Examining XBRL
New Technology to Modernize How Corporate
America Reports to Investors
There’s a new technology standard making headlines
today that you need to be aware of. Extensible Business Reporting
Language (XBRL) is gaining a strong following among regulators,
investors and analysts. This standard was designed to achieve
increased efficiency of public company reporting and improve the
accuracy of data out in the marketplace.
The SEC has made it clear that XBRL is the future
of financial reporting by publishing a rule proposal that, if
enacted in its current form, will make XBRL submission to EDGAR
mandatory, starting in the first quarter of 2009. But even for
private companies, XBRL is an important initiative to follow and
consider adopting. Ultimately interactive data will be used in the
internal financial systems of a company to improve the accuracy,
useability and speed of reporting and internal analysis. In
addition, regulators globally are using the standard for Central
Bank and tax reporting for both private and public companies.
What is XBRL?
XBRL is based on extensible markup language (XML), which is a way of
presenting information uniformly on the internet so that web-based
applications can process and exchange that information easily. It
can apply to any number of business reporting applications, such as
the reporting of bank institutions’ call reports or public company
financial statement data submitted to the SEC in U.S. GAAP format.
XBRL applies identifiers, or “tags,” to each
element being reported that help to define that element with a
presentation label, computer label, definition and other information
such as units, currency, etc., depending on the reporting
application. The definitions assigned to each element become the
agreed-upon standard used by all stakeholders to that reporting
application. As a result of using XBRL, terms and entities referred
to by different names by different organizations (or even different
departments within a single organization) become standardized,
eventually, around the globe.
For example, a company may call its tax expense
“income tax expense (benefit)” while another company may call it
“provision for income taxes”—with XBRL, both companies can use
different names but the underlying tag for the term is the same.
XBRL data can be reused and repurposed. Each piece
of business information such as “net income” or “EPS” has detailed
information packaged with it that makes it machine-readable for
automated processing, extraction and analysis. Once that data is
created, the same source data can be drawn upon again and again for
multiple reporting needs. The result for analysts and investors is:
• Better data—more accurate, more easily
understood because the ambiguity of definitions is removed.
• Faster data—accessible as soon as the filings are
released, analysts spend less time entering data and more time
analyzing it.
• Cheaper data—data can be pulled directly from the company
web site or the SEC EDGAR database, which means not having to rely
on or pay third-party data aggregators.
How has the SEC been involved?
Awareness of XBRL is increasing because SEC Chairman Christopher Cox
has put commission resources behind it.
In March 2005, the SEC launched its XBRL Voluntary
Filing Program (VFP), giving companies the opportunity to submit
their financial filings in XBRL format as a supplement to their
traditional ASCII or HTML filing. That program today has more than
75 participants and most joined as a learning opportunity to test
out the costs and resources required and benefits gained. Companies
in the VFP include Adobe, Microsoft, Pfizer and Dow Chemical, among
others.
“Adobe has been voluntarily filing its financials
in XBRL, beginning in 2005,” says Danica Joseph, equity accounting
manager at Adobe Systems Incorporated. “Since then, filing in XBRL
has been a standard part of Adobe’s fiscal reporting practices. We
believe XBRL holds promise for the future.”
In September 2006, the SEC committed $54 million
to the interactive data effort; $5.5 million was earmarked for a
project to build out the tags for all U.S. GAAP required disclosures
and footnotes. That contract was awarded to XBRL US, a nonprofit
501(C) and a member organization of accountants, technologists,
software companies, investment firms and data aggregators. XBRL US
embarked on a project to create that collection of terms, drawing
upon the expertise of a large team of accounting professionals and
technologists, with input from important stakeholder groups like
public company preparers and analysts.
The SEC established the Office of Interactive
Disclosure in October 2007 to lead the transformation to interactive
data in public company reporting. In January 2008, an SEC advisory
committee on the future of financial reporting recommended that XBRL
be mandated for all public company filing, following a phased
approach. And on April 28, 2008, XBRL US delivered to the SEC the
final collection of U.S. GAAP terms along with a Preparer’s Guide on
how to use them, technical documentation and case studies.
On May 14, 2008, the SEC approved a rule proposal
that, if enacted in its current form, will mandate XBRL for all
public companies, following a phased approach. Companies would be
required to submit XBRL-formatted documents as a supplement (not a
replacement) to their ASCII or HTML versions. The filings would
include the company’s primary financial statements with single tags
used to tag individual footnotes in the first year of their XBRL
submission. In year two, the same companies would be required to
begin providing more “detailed” tagging of their footnotes, e.g.,
they would have to identify elements or pieces of information
embedded inside the footnotes themselves. Furthermore, the SEC
proposal requires larger companies to comply first, followed by a
second wave, then a third as follows:
• Year 1: the proposed rules would apply
only to domestic and foreign large accelerated filers that use U.S.
GAAP and have a worldwide public float above $5 billion.
• Year 2: all other domestic and foreign
large accelerated filers using U.S. GAAP would be subject to
interactive data reporting.
• Year 3: all remaining filers using
U.S. GAAP, including smaller reporting companies, and all foreign
private issuers that prepare their financial statements in
accordance with IFRS as issued by the IASB would be subject to the
same interactive data reporting requirements.
The rule proposal is subject to a 60-day comment
period that ends August 1, 2008.
What should external reporting managers do
to get ready?
Get educated. A wealth of information is available and among your
first action steps would be to:
• Read the XBRL US Preparers Guide (http://xbrl.us/Documents/PreparersGuide.pdf)
and case studies (http://xbrl.us/Documents/XBRL_all_case_studies.pdf).
• Review the collection of business and
financial terms in XBRL format for U.S. GAAP (http://xbrl.us/Pages/us-gaap.aspx).
• Explore alternatives in creating
XBRL-formatted financials. Some companies license a software tool
and do the process themselves in-house; some outsource to a service
provider like their financial printer. Consider both options and
determine which makes the most sense for your organization.
• Review the “do it yourself” and
outsourcing options (http://xbrl.us/ruling/pages/browse.aspx).
• Talk to other XBRL voluntary filer
participants. You can find a list as well as filings at the SEC
Interactive Data spotlight page:
http://sec.gov/spotlight/xbrl.shtml.
• Look at other companies’ financial
statements in XBRL format (http://sec.gov/Archives/edgar/xbrl.html).
• Explore educational opportunities,
including those offered by the Education Foundation,
www.calcpa.org/foundation.
Developing Your
Plan
• Estimate the time and cost commitments;
review options with the service provider or software company you’ve
chosen to use.
• Identify the internal team; typically led
by external reporting and can also include investor relations,
legal, audit committee.
• Determine roles and responsibilities.
• Discuss the pros and cons of beginning
your submissions now with upper management.
• Advise management on the likelihood of a
mandate.
• Gain management commitment on the timing
of participating.
• Think through the process from start to
finish.
• Start early!
The next few months before year-end are a precious opportunity for
external reporting managers to get educated and test out what they
will likely be required to do in the very near term.
Campbell Pryde is the
chief standards officer at XBRL US. He can be reached at
campbell.pryde@xbrl.us.
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