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 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.
How has the SEC been involved?
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:
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?
Developing Your Plan
Campbell Pryde is the chief standards officer at XBRL US. He can be reached at email@example.com.