all public companies with market capitalisation greater than US$5bn would need to start applying XBRL tags to their 10-Ks and 10-Qs for periods ending on or after December 15th 2008. While these dates discussed above represent the need for organisations to move towards XBRL rather quickly, a recent Institute of Internal Auditors (IIA) survey of more than 200 chief audit executives worldwide found that more than half are not yet familiar with XBRL, and over 90% would need guidance on the new process of filing financial statements with interactive data. This just shows that the majority of internal auditors have not yet been engaged in the process of converting financial reporting into an interactive data format.

While it is already being put to practical use in a number of countries in North America, Europe and elsewhere and implementations of XBRL are growing rapidly around the world, there still seems to be an opportunity for others to start the process and reap the benefit.

Benefits

Lower cost of production of reports

In most current financial systems, the data is stored in text format and must be re-entered in order to be used in other applications. XBRL not only increases the speed of handling of this financial data, but also reduces the chance of error and permits automatic checking of information and, hence, reduces the overall cost of production of reports significantly.

Lower consumption costs

Consumers of information (including managers, corporate treasurers, investors, creditors, regulators, and others) will gain increased access to information in corporate reports at lower cost.

Enhanced information sharing

XBRL exponentially increases the timeliness and communication abilities between any and all parties interested in corporate information.

Areas of Impact

Continuous auditing and monitoring

Due to the need of compliance with regulators’ mandates, many organizations are trying to use XBRL at the end point of the business reporting supply chain. With XBRL, internal auditors can access deeper business data, perform easier data analytics, improve profiling and risk assessments, and continually audit and monitor the supply chain better.

Operation risk measurement and management

The current economic environment highlights the need for sustainable technology standards at the core of information governance. XBRL could be exploited for identifying and managing risks, ensuring oversight and enforcing corporate policies. In this extremely challenging economic climate, XBRL could be used for meeting the challenges of operational risk and compliance management.

Fraud prevention

Many millions of dollars are being lost by organisations due to inefficient fraud prevention systems that do not provide real-time information from across all of its operations. Much manual intervention is required to do deep analysis from disparate data sources and systems. With XBRL at deeper ledger levels of information, the entire accounting and operational processes can be integrated using the same language of communication and hence becoming more efficient. XBRL provides a single version of the truth, streamlining the anti-money laundering (AML) and fraud reporting processes and allowing all stakeholders to collaborate effectively.

Corporate performance management

XBRL offers significant potential benefits for internal reporting and hence better manage corporate performance. By taking the appropriate GAAP taxonomy and extending it to link with management reporting structures, an organisation can bridge external statutory reporting systems and internal management reporting. This also can provide real-time financial and management information that can be disseminated internally to any user at any level of the organisation, because XBRL handles the semantic complexity of aggregating financial data. Most CPM vendors provide the capability to produce financial statements as XBRL output.

Implementation

There are three ways with which organisations have been pursuing tagging of financial statements:

1. Build the application. While with this approach, organisations may have more control of the development schedule and feature set; this is not recommended unless they can support and upgrade the application.
2. Purchase an XBRL document creator. Many vendor companies, such as Rivet Software (Dragon Tag is an XBRL enabler which is a Microsoft Office add-in), Snappy Reports, Hitachi, Impede, and UBmatrix, have products that enable taxonomy creation, taxonomy validation, report production and ad hoc financial analysis of XBRL-tagged data. These products simplify the process by converting existing Microsoft Word and Excel financial data into XBRL format. The SEC released its own XBRL reporting tool, Financial Explorer, which provides a graphical analysis using graphs and interactive charts of the chosen company’s performance. Enterprises can use these technologies to create Web 2.0-style mash-ups that could feed up-to-the-minute financial information for a business unit to an executive based in his or her geographic location.
3. Outsource the solution. Companies, such as RR Donnelley, provide complete solutions for public companies’ EDGAR and SEC Online filing needs. They provide outsourced solutions that provide financial statements to companies converted to XBRL formatted data. The user can request different data types using a wizard to create proprietary templates and models or use one of the pre-packaged models.

Challenges and Risks

XBRL is still in the process of developing and being adopted which means:

• Existing taxonomies continue to change and evolve based on feedback from the field.
• Internal reporting software may not yet accommodate XBRL data or upgrades may be required.
• Maturity of the existing XBRL-enabled tools may be an issue.
• Staff training will be needed.

The risks to management of companies filing under electronic filing and reporting systems relate primarily to information being incorrectly compiled or being altered by unauthorised persons, either before or after it is reported or during transmission.

Conclusion

With the status of SEC proposal being in pending state, corporate treasurers and internal auditors will have time to catch up which could be beneficial to the organisations in the end. But the main point to note for the new adopters is to start now and get some test filings done and get prepared for the mandate which could happen very soon.