XBRL: the USA is expected to regulate the use of XBRL electronic tagging, a method that makes static financial information interactive. Other countries are watching closely, writes Ramona Dzinkowski.
On 14 May, the Securities Exchange Commission (SEC) in the US announced its plan to propose a rule that would require both US and foreign filers to provide their financial statements using an extensible business reporting language (XBRL) electronic data tagging taxonomy. Large filers (there are about 500 with market cap greater than US$5 billion) are expected to make disclosures in the XBRL format beginning in the fiscal periods ending in late 2008. Foreign filers using IFRS will follow suit in 2011.
The US is not the first to take this bold step towards regulating the XBRL taxonomy as the global financial reporting language of the future. Other equity regulators in China, Japan, Korea, Singapore and Spain have already mandated XBRL as the primary filing format.
In Japan earlier this year, all public companies were required to provide their company reports in XBRL. In Canada, and elsewhere around the world, voluntary filing programs are in place, but its security regulators are taking a wait-and-see approach to mandating them.
Can you spell XBRL?
In layman's terms, XBRL or 'eXtensible Business Reporting Language' is an information technology/knowledge-management taxonomy for financial information, not unlike barcoding.
It is a method by which companies will take the financial information now reported in a static format and make it interactive.
For external users, XBRL will allow financial information to be extracted from the financials and compared instantaneously. This could save analysts, regulators and other reporting authorities considerable time, while creating a level playing field in terms of information access. In the words of XBRL International: 'Human effort can switch to higher, more value-added aspects of analysis, review, reporting and decision making. In this way, investment analysts can save effort, greatly simplify the selection and comparison of data, and deepen their company analysis. Lenders can save costs and speed up their dealings with borrowers. Regulators and government departments can assemble, validate and review data much more efficiently and usefully than they have hitherto been able to do.'
Despite the efforts of the XBRL International and others who have attempted to educate the financial management community on the implications of XBRL, there are still more questions than answers. Is this really the biggest thing in America since Edgar in 1996, or even the Securities Act of 1933, as some would suggest, or is it just another layer of complexity in financial reporting and assurance imposed on filers? And why is now, in the current climate of uncertainty surrounding the future of US GAAP, a good time to implement it? Is it the right time, or simply the 'right' thing to do? Political puns aside, Christopher Cox, chairman of the SEC, has been a long-time proponent of XBRL, and is determined to see it through.
He also seems to be backed by the auditors, international accounting standard setters, stock exchanges, XBRL organisations, analysts and international securities regulators who say that XBRL will make life easier for everyone.
CFOs, however, are not convinced. In a recent letter to the SEC's Committee on Improvements to Financial Reporting (CIFR), the Committee on Corporate Reporting of Financial Executives International in the US expressed its concerns that requiring filers to adopt XBRL now will result in increased costs, with no improvements to internal processes. It concludes that until such time as technology and software providers can come up with a 'tested solution' to integrate operating and reporting information using the XBRL taxonomy, 'the vast majority of SEC issuers will use a bolt-on' process (which simply adds the taxonomy to the finished financial reports) for the foreseeable future, yielding no benefits to preparers.'
There is also a recognition that the world is going to IFRS, and that although there is considerable overlap in the US GAAP/IFRS taxonomies, perhaps now is not the time to adopt the much larger US GAAP taxonomy.
As most countries are adopting IFRS as the global reporting standard, they suggest delaying the adoption of the US GAAP-specific XBRL taxonomy, or rather, 'recommend appropriate sequencing of these efforts to allow companies to focus on convergence and avoid re-implementation of XBRL once international taxonomies are created that accurately reflect globally converged standards.'
Despite the general agreement on the need for a cost-effective assurance model for XBRL, there are still questions over what the ultimate role of the auditor will be and what this will mean for audit fees. While there is no requirement at this time, will the SEC eventually mandate an auditor's independent attestation on companies' implementation of XBRL? Will this open another pandora's box with respect to internal control certification and testing, or simplify it?
In its 25 May 2005 Staff Questions and Answers paper, the PCAOB provided guidance surrounding attestation engagements regarding XBRL furnished under the XBRL voluntary financial reporting program on the EDGAR system. The guidance ties the examination of XBRL-related documents and processes to the audit of internal control over financial reporting. For now, the SEC's Committee on Improving Financial Reporting (CIFR) has decided not to require an independent assurance process, and FEI US is in hearty agreement. The Committee on Corporate Reporting of FEI US points to the need for the audit of XBRL to stay where it is, saying that, with respect to assurance of tagged financial statements, 'An independent process would not only result in additional cost to investors, it would also add time to the preparation process between the tagging and reviewing of the financial statements and the filing of those statements '
But the question remains. Does adding a layer of examination to the audit of internal controls over financial reporting add complexity and hence cost to the audit process? Mike Willis, partner at PwC and chairman of XBRL International, suggests that it doesn't. He says: 'The level of rigour here is very similar to the level of rigour without XBRL. If you think of it, in a paper-based reporting process, we have to manually make these same kind of assessments, anyway. By standardising the business reporting supply chain through XBRL, the process will eventually become more efficient, not more complicated.'
Get bang for your buck
So how can CFOs in the US make lemonade out of what could be considered as just one more basket of lemons dished out by the SEC?
While it is generally agreed that adding another layer of work does little for the preparer, some suggest that by regulating XBRL now, the SEC has given the necessary push towards long-term efficiency enhancement. We know that securities regulation can give rise to both technology innovation and process improvement (witness SOX 404) and XBRL is expected to be no different. According to Professor Tony Dimnik from Queens University, by proposing to regulate the use of XBRL, 'the SEC has inspired service providers to develop the technology to support it, particularly those companies like Clarity Systems who operate in the corporate performance management space. It has also created the impetus for filers to speed up the process to capture the benefits sooner than later.'
A recent XBRL US report states, 'Establishing a single-source system eliminates manual entry and improves consistency, reliability, accuracy and speed of reporting. Data that is created once within an entity can be retrieved for multiple reporting situations for internal reporting to management, for the creation of the reports to the SEC, as well as the creation of reports to other regulatory agencies such as the Bureau of Economic Analysis (BEA) and the Federal Deposit Insurance Corporation (FDIC).'
So what is the price tag for all this connectivity? Taylor Hawes is controller of finance operations at Microsoft and chair of the Committee on Finance and Information Technology of Financial Executives International in the US. 'If you consider the full integration of XBRL into financial reporting systems, the costs of that implementation could be quite large,' he says. At the same time, there are risks associated with XBRL that stem from the current state of flux in financial reporting standards. 'The risk is that the taxonomy or the technical specifications of using XBRL differ or become fragmented in the multiple reporting jurisdictions using XBRL,' Hawes says. 'That fragmentation will eliminate the value proposition and efficiency derived by that standardisation. The consistency of the taxonomy is very important. At a fundamental level the inter-operability of the IFRS XBRL taxonomy and US GAAP is essential. A company should easily be able to not only reconcile the differences in accounting, but also easily map the presentation and the taxonomy from one to the other.'
XBRL in a global context
Perhaps Christopher Cox is right and XBRL's time has come in America. Most of the heavy lifting with respect to SOX 404 has been done. IFRS adoption is not there yet, giving financial executives a bit of time to focus on bringing the mechanics of financial reporting into the 21st century. Meanwhile, the rest of the world will take note in anticipation of their local securities regulators following suit.
