The language of business gone digital

March 30, 2009
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“Accounting is the language of business” is a phrase with which most business persons are familiar. Now, that language has gone digital.

After more than three years of researching, analyzing and testing — including utilizing the Security and Exchange Commission’s Voluntary Filer Program, in which Michigan’s own Dow Chemical Co. participated — at the end of last year (Dec. 18), the SEC voted to require public companies and mutual funds to begin filing required financial information using XBRL protocols, including primary financial statements, footnote disclosures and financial schedules. 

XBRL (Extensible Business Reporting Language) is an international data format designed specifically for the reporting of financial and other data that facilitates the compiling and sharing of business data and information. This “interactive data” format assigns unique, machine-readable “tags” or “bar codes” that make it much easier to identify and retrieve financial information. The tags, defined in standard “taxonomies” (dictionaries), identify financial statement elements such as sales, net income and cost-of-goods-sold, or other quantitative or qualitative reportable elements of financial information. Investors and analysts can create spreadsheet templates that would automatically insert specific tagged values into spreadsheet cells to provide consistent calculation and formatting of financial information. XBRL facilitates comparisons of the results from multiple companies, side-by-side, without having to extract this information from each filing, or can support inter-period comparisons for a single compan
y or multiple companies. Customized software applications can be developed to perform routine firm and industry analysis on tagged data without manual intervention.

The new SEC rule requires the largest 500 companies using U.S. GAAP, with a public float over $5 billion, to begin making financial disclosures using XBRL for fiscal periods ending on or after June 15, 2009. All other large, domestic and foreign, accelerated filers using U.S. GAAP must adhere to the same requirements, beginning with periods ending on or after June 15, 2010. Finally, all other filers, including smaller reporting companies and foreign companies utilizing International Financial Reporting Standards become subject to the requirement, effective for periods on or after June 15, 2011. And while this may appear to be quite an ambitious time line for implementation, the truth is that the U.S. is coming late to the table; we have some catching-up to do with the rest of world. China, Japan, Sweden and other countries are years ahead. 

And, of course, after the three-year rush to public-company compliance, the requirement begins its path down the “food chain,” to every public, private and even not-for-profit company generating financial information that might be a subject for efficacious scrutiny of vast amounts of financial data, especially for regulatory, credit-granting or investing purposes. We only need consider the example of the Sarbanes-Oxley whistle-blower legislation, as it is being adopted broadly throughout profit and not-for-profit segments.

SEC Chairman Christopher Cox probably feels vindicated, at least in some ways, as he has been a tireless advocate during his tenure at the helm. He reacted to the announcement: “Interactive data will help provide investors with the information they need, rather than just a warehouse of forms on which they can try to find it.” Indeed, the promise of this technological advancement is that it will place key information at the fingertips of investors, within seconds, and in the form in which the investor wants to see it. Judging from the sparse participation in the SEC’s voluntary program, however, many financial officers may not see this as such a great achievement; after all, it does represent one more regulatory hoop through which to jump. 

Again, many foreign countries have already adopted the XBRL requirement. In fact, the FDIC has required use of XBRL reporting for banks for its call reports, since 2005. Moreover, some believe the requirement has netted significant cost and efficiency benefits. Indeed, the promise is that XBRL is about more than simply external reporting. Instead, XBRL can free the data that is often held hostage in numerous diverse software packages, and allows managers to focus on running their organizations. XBRL should reduce the friction and inefficiencies of complying with information demands while providing an unprecedented level of accessibility and transparency to the organization’s stakeholders.

XBRL has potential in a host of other areas of information management, as well. For example, potential lenders usually require borrowers to provide financial information as a basis for making lending decisions. Instead of providing the information in either hardcopy form, or even in simple spreadsheet form, the borrower who submits XBRL formatted reports would enhance significantly the lender’s ability to process the request, allowing the potential lender to perform many more kinds of data analyses and risk assessments. 

So it’s coming! Moreover, if you are a public company required to file with the SEC, you cannot hide! On the other hand, as we noted earlier, even if you are not a public company, it is very likely that your company will need to begin providing, or using, XBRL manipulated data in the very near future.

To prepare, we offer the following proactive advice:

First, start early. Give yourself enough time to educate the appropriate persons regarding XBRL; indeed, attend an XBRL seminar. The AICPA, for example, began offering XBRL education segments years ago.  

Establish a sufficient budget, allowing enough resources for testing the new software and related manual processes. Also, allow enough resources to provide adequate training for employees. Too many projects fail for lack of the allocation of sufficient financial and human resources.

Identify an appropriate person, at a sufficiently high level, to assume responsibility for XBRL applications. The person responsible must understand financial reporting and that this is primarily a financial reporting project, rather than an “IT” project.

Beware: Try to be on the “leading edge” but not the “bleeding edge.” Select solid systems software solutions from established vendors whom you trust. While much reliable software already exists, developers are working frantically to enhance and expand those solutions. You do not want to be the guinea pig for an untried solution.

Bear in mind that while you can outsource the development and execution of your XBRL processes, you cannot delegate your responsibility for accurate and timely financial reporting. Someone within your organization must understand, monitor and have the authority to address any issues that arise in the XBRL reporting process.

One of the great consolations of XBRL applications is that, if you prepare the company well for implementation and follow-up, XBRL reporting should become quite transparent and unobtrusive. 

H. James Williams is dean and a professor of accounting, and David Cannon is an assistant professor of accounting at Grand Valley State University’s Seidman College of Business.

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