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XBRL: A Magic Pill?

By Philip Moyer
With the financial markets under siege and experts agreeing that we are not through the tumult yet, we see how critically investors, analysts, regulators and other key stakeholders need greater transparency into business and financial information.

In response to investor and regulator demands, global companies are reporting more information than ever, including financials, executive compensation, greenhouse gas emissions, child labor practices and geopolitical risk factors. In fact, companies are often overwhelmed with managing their external reporting and investors are also overwhelmed with the thousands of document pages they must parse through to determine the health, value and risk of a potential investment.

Is XBRL A Magic Pill for Transparency?
XBRL may not be a magic pill, but it steps us closer to a cure for financial complexity and overload. In brief, XBRL (eXtensible Business reporting Language) is an open-source global standard for more transparent, reusable, interactive data. XBRL has brought regulators, CEOs/CFOs, the accounting profession, investors and the financial analyst community together around a common set of data elements that represent the health and potential of a business.

Started 10 years ago, XBRL is being used widely today by companies (private and public) of all sizes for external reporting. Australia, China, India and Japan are just a few leading markets adopting XBRL. Ultimately, however, it will also be widely used by companies internally to help them better manage their financial information supply chain. Recently, the SEC announced a proposed rule to make XBRL filings a requirement for every public company in the U.S. over the next three years.

XBRL and CPAs
The accounting profession has been at the core of XBRL development and adoption. The idea of a common chart of accounts for financial reporting is not new. However, it was the combination of XML internet technology and a common set of tags based on accepted accounting standards that that allowed CPAs and other business reporting visionaries to develop XBRL. XBRL provides a common language that allows CPAs and others to better create and decipher the information found within traditional financial statements. It does this by creating information that is machine readable and significantly easier to share, analyze and track over time. Specifically, XBRL delivers:
• More reliable and accurate data collection
• Lower reporting costs
• Faster access to data
• Greater transparency of business information
• Improved re-usability of data (i.e., prepare it once, use it for many purposes)
• More time for detailed analysis of information rather than information gathering

Over the next decade, we believe XBRL will embark on three fundamental phases of adoption in the marketplace:

Phase 1: Companies Publishing XBRL Data to External Parties
Already under way across the world, this first phase calls for companies to create XBRL for regulatory reporting. The companies are not changing anything but the format of their reports to government regulators. Regulators and investors benefit because the data is easier to consume over public access platforms like the internet. And companies benefit as publishing external documents in XBRL is a reduction in external reporting costs because they can use the same set of elements to report across multiple regulatory and investor environments. CPAs in public practice and industry will play a major role as preparers of XBRL information and advisers to both public and private companies tagging their financials for external reporting.

For example, an increasing number of banks and financial services institutions will require that private companies tag their business and financial information when applying for loans and for use by the banks in monitoring loan covenants.
Estimated adoption time for Phase 1: 2006-2016

Phase 2: Analysis of XBRL Data
XBRL provides financial analysts with a common set of data elements about the companies they monitor. An August 2007 CFA Institute report indicated that more than 65 percent of certified financial analysts read a company’s 10K or 10Q and then manually re-key the data into their own financial models. Imagine the varied accounting methodologies used, potential data entry errors and lack of traceability back to a company’s original numbers from this inefficient process.

As the financial analyst community adopts XBRL, millions of redundant hours and the data-entry errors can be eliminated. Through XBRL, analysts can focus on more thorough analysis and increasing the number of companies they cover, rather than the quarterly ‘scavenger hunt’ they often go through to find the data elements they need. As analysts are able to increase the amount of data they consume, they will increase productivity, resulting in a greater number of companies being covered. In addition to analysts, CPAs in public practice and industry will play an important role as users of XBRL-tagged information for audits, benchmarking and performance analysis.
Estimated adoption time for Phase 2: 2009–2019

Phase 3. Adoption by the Financial Information Supply Chain
Feedback from reporting companies, regulators and investors will lead to a standard general ledger level version of XBRL. Companies will implement XBRL in their internal accounting systems so they have one set of books and one chart of accounts from start to close of their financial management process. XBRL in the core financial accounting systems will allow information to seamlessly flow in a common format, eliminating the need for companies to create a “virtual view” of its financial information. This shortens time to close the books and dramatically enhances the “auditability” of and consistency within a company’s financial information.

Most of the major accounting software, business reporting and analysis tool vendors are building XBRL into their products. The XBRL International consortium is creating a global general ledger to help companies close their books simultaneously around the world using disparate accounting software systems. This is possible because XBRL tagged data is platform independent. As you can imagine, CPAs will play the primary role in helping companies implement and manage XBRL throughout all of their accounting systems and processes.
Estimated adoption time for Phase 3: 2005-2025

First Steps First
So where are we now? XBRL is both a bridge across the chasm of technology adoption and a practical tool to manage overwhelming amounts of financial and company information. Regulatory agencies have taken the first steps to require XBRL and are key drivers of adoption—but they are not the only ones. Many companies already agree that financial reporting should not be as complex and burdensome as it has become. XBRL filing programs are producing tangible cost reductions for reporting companies and regulators, and the quality and accuracy of source information and analysis has improved.

As the most trusted business advisers, employers and clients will increasingly call upon CPAs to interpret and facilitate adoption of XBRL. A magic pill it may not be, but XBRL is an enabling cure for business reporting challenges.

Philip Moyer is CEO of EDGAR Online. Previously, he spent 15 years with Microsoft, most recently as manager of the professional services industry, with a focus on Sarbanes Oxley, XBRL and international accounting standards. You can find more information at www.edgar-online.com.