Is XBRL (a) yet another new rule to comply with or (b) an investment that promises valuable returns to companies and shareholders alike?
Judging from recent surveys on XBRL awareness in the U.S., most finance and accounting executives would fail this quiz. The correct answer is (c) both.
By neglecting to treat the SEC's new XBRL mandate as more than a compliance requirement, publicly listed companies might fail to leverage one of the biggest breakthroughs in accounting in the past 75 years. What's more, shareholders, competitors, and much larger numbers of analysts will be able to spot this missed opportunity because XBRL provides a new window into the performance and future prospects of organizations of all sizes.
The technology -- which transforms financial reporting from a document-based process to a data-driven process -- will give smaller public companies in particular a greater opportunity to tell their stories to a larger audience. Some 5,000 small and microcap U.S. companies do not receive any type of analyst coverage, according to Phillip Moyer, CEO and president of EDGAR Online Inc., a business and financial information provider that has applied XBRL technology (mapping data tags to individual financial statement line items) to thousands of companies. Analyst coverage of midsize companies has also decreased in recent years, primarily because companies are required to report more information and "analysts are more likely to stick to companies where there is higher transparency," Moyer adds. From a financial reporting perspective, XBRL enables genuinely "fair disclosure" to analysts and shareholders as well as for companies of all sizes seeking funding.
The technology offers other benefits to companies. "What makes XBRL so exciting for me and the rest of the accounting industry is that this is the most significant advancement in financial reporting since the invention of double-entry accounting," says BearingPoint XBRL Practice Lead Brian Hankin, who also serves as the technical lead on his firm's work with the SEC on its $43 million effort to modernize the EDGAR system. "The benefits that we've seen from XBRL based on hundreds of large-scale global implementations include significant cost savings; faster, more reliable handling of data; improved analysis; and a higher quality of decision-making. XBRL is much more than just a financial reporting technology."
Ready or Not?
At least it can be, judging from the achievements of companies in the growing number of other countries, including Japan, Australia, and The Netherlands, that already use XBRL. However, most U.S. finance and accounting professionals do not appear ready quite yet to tap the "beyond compliance" value of XBRL. In an online survey of more than 260 Institute of Management Accountants (IMA) members conducted in early summer:
• 86 percent of respondents say that their organizations are unprepared to implement XBRL;
• 84 percent of respondents consider themselves "novice" XBRL-ites; and
• 0 percent of respondents consider themselves "experts."
"Misconceptions span a wide range of issues from a general lack of understanding of what XBRL is to a lack of understanding of what successful implementation will require," reports Ajilon Finance Solutions Vice President Joyce Bastoli, whose firm conducted the survey of IMA members. "Issues such as how many resources will be required, how much implementation will cost, and how long it will take remain gray areas for many organizations that have yet to put the time behind fully mapping out the end-to-end process."
In the short term, there are straightforward steps that CFOs can take to prepare their functions and companies to comply with the new rules (see the "Short-Term Planning" side bar).
While very few U.S. companies participated in the SEC's voluntary XBRL filing program, some XBRL case studies do exist. Alcoa joined the voluntary filing program last year to demonstrate to stakeholders its leading financial reporting practices.
"We felt that it was our responsibility as a leader in financial reporting to help assist the SEC with this important initiative so that decisions regarding the use and future of XBRL could be determined and the users of financial information could be afforded the benefits of such technology for their investment decision-making as soon as possible," says Matthew Dinardo, Alcoa's manager, external reporting and financial accounting.
"Not Nearly as Big as Sox"'
Finance executives should immediately bone up on XBRL because they are most frequently responsible for implementing and managing the technology, according to XBRL consultants and software vendors. In midsize to larger companies, finance functions will work closely with their investor relations colleagues and their IT counterparts (especially database professionals).
Given this responsibility, CFOs should keep in mind that the impact of the new mandate on their company projects will be relatively minimal. "This is not nearly as big as SOX -- not by a long shot," says Hankin.
The consulting services and software investment required will be relatively minimal (see the "Tagging Compliance Costs" side bar). "There are very few companies, especially midsize organizations and smaller, that are opting to hire a full-time XBRL expert to do this," reports Moyer.
While the impact on individual companies should be small, the impact to the market could be huge -- once all of the relevant information in financial statements, including the footnotes, is assigned an XBRL tag and filed that way.
"The scope and impact of this rule is large in market terms, because it requires all publicly listed U.S. and foreign firms who operate in the U.S. to file in XBRL over the next three years," explains Mark Nashman, president and chief technology officer of Clarity Systems. From a liability perspective, the impact to individual companies, CEOs, and CFOs is "relatively low to begin with," Nashman continues, "since the requirement for the XBRL filing is treated as 'furnished,' rather than 'filed.' This indicates that the SEC realizes that there is a learning curve involved here." Additionally, companies will likely have more time, via a 30-day extension, to file their initial XBRL submissions.
"But companies need to take XBRL filing seriously because it's clear that the SEC is saying that everyone must get on board eventually," Nashman points out.
"Fast, Effective, and Inexpensive"
Count NASDAQ-listed PSS World Medical Inc. among companies getting an early start on XBRL.
"Waiting to implement anything mandated through the standards-setting bodies is never a good idea," says Michelle Boyer, PSS World Medical's senior director, accounting and reporting. "Our plans are to start this process in the fall."
Alcoa's XBRL implementation sounds relatively simple. After reviewing its options, the company elected to bypass a software tool in favor of services offered jointly by its financial printer, RR Donnelley, and EDGAR Online. "Because we liked what we heard from RR Donnelley, we looked no further than our financial printer," reports Dinardo. "From that point, it was just a matter of RR Donnelley converting the basic financial statements in our most recently filed Form 10-Q to XBRL, reviewing the tagged financial information, and filing the XBRL financial statements on a Form 8-K."
Dinardo says that the conversion posed no major challenges. "There is some time investment required to properly review the tagged financial information," he notes. "However, the time spent is inherently part of the process like anything else. ... The only real surprise about the actual process is how easy it was. There seemed to be a lot of discussion regarding the amount of time and cost needed, among other things, so it seemed like it would be an onerous task. That said, I do understand that once we start using the recently approved taxonomy and we apply it to more than just the basic financial statements, time and cost will increase; however, I do not see there being a major impact on the ease of the process."
The review process Dinardo mentions involves focusing on exceptions -- line-item deviations from a company's previous financial statements or deviations from competitors or emerging industry standard taxonomies. For example, if a company reports good well less intangibles this quarter but reported good will and intangibles in the previous quarter, it should understand why. "Did you make one tagging decision last quarter and a different tagging decision this quarter for the exact same line item?" Moyer explains. "Both decisions could be correct if you don't have any intangibles." Moyer's XBRL experts give customers the heads-up on these exceptions so that they can make the decision.
Companies may create custom tags, although each custom tag (e.g., revenue generated from energy generated from steam) has a child-parent relationship with a parent tag (e.g., revenue). These parent-child relationships ultimately make it possible for analysts, shareholders, and others to compare the performance of companies in different industries.
To date, Moyer says, the oil and gas and energy industries are more frequently using custom tags because of their unique accounting and reporting requirements. Ultimately, industry taxonomies (standard ways of applying XBRL tags to individual line items in financial statements) will emerge, making the tagging process easier to conduct for filers and making the information easier to crunch for analysts.
This is not to say that the current compliance process is difficult. "The advice I would give to other financial executives and managers as they move toward XBRL implementation is not to let all of the discussion about how XBRL is just one more major initiative for public companies to undertake with no perceived benefits cloud their judgment," Dinardo adds. "The process can be fast, effective, and inexpensive if you do your homework."
Long-Term Value and Impacts
The process also can be about much more than compliance.
"I've seen XBRL used for things like ERP modernization, consolidation, GRC, real-time controls monitoring, fraud detection, and real-time audit," reports Hankin. Those process improvements come from integrating the XBRL capability into accounting and consolidation (BPM, BI, etc.) systems. By doing so, companies "essentially are creating a very structured interface for all of that financial information that can be used for many different reasons and many different purposes to help improve business performance and operations," Hankin notes. "There is just a tremendous amount of additional value that they can get through the integrated approach."
These benefits extend to shareholders and the analyst community, where the playing field will be leveled. Financial analysis firms no longer "need to go get a $50,000 data terminal to be able to get access to 5,000 data elements," Moyer notes. "And they don't have to hire a staff of people offshore parsing through documents just to be able to identify the pension liabilities of a company I'm trying to invest in. ... What XBRL does is similar to what the Internet did for information and connected computers: It's the democratization of data."
Heightened transparency -- through faster, more accurate, more accessible, and more user friendly financial information -- will also pose new challenges with corporate finance and investor relations functions. In a recent blog entry (on Hitachi's excellent XBRL Web site), Dominic Jones, a principal with stakeholder communications consulting firm Clarity! Communications and founder of IR Web Report, predicts that IR officers will field many more questions of a technical accounting nature once XBRL filings start flowing.
Like Moyer, Jones also expects XBRL to democratize financial analysis. Since analysts and investors will need to spend less time formatting and analyzing past financial information, Jones expects these stakeholders to turn their attention to the future. As a result, CFOs and IR officers "will be under greater pressure to explain their companies' strategies and the context in which their businesses operate," Jones notes. "The ability to communicate these soft factors to investors will become much more important. They will need to become more proactive communicators."
Are CFOs and their IR colleagues prepared for this challenge? Recent surveys suggest not, but the good news is that XBRL compliance should go smoothly even if homework turns into a cram session. After all, most companies already practice a related form of tagging. "If you have multiple accounting systems, a BPM system, or a BI system, you are essentially inventing your own XBRL today."
The trick, of course, will be translating that process so that it meets compliance requirements and generates future value.
Short-Term Planning
When the SEC finalizes its XBLR rules, publicly listed U.S. companies -- and their finance functions in particular -- will need to create and execute a compliance plan that should cover the following steps:
1. Conduct a "perception audit" to shape a communications campaign. Find out what the finance and accounting and (at larger organizations) the investor relations (IR) staffers know about XBRL and what they need to learn about the topic. Use this information, Ajilon Finance Solutions Vice President Joyce Bastoli advises, to shape "internal communications vehicles, such as newsletters, the intranet, and e-mail, to spread the word about what's happening in this space." This information should include the SEC's new rules, a primer on how the technology works and what it does, updates on industry-specific taxonomies, and sources of additional information.
2. Identify a compliance approach. There are two options. Companies can either convert their financial statements to XBRL after the statements are produced (the so-called "drag and tag" approach) or else use software that integrates XBRL mapping into existing financial systems via ERP, BPM, BI, or other financial reporting and consolidation tools (many vendors of these systems are in the process of adding XBRL capabilities). The latter approach will initially consume more time and expense; however, XBRL experts -- even those who offer the conversion approach -- emphasize that an integrated approach is most likely to deliver long-term value. "Embedding XBRL into accounting systems really drives down cost and increases accuracy, so I expect this capability to end up inside of accounting systems," notes Phillip Moyer, CEO and president of EDGAR Online Inc. "Today and in the future, you still need to have workflow that manages what you release out to the public. There will be a need inside the firewall and outside the firewall to make sure that you're reliably creating XBRL."
3. Evaluate investments in services, training or new people. To date, few companies have sought to add full-time XBRL experts to their ranks. Instead, early adopters have tended to hire consultants or use the services offered by their software vendors. This will likely change in the future, says BearingPoint XBRL Practice Lead Brian Hankin. "Initially, companies will seek outside expertise to get started," he says. "After a few years, I expect finance and accounting organizations to begin to in-source the expertise necessary to remain compliant with XBRL and, more important, to further exploit the potential benefits of XBRL." Regardless of whether a company plans to hire full-time XBRL "taggers," finance accounting hiring managers should consider the rising value of these skills when evaluating any new hire. "Past implementation experience as well as sharp technical skills are not only important for XBRL but also a great asset to any finance team," Bastoli adds. "We recommend looking out for these skills when hiring permanent staff."
Tagging Compliance Costs
One of the most refreshing qualities of the new XBRL rules is that they bear so little resemblance to Sarbanes-Oxley. The costs and effort associated with XBRL tagging will pale in comparison to the Section 404 compliance burden. "We state it publicly," asserts EDGAR Online Inc. CEO and President Phillip Moyer. "In less than 10 hours we can help a company produce its first XBRL filing. There was nothing like that ever in the marketplace for Sarbanes-Oxley compliance, and I don't think that there ever will be."
Moyer's customers agree. "There really has not been a major challenge so far," reports Matthew Dinardo, Alcoa's manager, external reporting. "There is some time investment in order to properly review the tagged financial information; however, the time spent is inherently part of the process like anything else. As such, I do not equate the time needed to perform a review a challenge -- it's more like a necessary task in order to enhance the use of our financial information by interested parties."
The time and money that an integrated XBRL software solution requires -- one that embeds the tagging process into a company's accounting and consolidation systems -- is greater, but it can ultimately deliver a healthy return on investment because ensuing financial statement-publication processes will be largely automated.
BearingPoint XBRL Practice Lead Brian Hankin offers the following taxonomy of XBRL compliance costs:
• Upfront: These costs include software licenses, implementation and related services (consulting) costs, and, possibly training costs. Upfront costs most likely will be spread out over a three-year period because the SEC intends to design a phased approach to compliance (whereby more complicated XBRL tagging of footnote information will not be required until year two or three).
• Ongoing: If a company elects to manually tag the items in its financial statements, each filing process will likely require additional time and, possibly, cost (e.g., review by an outside XBRL publishing expert). Once the footnote tagging is completed, however, the ongoing cost is likely to minimal regardless of whether the tagging is done manually or in an automated fashion
• Value-Added: These costs are difficult to evaluate because the projects have yet to be performed and their purpose is to generate returns. "There is just a tremendous amount of value that companies can gain by creating a very structured interface for all of its financial information," emphasizes Hankin, who rattles off several process-improvement and efficiency opportunities, including automated tax (and other regulatory) filings, ERP modernization, internal controls monitoring, fraud detection, and continuous auditing.