XBRL changes financial reporting

Information Outlook, Dec, 2006 by Louise A. Klusek

Anyone who has been following developments at the Securities and Exchange Commission since the appointment of Christopher Cox as chairman knows that he is a champion of investor education. He has promoted the use of plain English to remove legalese from SEC documents. He has made the SEC's company filings and mutual fund reports fully searchable on the Web. He has spoken frequently about the need to give investors the tools they need to make informed investment decisions. This September he announced that the SEC intends to invest in an interactive data system that will make real-time search tools available to investors.

What is Interactive Data (XBRL)?

"Interactive data" is another term for XBRL or eXtensible Business Language Reporting. XBRL is essentially a classification system that uses metadata for financial reporting. It was developed as an open standard by a nonprofit consortium, XBRL International (www.xbrl.org). The consortium--composed of more than 450 companies, organizations, and government agencies--promotes the development and use of XBRL and freely licenses it to anyone. Under development for more than five years, XBRL has the capability to alter how investors, analysts, and regulatory agencies access and use corporate reports. Moreover, it has the potential to provide a uniform standard for the electronic distribution of corporate reports not only in the United State but also worldwide.

One analyst/consultant compares XBRL's effect on financial reporting to the Dewey Decimal System's effect on libraries. Simply put, XBRL enhances the analysis and sharing of financial information. It offers advantages to a wide variety of financial-data users, from the ordinary investor, to buy-side and sell-side analysts, to the reporting company itself. Librarians who deal directly with investors will be working in a new data-enhanced environment. Librarians who work in corporations, banks, or accounting firms will see their work streamlined by new desktop analysis tools.

How Does It Work?

We are used to seeing information presented in documents that use HTML to control how data looks on a Web page. But Web sites also employ another meta language called XML (eXtensible Markup Language) consisting of tags that describe data so that it can be read by various software applications. Data is tagged so that static documents can function as interactive reporting tools. XBRL is an extension of XML created to conform to the requirements of financial reporting.

Librarians might best appreciate XBRL if they understand it as metadata (data that provides context for data) specifically developed for financial statements. XBRL is based on a standard computer language that tags all elements of a given financial statement to a taxonomy or data dictionary. The tags surround the data with context, providing information about what the data represents, where it comes from, and why it is useful.

In XBRL, taxonomies go beyond simple description of discrete items. XBRL taxonomies define relationships between items (as a mathematical formula or a reference to a standard, for example). For example, any number in a financial statement will be defined in the taxonomy and will be recognized in any XBRL application. Non-numeric information is also tagged so that, in addition to other materials, accounting policies, compensation information, or information in the Management Discussion and Analysis (MD & A) are identifiable and retrievable. Taxonomies also include text labels in multiple languages that make it possible to "read" financial statements written in a foreign language. A financial report written in Chinese or Japanese, for instance, can be "read" in English if the report has been tagged in XBRL. XBRL is also extensible, which means that filing companies can extend the taxonomies for their own industry-specific or even company-specific needs.

Accounting Standards and XBRL

In the United States, accounting bodies have been key players in the development of XBRL taxonomies. Charles Hoffman, the acknowledged father of XBRL, conceived the idea and worked on the first prototype open standard in 1998 in cooperation with the American Institute of Certified Public Accountants (AICPA). In addition to AICPA, XBRL has the support of the Institute of Management Accountants, and the Financial Accounting Standards Board (FASB). Accounting bodies worldwide believe that XBRL will reduce accounting complexity and enhance the use of accounting standards.

XBRL-US--originally a volunteer committee of AICPA and now an independent not-for-profit organization--is leading the development of taxonomies for US GAAP (Generally Accepted Accounting Principles). Taxonomies for US GAAP are available today for several industry sectors: Commercial and Industrial, Banking and Savings, Insurance, and Investment Management. Taxonomies are not yet available for all industries; and, for some industries, they are still immature.

Certain industries, like oil and gas, will require taxonomies with greater depth of detail than what is currently available in the US GAAP Commercial and Industrial taxonomy. Other entities with particular reporting needs, such as conglomerates, will need to develop their own sets of custom extensions. The good news is that XBRL-US has just received a $5.5 million dollar contract from the SEC to complete the taxonomies for all US GAAP-based filers.