Achieving Financial Reporting Transparency with XBRL

InfoManagement Direct, July 18, 2008

Mary Beth Kush, Greg Fritsky

For many years, financial executives and accounting professionals have been searching for a reporting mechanism that can provide transparency to all stakeholders that process, report or rely on the financials of an organization, and the good news is that the search may finally be over.

On May 14, 2008, the Securities and Exchange Commission (SEC) announced that they voted on a rule requiring all U.S. companies to report their financial results using eXtensible business reporting language (XBRL). The SEC's proposed ruling will require that the 500 largest companies (defined as those “large filer” companies with a worldwide public float of $5 billion or more) that employ U.S. generally accepted accounting principles (GAAP) must start reporting in XBRL for fiscal periods ending in late 2008. The remaining companies that report using U.S. GAAP would also be required to report using XBRL but they will have an additional two year phase-in period to do so. XBRL reporting would be fully implemented by end of 2010.¹

Companies using International Financial Reporting Standards as issued by the International Financial Reporting Standards Board would also be required to provide disclosure using XBRL for fiscal periods ending in late 2010. SEC Chairman Christopher Cox stated, "This is all about bringing investors better, faster, more meaningful information about the companies they own. It would transform financial disclosure from a 1930s form-based system to a truly 21st century model that taps the power of technology for the benefit of investors.”

According to XBRL.org Web site, for each individual item of data XBRL provides an identifying tag that makes it computer readable.² The introduction of XBRL tags enables automated processing of business information by computer software, cutting out laborious and costly processes of manual re-entry and comparison. Computers can treat XBRL data "intelligently," because they can recognize the information in an XBRL document, select it, analyze it, store it, exchange it with other computers and present it automatically in a variety of ways for users. XBRL greatly speeds the handling of financial data, reduces the chance of error and permits automatic data validation of information. Data can be transformed into XBRL via mapping tools or software.

The use of XBRL provides organizations with an efficient and effective means to extract, analyze, share and report financial information across different business units. IT provides organizations with the ability to tag financial data points and create data dictionaries or taxonomies that classify users’ information requirements. A taxonomy has been created for GAAP with predefined financial data points ready for use by organizations and regulators alike. For example, a company’s net profit is represented by a specific data point in the GAAP taxonomy and can be easily extracted and interpreted by both internal and external business entities that utilize the same tags. Both regulators and organizations can utilize XBRL to communicate financial results, and now that everyone is speaking the same language, misunderstandings due to invalid or misunderstood data requirements will be mitigated. Because the data is standardized, XBRL expedites the analysis process by providing semantic meaning to the users of the data so that each user does not have to recreate the business rules or struggle to decipher the meaning of the data when preparing business reports.

The benefits that can be achieved using XBRL are shared by both those that rely on the information embedded in the financials that are reported as well as those responsible for the data collection and reporting functions. For companies, the mere fact that financial data can be readily extracted and reported to internal and external stakeholders in a highly efficient manner strongly supports the argument that the costs associated with data collection, processing and reporting will be reduced by employing XBRL. Greater efficiency is achieved by using XBRL to streamline the various processes that a company uses to collect and report financial information. For example, one company may have a dozen different business entities each required to report its financial results to the parent company that is responsible for the consolidation of the data. Using XBRL, the company can streamline the data collection process through the standardization of the data requirements – requirements that are then followed by each of the individual entities. Financial data that comes from various financial systems can be extracted automatically and then checked by software to ensure accuracy prior to transmittion. By automating the error checking process, the time to extract and transmit the data is reduced, and the information can be quickly reported to the parent and ultimately disseminated to the stakeholders.

For stakeholders, including investors, analysts, financial institutions and regulators that rely on the financial data being reported, each can compare and analyze data much more rapidly and efficiently if it is in XBRL format.

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