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 companys 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.
Because XBRL can handle data in different languages and accounting standards, it can be modified to meet different requirements regardless of the type of system or country where the company is located. Users of data received electronically in XBRL can automate its handling, cutting out time-consuming and costly collation and re-entry of information. Software can be used to validate the data and detect errors or omissions. By automating the entire reporting process, less human capital is deployed to perform time-consuming error checking. Instead, it can be focused on the analytical value of the data, and the regulators can focus efforts on what the data is telling them rather than wasting time on data validation.
Not only can regulators benefit from XBRL use, but so can IT, business intelligence (BI) directors and business analysts. Many BI vendors, such as Oracle, Information Builders, and Business Objects, are offering XBRL solutions as part of their performance management toolset. In some cases XBRL is an output option of the BI tool, and in other cases it is treated as a data source to be consolidated with other data structures. Because it is about retrieving data from the transactional level and is in an easily reusable format, data integrity is maintained as this important financial and business data is moved through the business intelligence environment. XBRL also helps achieve more technical data management goals. Receiving or producing XML-based standards within the data management environment helps achieve compliance related to interoperability. By design, XBRL can be consumed by Web services making business-to-business integration possible. By having a standard for business and financial data, organizations can more easily attain audit trails, increased access and accuracy for their financial and business data.
Achieving success at the FFIEC using XBRL
To really understand the benefits of XBRL, one need only look at the deployment of XBRL reporting by the Federal Financial Institutions Examination Council (FFIEC). In 2005, the FFIEC launched the first large-scale XBRL reporting effort by creating a system called the Central Data Repository (CDR). The goal of the CDR project was to improve the transparency and accuracy of financial reporting received from more than 8,000 U.S. domestic banks that are required to file Call Reports. By using XBRL and assigning descriptive tags to the various data elements that constitute the Call Report, the FFIEC was able to achieve significant benefits, which included improved data accuracy, reporting timeliness and overall processing efficiency. When you compare the FFIECs legacy system of data collection and processing related to the Call Reports versus the use of XBRL reporting, it becomes apparent that the unique data tags used by banks to map and transmit the data resulted in a significant reduction in the amount of time previously required to research and resolve exceptions. These exceptions were largely the result of the overall complexity of the reporting process. The standardized mapping of data drastically improved the rate of data reporting success because the requirements could be easily understood. The success of the FFIECs XBRL initiative was expedited and assured due to the involvement of the various data processing stakeholders. The project team spent time gathering requirements from the various stakeholders, each of whom provided insights regarding business process improvements that could be incorporated in focus areas (i.e., includes vendor software, secure data transmission, data receipt verification, online corrections and the central data repository). The stakeholders were familiar with the processing and the ways in which efficiencies could be gained. The implementation of XBRL was a catalyst for change and efficiency improvements that were warmly received. To share the news of the positive benefits achieved, the FFIEC announced that the XBRL implementation had a positive incremental impact on the FFIECs bottom line and is a viable solution XBRL increased productivity, efficiency, accuracy and quality.3
It is obvious that there will be costs associated with the implementation of XBRL, which includes performing the data mapping and coding the reports. However, the benefits that can be achieved, including lower costs as well as faster and more reliable reporting, can be expected to exceed those costs. The benefits of building credibility in the marketplace through the delivery of timely, consistent and reliable data will pay long-term dividends, and all of the stakeholders that prepare, extract, report, analyze or rely on the financial information supply chain should be ecstatic that the financial transparency search party has found and embraced XBRL.
- SEC Proposes New Way for Investors to Get Financial Information on Companies. U.S. Securities and Exchange Commission. http://www.sec.gov/news/press/2008/2008-85.htm, July 16, 2008.
XBRL International, http://www.xbrl.org/, XBRL International, July 16, 2008.
- XBRL White Paper, http://www.xbrl.org/us/us/FFIEC%20White%20Paper%2002Feb2006.pdf, XBRL International. July 16, 2008.
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