XBRL Becomes Reality
The Securities and Exchange Commission (SEC) in May gave public companies a good reason to quit procrastinating over XBRL when it voted unanimously to propose a rule requiring that financial statements be filed using the interactive data-tagging system.
“Information – meaningful, accurate, timely, easy-to-use financial reporting – always has been the driver of commerce and markets,” said David M. Blaszkowsky, director of the SEC’s Office of Interactive Disclosure. “This proposal provides the critical regulatory framework by which interactive data will make financial reporting more easily and quickly available, and help transform the relationship between filer and investor.”
Under the proposed rule, the 500 largest U.S. public companies will be required to provide financial information using interactive data formatted in eXtensible Business Reporting Language (XBRL) beginning as soon as next year. The remaining companies using U.S. generally accepted accounting principles would be required to begin using XBRL over the following two years, while companies using International Financial Reporting Standards (IFRS) would be required to begin utilizing the new format for fiscal periods ending in late 2010.
The required tagging disclosures would include companies’ primary financial statements, notes and financial statement schedules. Initially, companies would tag notes and schedules as blocks of text, then provide tags for the details within the notes and schedules the following year.
Advocates of XBRL note that the technology has the potential to streamline the SEC’s handling of annual reports. It is also expected to make it easier for companies to file 10-Qs and 10-Ks, and provide them with more flexibility in reporting.
“The reason people are pushing so hard for XBRL is that when we’re allowed to use it, we will realize quite substantial savings in terms of resources and manpower,” said John Stantial, assistant controller-financial reporting and analysis, United Technologies Corporation (UTC), which has been participating in the SEC’s XBRL pilot program. “…Once we are able to replace our current processes with XBRL, we figure we can take out as much as 20 percent of the hours from our external reporting process.”
UTC, a diversified company that provides high technology products and services to the global aerospace and building industries, is also looking at other ways XBRL can generate savings across the organization.
For example, with locations in 180 countries worldwide, UTC currently has hundreds of general ledger systems and data spread out worldwide in multiple formats. XBRL could allow the company to retain those different formats, but still consolidate data in a single location, enhancing inventory management and other processes.
“XBRL will enable us to do that by setting up a central warehouse and developing the tags we want to capture. We could apply those tags and sweep the data into the warehouse,” said Stantial.
As more organizations adopt XBRL, the benefits will evolve exponentially, he adds. Already, the Internal Revenue Service and the Federal Deposit Insurance Corporation utilize the technology, and other government agencies are looking into its adoption – all of which could benefit both private and public companies.
“Every time [a government agency] comes on-board, there is an underlying savings in manual efforts,” for companies utilizing XBRL, said Stantial.
Rob Blake, senior director of interactive services with Bowne & Co., Inc. and a founding member of XBRL, notes that the benefits of the data-tagging technology go beyond the SEC and the public companies that will use it for financial reporting.
Investors and analysts will have an easier time searching for and comparing financial statements. That, in turn, will benefit smaller public companies by raising their profile within the analyst community.
“The problem with the analyst community is that there are fewer of them to go around and yet more data than ever to be analyzed. XBRL absolutely has the chance to help raise awareness and make it easier on the analyst community to cover companies that they can’t get at today. That’s a fact,” said Blake. “…XBRL also has a value to the preparer community by providing an extra layer of internal control around data integrity for the financial information [they] communicate to a regulator like the SEC.”
Not everyone is jumping on the XBRL bandwagon, however. According to Financial Executives International (FEI), companies participating in the voluntary XBRL program have not seen any improvements in their internal processes. What they have seen is an increase in costs and efforts as a result of creating and providing tagged information.
The FEI also disputes claims that XBRL will mean faster access to financial data for investors and predicts that its use could actually lead to analysts receiving too much information.
In a letter to the SEC’s Committee on Improvements to Financial Reporting(CIFR), FEI Chairman Arnold Hanish states: “with the ‘all in’ direction that has been taken with the development of new taxonomies, we are not convinced that we will in fact meet the needs of analysts. We believe we may be creating a situation where preparers will be providing more information than the analysts want (versus key information/data), later than when they need it (to update their models), thereby missing the real window of opportunity which is likely when a company releases its earnings for the quarter.”
FEI also takes issue with a CIFR report that companies typically utilize one of two methods to tag financial statements: a “bolt-on” and an integrated approach.
According to the organization, the integrated approach that would allow companies to tag data as they prepare their filings is not yet feasible. As a result, they must take the bolt-on approach, meaning the information needed for tagging is available only after the full financial statements are complete, yielding no benefits to preparers.
Those who have already been in the XBRL trenches disagree with the idea that tagging will be too costly or complex for organizations to implement. In fact, they say that there is more than enough time for those large companies that will be required to file in XBRL next year to implement the internal processes to meet the deadlines.
UTC’s Stantial says it took his department about 80 man-hours the first time they filed XBRL financials, which included learning the software and getting accustomed to the technology’s lexicon and taxonomy.
“We can now do the same filing in about four hours. You do have a little bit of effort upfront to set up the tags and learn the software, but after that there is no effort involved,” he said. “…There are a lot of perceived roadblocks but in reality, there are none. People who typically haven’t done anything with [XBRL] like to toss out cost, but all you really need is a tagging software and that can be as little as $900. It’s hard to argue that cost is a deterrent.”
And while voluntary XBRL filers had the luxury of implementing the technology and processes without time constraints, those who are new to the process have a distinct advantage in terms of the resources available to guide them.
Bowne, for example, offers a wealth of information on the XBRL section of its website (www.bowne.com/xbrl), including white papers, an interactive viewer, a blog, news and a calendar of events.
Other key websites include XBRL International (www.xbrl.org) and XBRL U.S. (xbrl.us), and the SEC (www.sec.gov/spotlight/xbrl.htm).
According to Bowne’s Blake, XBRL will have the greatest impact on a company’s external reporting team, investors relations and general counsel. Although perceived to be a disruptive technology, it does not require a significant overhaul of a company’s IT systems.
In fact, just three things are needed: data; software that supports XBRL; and one of six SEC taxonomies that provide the basis for tagging the data.
“The reality is that XBRL is not costly, it’s not time-consuming and it’s not ‘rip and replace’ and ‘we have to go hire a team of XBRL experts’,” he said. “…Three years from now, we’re not going to be talking about XBRL. It’s going to be [as ubiquitous] as the plumbing in your house.”
As one who has already been in the trenches, UTC’s Stantial advises companies not to waste time intellectualizing XBRL. The fastest, cheapest and most effective way to get up to speed is to invest in tagging software and get the ball rolling.
“Stop trying to find a reason to shoot it down and instead find reasons to embrace it as a great tool,” he said.
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