Touted as the next big thing for financial reporting, XBRL – or extensible business reporting language – was supposed to conquer the IR world and make things a whole lot easier for everyone involved in the financial reporting process.
Zachary Coffin, chair of XBRL.org’s liaison committee, told IR magazine back in 2001 that ‘around 15-18 percent’ of US companies would be reporting in XBRL by the end of that year.
So what happened? Not a lot. In fact, it seems there are just four companies anywhere now regularly publishing their reports using XBRL: Microsoft, Morgan Stanley, Reuters and Edgar Online. All of them have fairly clear business motives to be at the forefront of a technology-led financial reporting revolution. But how come others have not followed rapidly in their footsteps?
Background briefing
XBRL is a freely available electronic language for financial reporting developed by an international consortium of accountants, companies and others. It brings the exchange of financial information into the internet world by ‘tagging’ figures so that reports can be more easily published, exchanged or analyzed in a variety of electronic formats. It uses XML – extensible mark-up language – tags to describe the financial information and allocate it to the relevant area within a publication or, indeed, an analyst’s model. For a detailed introduction to XBRL check out xbrl.org, the home page of the consortium that backs the project.
The logic of XBRL is difficult to argue against and it certainly has the weight of big players in the financial community behind it. The large accounting firms are on board, as are the standard-setters in most of the major markets. Several stock markets are in the consortium, with Nasdaq one of the leading recent advocates with its own online XBRL demo. Yet while the backing is there, little appears to have happened in corporate reporting.
Even those who specialize in electronic reporting say client companies have shown little or no interest to date. ‘I think it’s a little way down the road yet,’ says Keith Barrett, chief technology officer of Shareholder.com, a Boston online IR firm. ‘There’s been very little to no discussion of it from the client base although we are hearing it a bit more on the vendor side. Some of our vendors such as Edgar Online and Multex have said that they are developing or beginning to develop XBRL options within their products.’
Rob Lake, XBRL group program manager at Microsoft and also chair of the US XBRL domain working group, acknowledges that take-up has been slow but he believes we’re still in the first stages of adoption. Part of the problem seems to be that some of the consortium promised too much too soon.
For now, software developers are still building XBRL into their products. Some have begun to hit the shelves already but the vast majority will start to appear later this year. ‘The more vendors that add XBRL support to their software the easier it will get for companies to begin using and thinking about XBRL,’ says Lake.
This software can be split into two areas: accounting and enterprise resource planning (ERP) products; and more traditional reporting and analytical tools that sit in the programs on any desktop. Accounting and ERP vendors have been moving on apace with Navision, Caseware, Hyperion and SAP all having announced or about to release XBRL add-ons to their products. Other key vendors like JD Edwards and PeopleSoft are also members of the consortium so other products are in the pipeline.
But it is the desktop-based tools that are likely to make a real difference. Like it or not, the reality is that much of the financial reporting environment is held together by Microsoft Word and Excel. Lake confirms that the planned launch of Office 2003 this summer will be followed shortly by an XBRL add-on that can be downloaded from the web. He is vague about the exact schedule but suggests the add-on should be available in September.
‘The key hurdle that XBRL has to clear is that it needs to be easy and inexpensive. The Office add-on will help in that process as it’s an environment that most people are familiar with and using every day,’ notes Lake, adding that at that point you will not have to be technically minded in order to ‘XBRL-ize’ a financial report.
Tinker time
While the software front has been slowly advancing, accountants have continued to tinker with and refine the XBRL language that forms the basis of the whole project. In an ideal world, XBRL would simply take the currently globally accepted definitions of cash flow, sales and other financial metrics and then create electronic tags accordingly. Job done.
The trouble is, globally accepted definitions are not exactly the strong point of the accounting community. That means different taxonomies have to be created for each accounting language, such as US Gaap, UK Gaap or IAS, and then a way devised for each of those languages to interact with each other.
‘We have been moving forward on the taxonomy development,’ says Alison Jones, a partner at PricewaterhouseCoopers in London and leader of the XBRL group in the UK. ‘There are now UK Gaap, US Gaap and IAS taxonomies that can be used,’ she says, adding that there is a lot of work being undertaken to make the various taxonomies ‘converse’ with each other in a more effective fashion.
Just because the definition of cash flow is different from one accounting language to another does not present huge problems for creating a ‘universal’ language such as XBRL. The tagging system can actually help in making comparisons by pointing out the differences and clarifying the nature of the figures.
XBRL will make comparisons between companies in different markets a lot easier and put some pressure on standard-setters to converge their definitions and metrics. But even if it raises the pressure to converge, XBRL cannot in itself overcome the fact that the world is still blessed with numerous accounting standards. It may hasten the move toward IAS or even global Gaap but there’s still a long way to go.
‘There remains a lack of coherence in accounting structures that XBRL or any other XML derivative cannot overcome,’ says Miklos Vasarhelyi, KPMG professor of accounting information systems at Rutgers University. He has no doubt that XBRL – or some other XML approach – will become the norm for financial reporting but fears there will be perhaps 20 different national languages, each with, say, 60 other industry-based variations within them.
Round pegs, square holes
As Vasarhelyi points out, 1,200 variations on a theme does not make for a universal language. ‘Even if you end up with a common name [for a financial metric] you run the risk of the information below that being very different. The standard-setters should think very seriously about the impact of XBRL. They haven’t yet thought through the implications of what it could mean.’
This ‘bashing a round peg into a square hole’ type problem is noted by others inside and out of the XBRL consortium. Still, there is general agreement that XBRL is happening, that it will make a real difference to financial reporting, and that it will ease the pain of handling financial information and facilitate making comparisons between companies.
Liv Watson, a director at Edgar Online and member of the consortium, believes that the arrival of the Excel add-on later this year will be a major turning point. That will encourage companies to do the XBRL tagging themselves as they prepare their reports. In the meantime, Edgar Online has been busying itself tagging up the last seven years of financial reports on the SEC database of US-listed companies.
The accounts are tagged to 75 major data points. Watson admits that the process has involved making a range of judgment calls on various figures – as well as alerting the SEC to a number of reporting errors they have discovered in the process. But Watson hopes it will act as a lead in encouraging the investment and corporate communities down the XBRL route. The XBRL tagged information is slated for release in early April. ‘XBRL is going to happen,’ affirms Watson. ‘But generating any standard takes a lot of time and effort.’
XBRL has the potential to speed up the release and analysis of financial information and has major implications for improving financial transparency. In the current post-Enron environment, those advantages are making financial regulators like the SEC sit up and take notice. And this should be enough to encourage more companies to take the XBRL route in the coming months.
Whether they like the idea of producing reports that can be more easily compared with those of their peers and competitors remains to be seen. Such transparency may improve the oversight of investors but the flipside is that it could well curtail the freedom of corporates to make the sort of business decisions they have been able to make in the past. Financial reporting using XBRL may be on the way – but it still has a lot of obstacles to overcome.
