XBRL Revolution Has Begun

Spec for financial reporting on its way to becoming a mandate

By David Worthington

December 27, 2007 —

Extensible Business Reporting Language (XBRL) is poised to revolutionize financial reporting and analysis in the United States—provided stakeholders react favorably to a draft of the XBRL US GAAP Taxonomies. Its acceptance could clear the way for a mandate from the U.S. Securities and Exchange Commission later this year.

The draft, published on Dec. 5 by XBRL US, a consortium dedicated to the standard’s adoption in the United States, is under public review until the comment period ends April 4, 2008. XBRL US is encouraging auditors, investors, financial analysts, public company preparers and software providers to participate.

XBRL is an emerging XML-based standard to define and exchange business and financial performance information and is governed by the not-for-profit international consortium XBRL International. The taxonomies provide a set of tags that represent Generally Accepted Accounting Principles (GAAP) for financial reporting.

Both the European Union Central Bank Supervisors and the U.S. Federal Deposit Insurance Corp. have adopted XBRL as a standard for bank reporting.

David Blaskowsky, director the SEC's Office of Interactive Disclosure, explained that the comment period is intended for real-world users to ensure that the taxonomy is complete and to identify any remaining issues and gaps that need to be addressed.

A government-imposed mandate may follow suit. Blaskowsky said that the SEC was engaged in a “serious rule-making process” and could create a rule as the end of the first quarter. The SEC will hold roundtable events for stakeholders across the U.S. in the coming months.

He noted that the SEC is working closely with other financial regulatory bodies across the world. “There will be substantial benefits if the movement of information across borders can be facilitated,” he added. “The biggest win is the comparability and transferability of information.”

XBRL has received wide acceptance internationally for financial reporting: China and Japan mandated its use, and the United Kingdom is expected to make XBRL reporting obligatory by 2010.

Blaskowsky said that companies should start looking at XBRL today. “Given software cycles, [developers] have got to [pilot XBRL] today to have the tools that are required when the data becomes available. ‘Deploy some resource, take a run at it, and work in conjunction with financial management,’” he said.

Real-World Benefits
The SEC’s Blaskowsky said that there were three main value propositions: Internal and external financial information is available in real time, information does not have to be re-entered, and there is an absence of human errors introduced by intermediaries and any error is preserved.

“It’s not about the language; XBRL is an enabler,” he said, explaining that an XBRL-driven financial system enables new functionality and benefits. Some of the examples Blaskowsky mentioned are RSS feeds and alerts with settings for reports that have revenues or ratios that fall within specified parameters.

Mike Willis, a partner with PricewaterhouseCoopers and founding chairman of XBRL International, feels that the value proposition is to leverage standards like XBRL to streamline business processes within the enterprise, engage financial counterparts in review of taxonomy, and lower subsequent reporting time and costs.

PricewaterhouseCoopers has built XBRL into its analytical tools: Spreadsheets self-populate and accountants create reusable and sharable analytical formulas instead of keying in macros. “It [XBRL] can be used to apply analytical concepts to the entire internal information supply chain,” Willis said. “It’s like an MP3 file for analytical concepts.”

Likewise, economics of financial reporting could be affected. Willis noted that XBRL pushes validation and analysis away from the consumer and back onto the preparer, streamlining the reporting process. “Today [financial analysis and validation] is a cyclical process that takes days or weeks.

“With XBRL, analytical concepts are shared and articulated to the producer; the producer performs [analytical and validation] tests before sending data to customers and delivers a more quality package of data and answers to analytical questions,” Willis explained.

It also simplifies business rules management systems. “XBRL abstracts rules from the software layer and articulates it in taxonomies; it is more streamlined and is managed and controlled at the IP layer,” he said.

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