In-Depth

High Finance Learns a New Language

Talking Points
XBRL IS WINNING SUPPORTERS

  • XBRL is an XML-based standard for analysis, exchange and reporting of financially oriented business information. Its initial use will be to meet mandates for financial reporting and analysis.
  • Any organization that is familiar with XML is already much of the way there. Everything that needs to be done can be done outside the ERP and GL systems in middleware.
  • The SEC is fueling interest in XBRL, although its official position is pointedly neutral. Using XBRL is voluntary, but that may change soon.

Meet the new addition to the XML family, XBRL. eXensible Business Reporting Language represents another derivative of XML and promises to streamline the integration of business reports and automate the corresponding financial and business analysis. Although the initial uses of XBRL focus on financial reports that must be sent to the FDIC and SEC, it can be applied to almost any category of business reporting. XBRL also is being used in Europe to meet financial reporting mandates.

“XBRL represents a significant advance, but don’t expect it to change things overnight,” says Robert Kugel, VP and research director at Ventana Research. To start, XBRL “makes it easier to deal with financial numbers,” he explains. Therefore, the initial uses of XBRL for mandated financial reporting and the accompanying analysis of those reports represent only the beginning of what the technology can do.

Ultimately, “XBRL has the potential to unleash a lot of creativity,” Kugel says. For example, it would enable the business analysis of the parties in a supply chain or the state of particular markets. These types of analysis are not practical today, as data has to be culled manually, normalized and re-input into spreadsheets or other analytical applications.

Adopting XBRL, however, shouldn’t be a burden. Any organization that is familiar with XML is already much of the way there. All that’s needed is to pick up the appropriate industry-specific schema and adopt some simple maintenance tools. Companies don’t even have to change their existing financial applications. “Virtually everything that needs to be done can be done outside the ERP and GL systems in middleware,” says Walter Hamscher, vice chair, XBRL International. And it doesn’t have to be expensive. “How much you spend depends on how much value you want,” Hamscher continues.

It’s not only the data
Simply put, XBRL is an XML-based standard for the analysis, exchange and reporting of financially oriented business information. XBRL International (www.XBRL.org) freely licenses the XBRL standard and framework as a specification for structuring and representing information in business reports so it may be extracted and processed automatically by XBRL-aware applications.

Specifically, XBRL defines data-formatting conventions and vocabularies for marking up and describing business report data, such as sales or net assets. Like XML, it is tag based. Descriptions in the form of tags or labels are attached to the various pieces of business data. These tags describe the particular piece of data in terms of an agreed-upon vocabulary. That vocabulary is referred to as an XBRL taxonomy, the specific schema tags. The taxonomy performs a function similar to the document type definition used with XML, although it is more detailed than the DTD.

XBRL then employs XML’s XML Linking Language (XLink) capability to further extend the taxonomy definitions. “XBRL is not just data but semantics—about what the data means. XLink is how you specify the semantics,” says Hugh Wallis, an independent consultant for XBRL International.

Once the organization has the appropriate taxonomy, it can enable its reports for XBRL. From there, organizations can more easily use and share data from the reports within the organization and between organizations. XBRL-aware applications can take advantage of the high level of specificity and self-describing nature of the tags to automatically process the information for purposes of reporting and analysis. XBRL is independent of any hardware platform, software operating system, programming language or accounting standard, as noted in a recent PricewaterhouseCoopers report titled “XBRL: Improving Business Reporting Through Standardization.”

Government regulators want it
XBRL is not exactly new, although few outside the immediate circle of XBRL International seem aware of it. XBRL International, the global trade association that developed, maintains and promotes XBRL, was formed in 1998. It was the first attempt at the standard, under the name eXtensible Financial Reporting Markup Language, appeared in the fall of 1999. “The financial reporting focus was too limiting. They changed the name to XBRL because the technology could address any business reporting, internal or external,” explains Rob Blake, VP, Rivet Software, an early XBRL tool provider.

Right now, government regulators in the U.S. and abroad are driving the immediate interest in XBRL. “A number of regulators, tax authorities and market exchanges are requiring, planning to require or considering requiring XBRL-compliant submissions of financial information,” according to Gartner’s 2004 report titled, “Hype Cycle for XML Technologies.” Today, the FDIC requires the 5,000 banks it oversees in the U.S. to submit their quarterly call reports in XBRL format. The SEC currently is recommending the use of XBRL for filing reports on a voluntary basis, but the industry widely expects SEC to mandate the use of XBRL in the future.

As expected, the early adopters of XBRL are the auditing and accounting firms involved in financial reporting and the banks that fall under the FDIC mandates. The investment industry also is moving quickly to adopt XBRL, with corporate investor relations departments and the investment firms quickly jumping on the growing XBRL bandwagon.

Financial firms want it, too
At a recent XBRL International conference held in Boston this spring, Elmer Huh, executive director of global valuation and accounting at Morgan Stanley, described the investment firm’s interest in XBRL to streamline and automate the investment analysis process. “XBRL allows scalable querying of financial reports,” Huh said. He described the time financial analysts spend painstakingly extracting information from financial reports and manually re-entering it into spreadsheets. “XBRL reduces errors and speeds the data into our models,” he concluded. XBRL, for example, reduces from days to minutes the time it took an analyst to extract data from the detailed footnotes of financial reports.

Using its new XBRL-based investment analysis platform, Huh expects Morgan Stanley analysts to be able to assess more companies and make broader and deeper analyses across entire industries. By comparison, “HTML and PDF only exploit the ease of distribution that the Internet offers. They are of little more value than a photocopied press release, while XBRL will allow accurate, relevant, scalable querying of financial information,” Huh told the conference audience.

Small and mid-cap companies, in particular, will benefit from XBR, Kugel suggests. Today investment firms, such as Morgan Stanley, haven’t the resources to follow any but the leaders in a given market segment. Through the automation of the analysis of financial reports enabled by XBRL, however, many more companies will find their way onto the radar screens of potential investors.

Software AG is one of those mid-cap companies that can be easily overlooked by the investment analysts who have barely enough time to focus on the largest software companies, such as SAP and Oracle. The company adopted XBRL in 2001 believing it will “reduce the cost of compiling and reporting financial information,” says Othmar Winzig, Software AG’s VP of investor relations, speaking at the XBRL conference in Boston. XBRL will also help companies as they seek financing in the global capital markets. However, “to gain the advantages of XBRL, it needs widespread adoption,” he adds.

Microsoft is another early adopter of XBRL. It publishes its financials in XBRL, reports Michael Ohata, Microsoft director of business reporting. “XBRL is the key for driving efficiency in reporting,” he says. Ohato estimates using XBRL has enabled the company to spend one-fifth the time on financial reporting it previously required.

Microsoft looks at XBRL to be applied beyond basic financial reporting. “We see it as part of the trend toward business performance management,” Ohato says. It will enable companies to expedite the collection and dissemination of performance data, such as key performance indicators, through a technology architecture that includes not only XBRL but XML and Web services.

In the long term, the biggest payback from XBRL will likely come from compliance. “XBRL will definitely help with Sarbanes-Oxley compliance by putting in a metadata layer for controls and real-time monitoring,” Ohata says. XBRL, for example, could be used to create what amounts to a real-time auditing system that automatically collects, analyzes and reports data almost as fast as it changes.

A tighter standard with the right taxonomy
At the moment, the banking and investment industries are driving most of the action around XBRL. The FDIC and the SEC in the U.S. and their European counterparts are either requiring submissions in XBRL form or are expected to require it in the near future.

“In Europe, banking regulations are requiring XBRL. In the U.S., the SEC has asked for voluntary filings, but XBRL will likely become mandatory,” says Bryce Pippert, director of technical support for UBmatrix, a XBRL tool provider. XBRL will greatly simplify the workload of regulators who have to sift through the required filings.

The FDIC already mandates banks submit their quarterly call reports in XBRL format. Initially, the agency thought it could achieve what it needed using XML, but “everybody does XML differently,” says Mark Montoya, systems analyst and XBRL specialist at the FDIC.

XBRL, however, promised to provide a much more tightly defined standard, especially when it was combined with the right taxonomy. The FDIC set out to develop its own taxonomy specific to quarterly call reports based on the U.S. government’s “Micro Data Reference Manual,” which consists of about 2,000 terms. The taxonomy was built for the FDIC by KPMG and UBmatrix.

With the taxonomy in hand, the FDIC then built a presentation form to provide the banks, Montoya explains. The banks use the presentation form as the basis for their XBRL submissions. The XBRL process allows the banks to validate their data before they submit it. In practice, the process is simple and nearly transparent to the banks and the analysts at the FDIC. “Whoever is doing it doesn’t need to know XBRL. It’s just a form. When they click submit, our XBRL framework does the rest,” Montoya says.

XBRL is not a sure thing
The benefits of XBRL are greater speed, reduced work and fewer errors. As a result, XBRL cuts the time required and lowers the cost of pulling information from business reports and putting into spreadsheets or other analytical applications. It also eliminates the need to extract, transform and map business data to make it readable by other systems.

“The payoff is we can turn around the data much quicker. Instead of taking months, we can process the data almost immediately,” says Montoya. In published reports, the FDIC cites a 25-percent reduction in processing costs due to XBRL.

Even with the benefits, XBRL is not a sure thing. As Derby notes in his speech to XBRL International: “There are still open questions on the future adoption of the standard and whether we will see more widespread adoption of this tool.” The questions revolve around the availability of commercial tools, confusion caused by extensions to the XBRL standard and the future direction of the standard itself. (See related story, “Developing apps is easier starting from XML.”)

Still, XBRL today is attracting supporters based on its benefits. “I believe strongly in the benefits that can be derived from the use of tagged data—more accurate and reliable data made available faster and cheaper,” Derby told his XBRL audience. The only candidate for that is XBRL.

ILLUSTRATION BY TAD MAJEWSKI

Sidebar: Developing apps is easier starting from XML
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