The Securities and Exchange Commission has finally pulled back the curtain on how it wants investors and Corporate America to use XBRL, unveiling a glittering new way to read financial statements filed in the interactive data language.
Anyone can now visit the SEC’s Web site and use a prototype application known as an XBRL reader, which presents the financial reports of more than two dozen companies participating in the Commission’s XBRL pilot project. The reader checks the SEC database for new filings every night, pulls out data in those filings that has been “tagged” with XBRL labels, and then presents them in neat formats far easier to read than the text-only filings one typically must dig up from the SEC’s Edgar database.
For example, a user could see that ADP (one of the pilot program participants) filed a new quarterly report on Nov. 30. Users can call up that filing and quickly scan the income statement, the statement of cash flows, the notes to financial statements, and more. The application also lines up this quarter’s data against the year-ago period for comparison.
Cox
SEC Chairman Christopher Cox—the cheerleader-in-chief for XBRL—announced the application’s availability last week at the XBRL International Conference & Exhibition in Philadelphia. Cox and a who’s who of other financial reporting regulators gave ringing endorsements of the technology’s potential. They envision a world where machines collect and present XBRL-tagged data at lightning speed, giving people more time to study financial reports.
“We’re very excited,” Cox told the crowd of several hundred. “It’s freeing up humans to make the analysis that machines can’t replicate.”
Whether XBRL can deliver on those hopes, however, remains unclear. Its success depends on developing a robust system of tags (commonly called taxonomies) to let companies put the necessary labels on their data. Cox wants a full range of taxonomies for all industries by the middle of next year, and insisted that “the job is already finished for many industries,” although skeptics say such a comprehensive system will take far longer to complete.
Tweedie
Bob Herz and Sir David Tweedie, chairmen of the Financial Accounting Standards Board and the International Accounting Standards Board, respectively, both said XBRL also has the potential to help companies convey the same concepts or values in financial statements across multiple accounting regimes. Tweedie gave the example of tagging one number as a company’s pension liabilities, so it would be identified as such whether the company states it in U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards.
“That’s what we’ve got to get rid of in accounting: not showing things the way they are,” he told the audience.
Financial Reporting vs. Internal Controls
XBRL is divided into two worlds: XBRL for financial reporting alone (XBRL-FR) and XBRL for all financial and internal control actions that appear on the general ledger (XBRL-GL). The prototype application that the SEC unveiled last week works solely with financial reports, and when Cox and other securities regulators give their XBRL pep talks, they still refer mostly to its usefulness in presenting financial data.
The appeals of XBRL in financial reporting—assuming it works—are many. Mutual funds and other investors could review a portfolio company’s financial statements more quickly or compare it against peer companies. Smaller companies might get more attention from industry analysts, since the analysts could spend more time researching the companies rather than entering financial data into spreadsheets.
Using XBRL for the general ledger and internal control functions is more tricky. In theory, it could help companies achieve accounting and compliance executives’ dreams of “continuous reporting,” so they know exactly how each internal control performs and what the company’s balances are as various transactions flow through the bookkeeping system. But XBRL lacks several vital functions, such as a quick way to self-validate that a piece of data has been tagged correctly. Without that, one basic utility of the language—its speed, and the ability for one machine to hand off XBRL-tagged data to another without humans worrying about it—can’t happen.
Vasarhelyi
And while continuous reporting sounds like a powerful advance in financial reporting, at the moment companies would face a liability nightmare by publishing unaudited financials all the time. “The SEC needs to understand that we need a safe-harbor provision, and we need it fast,” says Milkos Vasarhelyi, director of the Rutgers Accounting Research Center.
Nevertheless, software vendors are trying to sell some XBRL applications to help manage internal controls. One early use could be a tool to catch errors in Excel spreadsheets as they happen, rather than long after the fact when financial reports are being tallied up. For example, corporate headquarters often create template spreadsheets for local offices to track spending, which local executives modify by, say, inserting an extra line to track an expense category—and then never bother to let the CFO’s office know.
Peterson
According to Darren Peterson, marketing chief for software company UBMatrix, XBRL can solve that problem by labeling individual pieces of data as they’re entered into the Excel document. The company’s main financial IT systems could then look for relevant data based on its label, rather than its location on the local subsidiary’s spreadsheet.
Eric Cohen, a long-time XBRL developer who now leads XBRL work at PricewaterhouseCoopers, also gave the example of thorny tax problems like FIN 48, which requires companies to disclose their uncertainty about tax positions they are claiming and booking liabilities accordingly. If a company could tag all relevant numbers it uses in calculating its tax positions, auditors could quickly trace back that data to other financial documents that generated them. That means faster access to better audit trails, which never hurts when trying to win favor with auditors over a claimed tax benefit.
Regardless, for all the optimism over XBRL’s long-term potential, even its supporters temper their hopes for moving beyond today’s norms any time soon. Herz floated the idea of whether, someday, companies could move to continuous reporting and dispose of financial statements entirely. The idea sounds good, he said, but then quickly added, “I don’t see that happening in the near future … There’s still a big penchant for having standardized reporting formats.”
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