High Finance Learns a New Language
- By Alan Radding
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
- 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
“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
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
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is easier starting from XML
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suggests giving EDGAR a try
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