Financial Reporting: With XBRL, It’s Tag You’re It

In the name of transparency, standardized business reporting to get an interactive signature

By James C. Hyatt

There’s an XBRL in your future. That’s shorthand for “eXtensible Business Reporting Language,” an important financial reporting initiative that many large companies have tested, and which the SEC is strongly pushing.

The XBRL idea is a decade old, but it is clearly picking up speed. Its progress prompted Motley Fool commenter Tim Beyers earlier this year to call XBRL “the most important shareholder initiative in a decade.”

The idea is to standardize business-information reporting and make it interactive so that a wide variety of information users—from accountants, software companies and government agencies to investors and researchers as well as companies themselves—can search corporate filings and compare data in creative ways.

A major hurdle, however, has been the creation of “taxonomies” or agreed-upon definitions that will be used in all XBRL reports. To take a simple example, one company’s financial report might refer to “Net Income;” another, to “netincome,” and a third to “NI” even though all mean the same type of item. Under XBRL, they’d have to use the correct tag so that what they report as net income is consistent with other companies. So far, about 13,000 of these tags have been established.

Sounds complex. But as David Blaszkowsky, director of the SEC’s office of interactive disclosure notes, “a huge number of them are irrelevant for most purposes; most companies need only a small percentage.” He says adopting XBRL has turned out to be “remarkably inexpensive–orders of magnitude below what people were worried about.” Equally important, “when you’ve tagged it once, you don’t have to tag it again.” In other words, after the system has been installed, the same tags work in the future and the same information can be used in a variety of ways other than for SEC filings.

Proponents see many advantages. As SEC Chairman Christopher Cox told an international roundtable at the Commission earlier this year, “Whereas today an ordinary investor can’t compare the financial reports of six or 12 or 24 companies without an enormous amount of work, in the near future that power will be at his or her fingertips, probably for free, on just about any financial website.

“And it’s even more exciting that our ordinary investor will not only be able to compare U.S. companies, but companies around the world. That’s because interactive data is being built to accommodate at least 30 different spoken languages, and it’s being introduced in nearly every major market around the world.”

Indeed, Comcast Chief Accounting Officer Lawrence Salva commented to the SEC: “In a time when technology continues to astound us and the flow of information and knowledge is so seamless, it is hard to believe that Interactive Data did not take root long ago.”

The SEC received almost 100 public comments, most of them favorable, on its proposal to require that filings be made in the XBRL system. Several noted that XBRL would eliminate the need for third parties to transfer corporate information into other formats, which can result in omissions and errors. On the other hand, there are questions about whether information filed in XBRL will be subject to the same standards that currently apply to audited financial statements and reports.

Many corporate comments urged the SEC to relieve companies of liability for errors in XBRL-prepared filings. For example, Intel Corp. commented: “…liability attached to interactive data should be limited to cases involving fraud for deliberately manipulating or misusing the tags.” Several companies worry that the XBRL approach will tend to confuse investors who cherry-pick specific items for review without reading the accompanying explanations and footnotes.

Currently, the SEC isn’t proposing to include executive compensation items in XBRL filings, nor would it require governance policies or CSR reports to be filed in the system. But that wouldn’t preclude other groups from adopting XBRL. The Global Reporting Initiative, for example, has done considerable research into creating an XBRL taxonomy for nonfinancial performance data.

In May, GRI and nine leading socially responsible investment firms said they’d like to work toward a system where companies release a standard set of environmental, social and governance information. Currently, they noted, such reports “aren’t yet comparable enough and are often delivered in formats that are difficult to use. Companies have expressed the view that their existing published information is not sufficiently utilized and that the number of requests for information continues to grow.”

There are skeptics, however. Jay Starkman, a CPA in Atlanta, observed in his comments to the SEC that users of XBRL-tagged information will need to have an XBRL viewer, currently in Windows software, “so development of XBRL may entrench Microsoft operating systems, to the detriment of competitors Linux and Mac.” And he labeled as “poppycock” the SEC’s assumptions about the versatility and utility of XBRL. “As it exists today, XBRL has limited interoperability with just a few commercial software products. XBRL might improve and meet this promise in the future, but it lacks those capabilities today.”

Several comments urged the SEC to slowdown its proposed implementation schedule for XBRL filings to get various kinks worked out.

James C. Hyatt, formerly a reporter and editor at The Wall Street Journal, is a N.J.-based freelance writer whose work appears frequently on TheCro.com.

Posted October 16, 2008 in Financial