By mid-2010, public companies with market capitalizations of more than $700 million must report their earnings to the U.S. Securities and Exchange Commission (SEC) formatted in XBRL. By 2011, virtually all public company filers will be required to use XBRL reporting, according to the SEC's final rule issued last year. For the nation's 50 largest companies, the SEC XBRL mandate kicked in last year.
XBRL is an XML-based language for communicating business and financial information between companies and the Internet. As its adoption spreads, experts assert that this interactive data format will fundamentally change business reporting by providing anyone with a computer and Internet connection a ready means to search, sort and compare data now buried in SEC filings.
But companies would be wise to view XBRL as more than just an SEC reporting requirement, or investor watchdog bonanza, for that matter, said analysts and industry groups which support its use.
XBRL works by tagging each individual item of data with a unique code. The tags can be read by a computer across many platforms. Organized as taxonomies, XBRL language can also be customized, or extended as its name implies, to provide tags that describe information specific to a particular company.
"It's an essential technology for financial reporting, particularly for U.S. companies now that have to file with the SEC," said Paul Hamerman, an analyst at Cambridge, Mass.-based Forrester Research Inc. Certainly, investors and investigators can use XBRL's analysis tools to search and compare financial data. "That is really one of the benefits of XBRL; the data is represented in machine-readable format and a consistent format. You can aggregate and compare data using the published XBRL data that the government collects."
Smart businesses will use XBRL tags to automate their processes for collecting and analyzing business information internally and across companies, said Hamerman and others. Used early in the reporting process, XBRL can help minimize risk by automating the access and analysis of risk-related data in filings, as laid out in Gartner Inc.'s recent report, "XBRL: A Tool for More-Effective Risk Management." In addition, XBRL can reduce operational risk resulting from poor data quality and mistakes made through manual manipulation of data.
Indeed, the open standard has no shortage of promoters. XBRL International, the not-for-profit consortium working to develop and spread the use of XBRL worldwide, has built a comprehensive website laying out the origins and many uses of XBRL. Think tanks such as the Open Compliance and Ethics Group view the XBRL format as the best foundation for building a common language for governance, risk and compliance programs.
But thus far there is not much evidence that companies are embracing XBRL as an internal standard that can bring value, said Hamerman and others. "There is a published open standard for internal integration of general ledger systems, which hasn't seen much use," he said.
The XBRL reporting process
Gartner analyst Mary Knox, who covers financial services at the Stamford, Conn.-based consultancy, agreed that corporations have yet to embrace XBRL as a means to improve internal processes and minimize risk.
The sooner within the whole accounting and reporting processes that you move to standardization means that some of the early desired benefits of XBRL can be received.
Mary Knox, analyst, Gartner Inc.
Banks, for example, have been required by the Federal Deposit Insurance Corp. for years now to use XBRL in their quarterly call reports. Rather than incorporate XBRL into their internal systems, the preponderance of companies prepare their financial filings as usual, then hand the reports over for translation into XBRL. Banks are not alone in this.
"My understanding is that most of the corporations that have been moving to the mandated XBRL filings do so at the very end of the process," Knox said. "A lot of times this is being outsourced."
The SEC may be partly responsible for this, because it still requires corporations to submit paper filings, as well as the XBRL filings. This kind of clerical approach to XBRL reporting misses out on its benefits. "One of the values of XBRL is that through the various link bases, you can create all sorts of validations and improve the accuracy of filings," Knox said. Fixing errors at the end of the process, in multiple systems no less, can be a "nightmare scenario."
"The sooner within the whole accounting and reporting processes that you move to standardization means that some of the early desired benefits of XBRL can be received. And that is to standardize the corporate performance information inside of firms across platforms," Knox said. But companies have been slow to see the value in this, she added, and even pushed back against expanding the use of XBRL, calling into question XBRL's status as a standard.
A good example of corporate ambivalence about XBRL reporting is the issue of using XBRL taxonomies to report corporate actions, or special events that could affect a company's securities, such as stocks and bonds. The push for using XBRL to report these special events has come mainly from the intermediaries that pore over, interpret and publish such disclosures for the investor community, not from the companies. The benefit of standardized formats for the intermediaries is clear, in that the interactive data tags would save them a lot of time.
"The problem is there is really very little value to the issuers themselves, which in many cases go through lawyers when it comes to issuing some of these complex announcements because of the legal risk that might arise to them," Knox said. "To learn a new standard or new method of issuing when you have been doing something a particular way, for things that may only occur periodically, is not something companies are eager to do."
Let us know what you think about the story; email Linda Tucci, Senior News Writer.