Extensible business reporting language offers major benefits, but only a handful of companies are implementing it. That may change soon.
Even technologies that sound particularly appealing can take a long time to catch on if there's no mandate or urgency behind them. Take extensible business reporting language (XBRL). Since it emerged five years ago, XBRL has been touted for enhancing the Internet-based exchange of financial information, improving reporting quality while lowering reporting costs and establishing more precise communication with external stakeholders.
Still, misconceptions persist about exactly what it is. XBRL is a standards-based method for preparing, publishing, exchanging and analyzing financial information. It tags financial information to a data dictionary (taxonomy) so that it can be assimilated into one standard language format. When all data is in a standard format, a more efficient exchange of financial information can take place. For example, when an XBRL-enabled application extracts a number tagged in XBRL as "gross sales" from another XBRL-enabled system, that application automatically recognizes the term strictly defined in the financial taxonomy.
Internally, this tool lets companies automate -- and therefore streamline and accelerate -- the collection and reporting of data; it increases data transparency, enhances data quality, and reduces errors; and it makes real-time operational information available to business managers. Externally, XBRL can make it easier for third parties such as banks, investors, analysts, auditors, credit companies, competitors and regulatory bodies such as the SEC to find and analyze companies' financial information.
There are plenty of things XBRL isn't. It's not a software product, nor is it something that users need to attach to their accounting software. XBRL doesn't change accounting standards; it enhances the usability of those standards. It's designed to be integrated into business software products and will likely become embedded in more and more of those systems as its popularity increases.
Support for XBRL is subdued. The American Institute of Certified Public Accountants (AICPA) has championed XBRL, and in April, the Institute of Management Accountants voiced its backing of the format. Right now, however, some business software vendors question whether incorporating XBRL into their current offerings will generate revenue. In short, XBRL continues to simmer. There are signs, though, that it could eventually heat up to a boil in the mainstream business community.
Navigating Stage Two
The initial euphoria over XBRL's potential has been dampened by a more realistic view of what it can do and how it will likely evolve. But that's to be understood. "There are basically three stages for the evolution of a technology," says Mary Knox, research director, investment services, at Gartner Inc. in Stamford, Conn. "The first stage consists mainly of market hype, when promises of what the technology can do produce unrealistically high hopes. The second stage is disillusionment, during which time a more realistic view of what the technology can and can't do emerges. And the third stage comes when the technology begins entering its mainstream, productive life. XBRL is currently in the second stage. We believe it will hit a decent market penetration -- that is, 20 percent to 50 percent of U.S. public companies -- within the next two to five years."
In February of this year, the SEC took a step that might encourage the shift by establishing a voluntary pilot program for filing 10-K and 8-K financial reports in XBRL format to EDGAR, the Electronic Data Gathering Analysis and Retrieval system on its Web site. Under the program, filers can test submission of documents in XBRL; the SEC can examine the processing and storage of XBRL files and investigate mechanisms to view and analyze the information; and at no charge, the public can download data from the XBRL-coded filings. However, fewer than 10 enterprises, including Microsoft and Adobe, had chosen to submit reports in XBRL by November 7.
Visitors to the EDGAR Web site can still download information from the many SEC documents filed in the traditional text format to perform competitive analyses, but comparing the data manually is a time-consuming and error-prone process.
A few financial information companies, notably EDGAR Online Inc., have emerged to provide another alternative. EDGAR Online offers EDGAR data in XBRL and other formats and makes it available to investors, analysts and other interested parties for a fee.
Despite EDGAR's usefulness, it is not perfect. Instead of providing information at a granular level -- line item by line item -- it lumps most of the data into tables. That format makes it difficult for users to get a clear picture of every piece of financial data as well as specific timelines and dates for that information.
Still a Long Way To Go
Although the banking community has been ordered to file its call reports in XBRL (see The FDIC's XBRL Mandate), the rest of the corporate world has been given no such directives by the SEC or other regulators. Without that kind of push, its adoption is expected to be slow.
XBRL's forte is standardizing data, so you might assume that XBRL's adoption rate would be sped up by Sarbanes-Oxley compliance requirements. However, that doesn't appear likely.
"Compliance management attestation and reporting requirements have not been a strong driver for XBRL by public companies," says Lane Leskela, research vice president at Gartner Investment Advisory Services in Stamford, Conn. "For internal and external audit reports, there's still a certain amount of management comfort with eyeball-level review in the manual preparation of official documents. Although many business process management vendors provide XBRL capability for the compliance reporting function, many of their clients view this capability as helpful but not critical to supporting their compliance management process."
Even so, at the core of most compliance and reporting processes lie control, data-quality and process problems. XBRL is specifically designed to address those issues, according to Mike Willis, partner at PricewaterhouseCoopers LLP in Tampa, Fla., and founding chairman of XBRL International, a consortium of more than 350 firms whose purpose is to promote XBRL's development and usage. "Organizations that are leveraging this standard are beginning to realize the [companywide] cost benefits," says Willis. In particular, "XBRL can reduce the costs associated with the production of financial reports by 30 percent to 70 percent. Plus, with XBRL there are no presentation costs, just the facts."
From a performance management perspective, companies can get closer to one version of the truth through what Knox calls single-instance data -- a single data set made possible by XBRL that can be used for external and internal reporting. Just using XBRL, however, won't automatically produce performance improvements. "A company can end up having a bunch of XBRL silos of information if there isn't an open reporting architecture that goes along with its adoption," says Knox. "Companies need a collaborative, open, communicative type of culture to maximize performance-related XBRL benefits."
Straight From the Horse's Mouth
With XBRL, analysts get their information directly from the company whose data they are analyzing rather than through an intermediary. "CFOs will say they've got great coverage with analysts already, so how could that coverage be enhanced with XBRL? But what they don't realize is where analysts get the data for their valuation models," Willis points out. "Analysts produce their data from third-party distributors and aggregators, and data from third parties isn't always accurate. It may or may not represent the company's true picture. Third parties use a cookie-cutter model for their financial data, which can be like trying to put a round peg in a square hole. XBRL puts the company in control of its own data."
For Business Objects, a business intelligence software firm based in Vancouver, British Columbia, freedom to tell its own story to the investment community was one of the reasons for implementing XBRL. The company has filed its financial statements to the SEC in XBRL format since the first quarter of this year. "Third-party resellers of financial data lose the detail when they normalize that data," says Diane Mueller, Business Objects' senior product manager, enterprise reporting, and chair of XBRL International's XBRL for General Ledger Working Group. "With XBRL, you get the exact information about the company, not a normalized version of it." She adds that her organization focuses XBRL efforts on its income statement, balance sheet and statement of cash flows, which she believes is what a company would typically tag first when working with XBRL.
What about the challenges of implementing XBRL? It doesn't have to be a nightmare, according to companies that have gone through the process. For instance, Business Objects uses an XBRL plug-in from Rivet Software.
"The Rivet plug-in gives us a data dictionary for accounting that we need to tag our own financial reports to, and we can use it to drag and save all that information as an XBRL document," says Mueller. "At the beginning, I walked the finance managers through it, and an IT person helped with the initial setup work. If there are additional line items that need to be included in the second-quarter report that weren't included in the first-quarter report, we can adjust the mapping. And if our company wants a different taxonomy for something like an assets category, we can do that."
The few companies that are implementing XBRL capabilities tend to have a stake in its development. For Bowne & Co., a financial printing concern based in New York City, filing Form 8-K with the SEC in XBRL provided a first-hand look at the problems its clients might face with XBRL. "If it became mainstream, our clients would hand us documents that were marked up in XBRL, which we'd receive, store and validate to see that those documents comply with the SEC," says Dave Copenhafer, director of EDGAR services at Bowne. "When you print a document marked in XBRL, it's gibberish, but it can be made readable in text format."
Ernst & Young is developing education and usage programs to help clients with XBRL when the format reaches broad acceptance. "We're using it to see how clients would create XBRL documents and translate those documents for auditing purposes and in general to see what other issues clients face when using XBRL," says Paul Penler, principal at Ernst & Young in Cleveland, Ohio, and vice chair of XBRL International. "We believe XBRL could become mainstream within three to five years, particularly if the SEC makes it mandatory. And while there are no announcements to that effect yet, presumably that's something the SEC has in mind."
The SEC has good reasons to require its usage in the future, particularly because it would streamline the additional workload that Sarbanes-Oxley compliance has placed on that agency. Until that happens, the most compelling reason for using XBRL is the distinct advantage of being able to use it to tell the company's real story to external stakeholders, not some third party's version of it.
The FDIC's XBRL Mandate
Even though extensible business reporting language (XBRL) shows great promise for reporting financial information, it has yet to be widely adopted. So far, no one has been able to see how this Internet-capable language will impact an industry. But in October, the banking community began serving as a test case. Now the FDIC requires all 8,300-plus commercial U.S. banks to use XBRL in filing their call reports -- quarterly filings that include a bank's balance sheet, income statement and list of securities. It's logical that banks would be the first to use XBRL industrywide. XBRL is based on the standardization of financial terms, and the banking industry has already achieved a high degree of standardization in the way its financial information must be reported to the FDIC.
"At the FDIC, we've long recognized that XBRL isn't just a good idea on paper; it is real, and it works," says Mike Bartell, the FDIC's CIO in Washington, D.C. "Too much critical information today is buried or obscured by the massive volume of data that we all create and process. The longer it takes us to manage that data, the less responsive we are to the needs of the industry and the public. While XBRL may not be the only answer, it's a key part of the solution needed to help address these issues."
XBRL benefits each bank internally because errors made in the preparation of these reports pop up instantly and can be corrected on the spot. In the past, a bank wouldn't know it had made a mistake until it received feedback from the FDIC. That instant feedback saves banks the time they have spent fixing the problem areas and resubmitting corrected reports to the FDIC.
More importantly, a report written in XBRL now gives Wall Street analysts an immediate, accurate look at the financial health of any U.S. commercial bank they want to track. Instead of having to wait 30 to 60 days after the quarter end for a bank's call report information, analysts can retrieve it as soon as the bank files it. Whether that kind of fresh financial information becomes available in other industries hinges on their ability to develop a standardized language for their own balance sheets and income statements -- a far greater challenge than adopting XBRL conventions for bank financial statements, which were already highly standardized.