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The Hope and Hype of XBRL

September 2, 2009

There are ten potential effects of XBRL that could change the future of financial and other reporting. But which offer hope for the future and which is hype? I believe that these claims mostly offer hope, but let’s expose the hype as well. Here is my analysis of what we may look forward to with XBRL.

Companies adopt e-Reporting: It is realistic to think that those who tag their financial data deeply within their financial systems will have relatively easy access to the financial and non-financial data they tag. In the same way, tagging financial reporting source data will enable automated reporting opportunities both internally and externally. When companies understand how to utilize XBRL they will begin giving internal financial reporting users XBRL “readers” to enable use of electronic financial and non-financial data by internal stakeholders. In addition, technologies like Really Simple Syndication (RSS) will begin to become prevalent thereby enabling investors, analysts and the public to “subscribe” (through web-based technologies) to company financial reports the same way they currently subscribe to news feeds and blog posts.  In addition, electronic reporting is likely to at first enhance and then replace paper reporting (both internally and externally).

The US GAAP versus IFRS debate becomes moot: There are standardized XBRL taxonomies for both US GAAP and IFRS. XBRL.org would be wise to relate the taxonomies to each other to facilitate conversions between US GAAP and XBRL (I would bet somebody is already doing so). A connection between the taxonomies would become more important when the SEC publishes its revised Roadmap to IFRS (expected later this year). By connecting the two taxonomies, electronic financial comparisons are facilitated. There is some truth the claim that US GAAP versus IFRS debate becomes moot. Under both financial reporting schemes XBRL improves transparency thereby reducing some portions of the US GAAP or IFRS debate. In addition, with connected taxonomies users will be able to more easily compare amounts no matter which GAAP is used. But there is mostly hype in this claim because IFRS and US GAAP are so different in content and disclosure requirements. The conversion from US GAAP to IFRS is a massive effort, even with some facilitation by XBRL.

Assurance about non-financial Information becomes as important and prevalent as about financial Information: XBRL reporting enables disaggregated use of information. XBRL tags are or will be required for financial statements as well as footnotes and schedules in SEC filings. As XBRL becomes a normalized part of corporate reporting, more information will be coded in XBRL and released to business partners, vendors, customers and the public. Companies will want to utilize appropriate internal controls to validate XBRL tagged data since XBRL will be their way of “telling their story” to the world. Appropriate corporate governance should include some level of internal and external assurance on XBRL tags and rendered reports for financial and non-financial data. The assurance provided is likely to become very important for both financial and non-financial data since both communicate the companies message to the world, especially as disaggregation of XBRL data becomes more prevalent.

Companies treat business reporting like digital media: The SEC is requiring public companies to post every quarterly and annual XBRL filing to their websites for one year each. The SEC is making electronic versions of certain filings (most notably 10-Qs and 10-Ks) available on its website first through the use of Edgar supplemented by the SEC’s new system “IDEA” and then ultimately exclusively with the “IDEA” electronic reporting system. The future of SEC reporting will continue to move closer to fully electronic and farther from paper filings (pursuant to the SEC’s 21st Century Reporting Initiative). Companies will also begin to use XBRL (“Interactive Data” as the SEC calls it) in more ways internally. All of these activities point to increasing use of XBRL for public data. Companies should treat the XBRL data like digital media, because they are (or will be) communicating an electronic image in the global marketplace through the release of XBRL data. Appropriate electronic security and controls should be utilized for XBRL data in the same way companies protect other digital media.

Intermediaries redefine their roles–or lose them: In the past companies have given their SEC filings to third parties (such as printers) to be “Edgarized”. Since Edgar will be replaced by the XBRL enabled and web based “IDEA” system, third parties that “Edgarize” will have to redefine their roles to avoid losing market share. Other third party intermediaries that use and disseminate large amounts of data will also need to move toward XBRL as companies begin to use XBRL more aggressively for all sorts of information sharing.

Governments become more accountable for their performance: Governments will increasingly use XBRL to streamline reporting and data sharing. We already see this with certain SEC filing and FDIC bank Call Reports, both of which are (or will be) required in XBRL format. Other governments have moved to XBRL more swiftly that the US Federal Government. China was able to implement XBRL very quickly because companies didn’t actually switch to XBRL reporting. They continued to fill out the same forms they always used, while behind-the-scenes software translated line items into XBRL data. This method allowed China’s capital market to quickly adapt to the new information standard—with no cost of compliance for reporting companies. Japan currently uses XBRL for reporting by 8000 publically traded companies. The Japanese noticed a side benefit of XBRL use. They had difficulty in translating their business and financial information into English, but since the US GAAP Taxonomy is in English, the related tagged data could be easily rendered in English. The Netherlands has embarked in a massive effort to completely overhaul all government reporting. Their various agencies and departments shared the information elements they separately gathered and realized that they could significantly reduce the burden on corporations by harmonizing the elements used across all agencies. This would allow them to move toward utilizing one submission of data by companies in every department across the Dutch government.

Will governments activities become more transparent and accountable in the future? I think it is just a matter of time. Let’s hope that day arrives sooner rather than later—especially for the US government (I hope you are reading this President Obama). XBRL could significantly reduce the administrative burden on companies, citizens and federal employees thereby reducing the time and money required to carry out government activities. Government reporting published in XBRL will enable speedy and automated analysis of government activities. XBRL could finally usher in an age on increasing governmental transparency.

Authorities write policy in digital code: Certainly policy and legal documents will become increasingly electronic. Much is already published on the internet through the use of HTML (HTML is a cousin of XBRL that is designed to format and display text – most web pages are primarily HTML data. If you are a blogger, you probably know some HTML code. The electronic format policies take remains to be seen. I suppose someone could theoretically develop an XBRL Taxonomy for every word (or at least the most used words) in the English language, but I don’t see a need for that. Financial and business information contained within text is different. Data imbedded in text will be increasingly tagged with XBRL for use by consumers, capital markets, government and companies. The SEC will require tagging of data embedded in text (particularly financial statement footnotes, but elsewhere in SEC filings too) in the second year of adoption of XBRL for SEC reporting. To the extent that policies contain financial and other business data embedded within text, authorities may indeed begin to write in code, especially those authorities that utilize younger workers who are technology savvy. Today many bloggers and web publishers write their web posting in HTML code. We may indeed see a day when authorities will write policy in digital code. Perhaps we will even see a day when software developers will develop software that seamlessly converts information into XBRL while originators enter text and data in a MS Word type interface.

Global capital markets become democratized: Capital markets around the world are beginning to utilize XBRL and the United States is no exception. By the time that the SEC’s three year phase in of XBRL is completed (in 2011), the US capital markets will begin to utilize XBRL to electronically download XBRL data, either in whole or in disaggregated pieces (so much for audit opinions on “the financial statements taken as a whole” – a topic for another day). Investors, analysts and the public will utilize XBRL enabled tools to analyze company information to whatever extent they desire. Their analysis will become increasingly digital and automated. Even individual investors will be able to analyze XBRL financial statement using tools that are as ubiquitous as Excel and Word (Office 2007 is XML [XML is another cousin of XBRL] based and can easily “render” XBRL files – try opening company XBRL files in Excel and Word). Now that companies are filing XBRL documents with the SEC you can download and save their filing in Excel using Edgar (press the Interactive Data button on the SEC website). Explore these SEC website pages to check out what can be done with XBRL:

As investors, analysts and the public begin to analyze XBRL files from global capital markets, the best global investment opportunities will win investment dollars. Economic “voting” will be done with dollars thereby leading to a democratized global capital markets. Capital markets will increasingly cater to their XBRL enabled “customers” 

E-Reporting becomes as important as e-Commerce: We will be able to subscribe to company SEC filings in the future through technologies like RSS. If you are not familiar with RSS (Really Simple Syndication) you should check it out on www.youtube.com. As investors, analysts and the public begin to use RSS or similar technologies to access corporate SEC filings, they will begin to demand access to other information in similarly automated ways. In the future companies will need to pay close attention to what they report with XBRL and how they report it. I believe that e-Reporting will increase significantly as XBRL becomes more prevalent thereby making e-Reporting and e-Commerce  equally important electronic business tools. See my previous post “Really Simple Reporting”.

We know how economies are performing–in time to act: As XBRL gains wider use in governments, security commissions, capital markets and companies, the public will have increasingly real-time electronic data that can be analyzed in automated ways. The speed of communicating economic information will significantly increase thereby enabling the free market to react very quickly to all sorts of company financial information, economic indicators and governmental reporting. We will increasingly understand the performance of companies, markets and governments in time to take action.

What are your thoughts about the impact of XBRL on the future?

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2 Comments leave one →
  1. September 3, 2009 11:28 am

    Hi Jeff,

    What a great post! So many interesting ideas in here. Just a few quick thoughts:

    (1) The trend toward worldwide adoption of XBRL for financial reporting is overwhelming. It’s becoming harder to find sizable countries that aren’t working toward adoption than ones that are. It could be debated whether Chairman Cox gave the final push that made this movement inexorable, or whether he was just being swept along with the tide. But the tendency toward global implementation is unmistakable.

    (2) It may be that “there is some truth [to] the claim that US GAAP versus IFRS debate becomes moot” because of XBRL adoption. But I don’t think the important differences between the IFRS and US GAAP approaches to taxonomy development should be understated. The IFRS taxonomy is a completely standard-driven approach that is not industry-specific; it has far fewer elements than that for US GAAP.

    (3) I’m uncertain how providing assurance on disaggregated data will work. The purpose of the external audit has traditionally been to express an opinion on the overall fairness of financial statements. Toward that end, auditors routinely make decisions on materiality in the context of that goal that would clearly be different if applied to individual data elements. Perhaps the twin goals of providing an overall opinion on the fairness of statements and attesting to the accuracy of disaggregated data can be harmonized, but they do not seem complementary.

    (4) I think there are some technologists who would take issue with your statement that “XML is another cousin of XBRL” and declare XBRL is XML.

    Bob Schneider
    Editor, Data Interactive (the Hitachi XBRL blog)
    hitachidatainteractive.com

    • Jeff Henson permalink
      September 3, 2009 9:39 pm

      Thanks Bob, this post took me a while to author.

      I agree with many of your thoughts. I’m not quite settled on the right approach to XBRL assurance. I still have more to think about there. But I do think companies would be wise to have some validation that data is properly tagged (financial and non-financial data) and XBRL files properly render financial reports. Does that assurance need to be provided by third parties? I think we may see that in the future.

      As for disaggregation, my concern is that we will see a day when financial statement users slice data into pieces in automated ways and never see financial statements as a whole. I am not sure of the best way to deal with that problem, but I think standard setters and regulators should think through this issue.

      Jeff

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