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The Ups and Downs of XBRL

May 3, 2010

Proponents of XBRL cite many benefits. Others say that XBRL is not a panacea. XBRL offers many benefits to help drive financial reporting efficiency and accuracy, but there are a few drawbacks that you need to watch out for. In this post we’ll explore some of the ups and downs of XBRL.

The Advantages of XBRL

XBRL is a universally accepted information sharing tool. XBRL is available universally in many countries and facilitates sharing business information in many languages, on virtually any computer platform and in multiple accounting standards. Investors can access business information electronically with XBRL thereby enabling almost real-time analysis. Business information tagged with XBRL can be converted into a variety of formats including HTML, spreadsheets and databases. Because XBRL is so widely accepted, companies can increase automated information sharing with minimal implementation costs.

XBRL is beneficial for a variety of stakeholders. XBRL has broad appeal because it can be utilized by investors to facilitate analysis of financial results, by companies to eliminate manual input and review of information passed through the financial reporting process, and by governmental entities to efficiently gather information from business. XBRL can drive business information sharing efficiencies in a variety of situations. Companies should begin to explore using XBRL in other ways once they complete SEC compliance requirements.

XBRL adapts well to a variety of uses. XBRL is not just a financial reporting tool. XBRL can be used in a variety of business information sharing situations. XBRL could streamline tax return preparation and reporting, sharing of non-financial business information, like production volumes, inventory reserves or merchandise shrinkage. XBRL could facilitate internal corporate efficiencies including the automated movement of information from its source to its end use. XBRL can also enable information sharing between companies and their vendors, customers and business partners. Consider for instance that automated matching of purchase orders, receiving documents and invoices could be automated utilizing XBRL technologies. In addition, there is an open source taxonomy, Global Ledger, that companies could utilize to jump-start the use of XBRL within their organization

XBRL provides context, validation, persistence and reusability. A company can use XBRL to improve both the speed and accuracy of information moved through its reporting cycle. In addition, XBRL can improve spreadsheet controls by electronically accessing information from source systems thereby significantly mitigating human input errors. In addition, business information tagged with XBRL persists from period to period and is thereby easily reusable.

XBRL is Open Source. Organizations have paid to develop taxonomies that can be used without any cost to those that use them. There are also web-based readers to read the taxonomies and web-based tools for rendering XBRL Instance files. Even Microsoft Office, a tool widely available in almost every company, is XML enabled (XBRL is a special type of XML). By utilizing the freely available XBRL resources, companies can benefit from XBRL while keeping implementation costs to a minimum.

The Disadvantages of XBRL

XBRL facilitates near real-time disclosure. The potential to quickly report information in automated ways is a double edged sword. On the one hand, near real-time disclosure improves transparency and sharing of information for a variety of beneficial purposes. On the other hand, near real-time disclosure may emphasize short-term results at the expense of long-term objectives. Some argue that financial information shared in a real-time way may cause undue volatility in stock prices and impulsive decisions by investors, suppliers, customers and business managers.

XBRL increases the potential for error. Many cite the potential for errors and inconsistencies as a major disadvantage. If companies select the wrong tag from a taxonomy (for example the US GAAP Taxonomy or “UGT”) then users of that information would rely on the incorrect information. This is a concern during implementation as companies begin to select  UGT elements for the first time, but the UGT “tags” chosen by companies will improve over time as XBRL users learn how to select the best UGT elements to represent their information. In addition, the SEC will review XBRL exhibits and make comments where they believe corrections should be made. Since XBRL persists from period to period, electronic reporting accuracy should improve over time.

XBRL may increase information abuse. In an information age where dishonest people are electronically enabled, abuse is bound to occur. As more information becomes electronically companies will need to implement appropriate safeguards to protect their information, including XBRL tagged information.

XBRL taxonomies are extensible. Taxonomies are extensible. In other words, they can be expanded to meet a variety of purposes. One such reason for extending a taxonomy is to add a new taxonomy element that better describes an amount for which there is not a currently available taxonomy element. Extending a taxonomy is perfectly appropriate in some cases such as tagging disclosures required by  a newly effective accounting standard that has not yet been incorporated into the UGT. However, some argue that companies can over use taxonomy extensions thereby rendering (pardon the pun) the resulting instance document less comparable with companies in the same industry. Overuse of taxonomy extensions can be a problem. There are examples of companies utilizing UGT extensions exclusively in their filings with the SEC. Extensions are a necessary part of XBRL use, but use of extensions should be made only when appropriate taxonomy elements are not available.

Conclusion

Companies need to utilize XBRL in the ways that are beneficial for information sharing internally and externally. At the same time they should consider information security, taxonomy element selection accuracy and internal controls to prevent abuse and minimize errors. Companies should also prepare for more frequent electronic reporting and shorter reporting cycles, especially if the SEC begins to implement portions of its Twenty First Century Disclosure Initiative. It would also be a good idea for companies to consider the auditor’s role in the XBRL process as well as how audits may become more automated using XBRL technologies. In addition, companies should encourage conversations about XBRL between their accounting and finance staff and the information technology department.

What will you do with XBRL?

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