Learning a new language: XBRL

Jun 01, 2008
<p>Extensible business reporting language (XBRL) is predicted to revolutionise IR by lowering costs and reporting time, yet with the exception of some Asian firms uptake has so far been slow, especially in the US</p>

It may not sound revolutionary, but extensible business reporting language – or XBRL, as it is better known – is predicted to change fundamentally the way financial information is produced, viewed and analyzed. The impact on the IR function could be huge, yet take-up in most regions has been very slow, perhaps because XBRL is promising a lot but has yet to deliver.

Commentators predict the SEC will mandate the use of XBRL for the 500 largest US companies by the end of this year or the start of 2009, with all US companies obliged to start using it by 2012.

XBRL, which SEC chairman Christopher Cox calls a ‘GPS homing device’ for financial data, works in a remarkably simple way, acting like a bar code for data in financial statements. Each item, such as gross margin or revenue, is given a tag that allows investors to summon specific data instantly.

Accuracy should improve alongside speed of access. Currently, investors and analysts manually remove data from financial reports or receive it from third-party aggregators. Both options are prone to producing errors. With XBRL, the investment community can access data directly from companies.

In April 2005, to test the new reporting language, the SEC set up a voluntary program that allowed companies to file quarterly reports in XBRL along with their official reports. By 2007, however, just 60 companies had joined the scheme.

‘The plea was put out three years ago, but the majority of firms have not taken any notice,’ says John Stantial, assistant controller at United Technologies Corporation (UTC), whose businesses include Otis Elevators and Pratt & Whitney.

Some observers predict XBRL will allow overworked analysts to cover more companies. Mike Willis, a partner at PricewaterhouseCoopers and the founding chairman of XBRL International, explains the situation in macroeconomic terms. ‘Standards appear to lower costs in a supply chain: for example, bar codes make it quicker and cheaper to process containers,’ he points out. ‘XBRL is doing the same thing for the business supply chain. If you lower the cost of accessing information, you enable more people to take part. That will have the biggest impact on companies that do not have coverage.

‘Right now, most sell-side firms focus on around 2,000 companies. If you are a company outside of that 2,000, your liquidity will be poor. XBRL is going to lower the cost of access for analysts, which should enable more companies to receive coverage.’

Taylor Hawes, controller for global platforms and operations at Microsoft, who developed the company’s XBRL-enabled website, agrees with this. ‘If all information is easily accessible electronically, would analysts have the ability to increase their coverage of companies?’ he wonders. ‘I think the presumption is ‘yes’. If it is less work to gather data, more time can be spent on analysis and enlarging coverage.’

The case for
There is already some evidence of this in the US. The Federal Deposit Insurance Corporation (FDIC), one of the regulatory bodies for the financial services industry, has mandated XBRL for the filing of all bank call reports. According to Phillip Moyer, chief executive of data provider EDGAR Online, the FDIC is now able to cover the same number of banks with a fifth of the staff. ‘The regulator’s coverage has become a lot more efficient now that XBRL data is flowing directly to it,’ he notes.

Even so, US-based analysts are not taking much notice of XBRL. At UTC the financial reporting team is heavily involved in XBRL but the IR department is not showing much interest because analysts are not asking any questions about it.

‘I think the IR department would jump on XBRL if analysts showed interest, but right now they aren’t,’ says Stantial. He believes analysts will embrace XBRL only once it is mandated and there’s enough data out there to make switching to a new system worthwhile.

Of course, IROs also spend time cutting and pasting data from financial reports, so there should be internal benefits, too. ‘XBRL is going to relieve some of the manual effort that goes into publishing information,’ says Willis. ‘It will increase the value of IR because IROs will have more time to think about how information is presented to the market.’

UTC undertook a study to find out how much time is saved by reporting in XBRL. ‘Our tests show it cuts out 20 percent of reporting time per quarter,’ says Stantial. ‘At least, it would, if we could file solely in XBRL.’

The case against
There is plenty of resistance to XBRL. Financial Executives International (FEI), an association for CFOs and other senior finance executives, sent a letter to the SEC in April, stating: ‘As preparers we have learned that there are no improvements at this time in our internal processes as a result of creating and providing tagged information, and that preparers do, in fact, experience increased costs and efforts as a result.’

FEI explains that most companies create their financial statements as usual and then ‘bolt on’ the XBRL tags afterwards. Willis says this is an understandable but narrow-minded view, given that XBRL is a new technology. He returns to the example of a shop bar code to make his point, explaining that when bar codes were first introduced, they were used only in the shop itself. Soon afterward, however, bar codes were integrated into the supply chain and ended up vastly improving efficiency.

Moyer also expresses disappointment with the FEI letter. ‘For someone to think internal costs will be reduced today because a company is reporting in a different format is like suggesting that internal costs decreased when companies put up their web page for the first time,’ he says. ‘XBRL will work in the same way as the internet, driving down costs as standards emerge in the information supply chain.’

In contrast to the US, XBRL is already mandated in many Asian countries, such as China, Japan and South Korea. These locations offer a glimpse of where the rest of the world may be heading.

‘In the US, if you look at the data coming out of large data aggregators, only a couple of hundred data items are finding their way to analysts, and analysts have to go through parts of the documents to get extra information,’ comments Moyer. ‘On the other hand, China has made XBRL mandatory for all 1,500 companies on the Shanghai and Shenzhen stock exchanges. These companies are publishing data at a rate of 3,500 items each. This is the depth of information available to investors in China.’

The UK view
XBRL in the UK, like in the US, is still at a voluntary stage. HM Revenue & Customs (HMRC) and Companies House have been running voluntary filing programs since 2006. Companies House accepts company accounts in XBRL, and HMRC is receiving XBRL tax returns. Last year around 210,000 companies voluntarily used XBRL, and the government has said it plans to make the technology mandatory for company tax returns in 2011.

Multilingual reporting

With XBRL, the labels attached to balance sheets and income statements can be published in a number of different languages, which should make companies more effective at accessing global markets. Mike Willis, the founding chairman of XBRL International, believes this is one reason why XBRL has proved popular in the high-growth, capital-hungry markets of Asia.

‘Before mandating XBRL, the Koreans tried this with their top 20 companies,’ he says. ‘They made the labels available in five languages and, over a three-week period, the amount of international investment in these 20 companies doubled. The economic consequences are pretty substantial.’

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