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June 28, 2010

Interactive Financial Data and XBRL: the Way Forward?

Posted by Dimitar Vlahov 

Today’s means of exchanging financial data have entered a process of global synchronization and standardization. Intuitively, this makes sense given the interconnected and interdependent nature of economic and business entities around the world, coupled with advances in computing power. In practice, the trend is evidenced by the rapid spread of XBRL, a novel set of programming rules for recording and reporting financial data electronically. Over the last several years this new freely-available open standard has been employed by more than 550 major companies, organizations and governments, including many central banks, finance ministries, the International Accounting Standards Board (IASB), the U.S. Securities and Exchange Commission (SEC), and the Tokyo Stock Exchange. A Forbes report estimates that XBRL encoding is used by companies representing more than 75% of the world's market capitalization. So popular has XBRL become that one can now even buy “XBRL for Dummies” on Amazon. This note provides a quick account of what XBRL is and why it is relevant for public financial management.

XBRL stands for eXtensible Business Reporting Language. It is a set of rules for encoding documents electronically used for communication of business and financial data that has been developed by an international non-profit consortium since 1998. It is based on XML (Extensible Markup Language), which from a computing point of view indicates an emphasis on simplicity, generality, and universal usability over the Internet. In a nutshell, instead of treating pieces of financial information as simple blocks of text – which is what current-generation widely-spread technologies do – XBRL provides standard “smart” identifying tags for each individual item of data. These tags serve as an electronic barcode that carries key information about the data, thus establishing a consistent structure whereby data is not only identified but also given a context. Merging and comparing with other XBRL-compatible data becomes increasingly easy. Just like HTML provides standardized code to present text and information in a predictable format over many different web browsers, XBRL provides a contextual explanation to make financial data instantly readable by a variety of software applications.

It is important to note that these tags are more than simple labels.  They provide a range of information about the item, such as whether it is a monetary item, percentage or fraction. They also show how items are related to one another, i.e. they carry information about accounting/business formulas for deriving variables.  Finally, the tags can also identify whether a given piece of data falls into particular custom-defined groupings for organizational or presentational purposes. All these features collectively make financial data readily interactive.

All possible tag meanings are defined in XBRL “dictionaries” or taxonomies. The adaptability and universal usability of XBRL code stem from the fact that these dictionaries are open, easy to extend and merge. Thus, each user can create their own taxonomy, or a tree of definitions, as wide-reaching as necessary for the data to be understandable across organizations and even accounting systems. Many different organizations, including regulators, specific industries or even companies, may also require taxonomies to cover their own business reporting needs. National jurisdictions have different accounting regulations, so each may have its own taxonomy for financial reporting. Any taxonomy can be defined to communicate with and “understand” other taxonomies.

The main benefit of producing and spreading XBRL-compatible financial data, then, is that it greatly simplifies the process of financial reporting and analysis. Since computers can treat XBRL data "intelligently" due to the tags that accompany the data, XBRL-compatible software can recognize the information in any XBRL document, select it, analyze it, store it, exchange it with other computers and present it automatically in a variety of ways for users. If an organization needs to send its financial results to an external partner - an accountant or a regulator, for example - having XBRL-compatible data eliminates the need to re-enter and re-label data into a new system. XBRL data flows smoothly in the whole stream – from its origin to all final users of the data.

One of the best examples of the usefulness of XBRL is its adoption by the SEC. In early 2009, the Commission started requiring XBRL tagging of all public companies and foreign private issuers that prepare their financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP), and foreign private issuers that prepare their financial statements using International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). In this format, the Commission observes, financial statement information could be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software, and used within investment models in other software formats. The new rules are intended not only to make financial information easier for investors to analyze, but also to assist in automating regulatory filings and business information processing. The Commission further insists that interactive data has the potential to increase the speed, accuracy and usability of financial disclosure, and eventually reduce costs. The Commission’s final rule is publicly available and you can download it here.

PFM authorities around the world have also started adopting XBRL. Many governments see it as a way to make the public and private sectors “speak the same language” for the purposes of reporting, compliance and transparency. In that spirit, the EU is in the process of adopting the use of XBRL in its efforts to reduce administrative burdens on businesses. The Brazilian finance ministry reported recently that XBRL is helping improve transparency and comparability across government entities, especially on the state and municipality levels. The Ministry of Corporate Affairs of India has decided to introduce XBRL across taxation and accounting organizations during 2011. Similar initiatives are also being undertaken in China and a number of other countries. Click here to download a detailed presentation on the driving forces of XBRL’s global adoption, together with specific country updates.

In short, the potential for XBRL within governments’ reporting is very high, although its use has been, so far, limited.

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Comments

There was a great presentation at the recent ICGFM (International Consortium on Government Financial Management) conference in May by the author of XBRL for Dummies, Liv Apneseth Watson (http://icgfm.blogspot.com/2010/05/xbrla-language-of-government-20-world.html) and Ana Cristina Bittar de Oliveira from the Government of Brazil (http://icgfm.blogspot.com/2010/05/using-xbrl-to-improve-transparency-in.html). The attendee surveys found XBRL was the most interesting topic at the conference.

XBRL has crossed the chasm. There are numerous examples of how XBRL has been used to simplify financial reporting to government. XBRL has the promise of improving transparency of government reporting to the public.

Companies that are using XBRL and see its potential are eager for the platform to emerge past its growing pains. They are calculating the cost of submitting their financial data in two completely separate formats to accommodate dual reporting regimes. Some are frustrated by naysayers, like the Financial Executives International’s Committee on Corporate Reporting, who are telling the SEC to curtail or halt XBRL adoption. CCR sent an unsolicited comment letter to the SEC asking that companies be allowed additional time to complete the filing, and that they be permitted to do less detailed tagging.

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