So Far, XBRL Participants Are Those Who Stand To Benefit

Now that the Securities and Exchange Commission has officially encouraged corporations to file financial statements using intelligent “XBRL” formatting, you might think the “Next Big Thing” in financial reporting has arrived.

You would be wrong.

Despite prodding from information technology vendors and the SEC’s first tentative steps to embrace it, most chief financial officers still scratch their heads in puzzlement about how extensible business reporting language can help them. In addition, the burdens of ongoing compliance initiatives—including the internal control provisions of Sarbanes-Oxley—are causing CFOs to put the XBRL pilot on the backburner. “I’m not sure if I fully understand the value proposition or the ROI [return-on-investment] equation,” said one Boston-area CFO who asked to remain anonymous. “And frankly, we’ve got other fish to fry right now.”

Raisch

In theory, XBRL makes lots of sense: The language enables companies to code their financial reports with various tags or markers so that analysts and financial statement users can more efficiently analyze and compare data. To those ends, XBRL could ostensibly update a decades-old financial disclosure system. "Current standardized business reporting is still living in the 1930's when paper was the only effective medium of storage and communication," notes Robert Raisch, principal at Raisch Financial Information Service.

In practice, however, many see XBRL as too much technical challenge for too little payoff.

“I think a lot of CFOs are highly interested,” says Microsoft Controller, Global Platforms & Operations Taylor Hawes, whose company is one of the few that has filed financial statements in XBRL. But Hawes also admits that the benefits may still be murky for many financial officers. “I also think their question on the value proposition of XBRL is a fair one,” he says.

Hawes expects more CFOs to consider the language as tools to exploit it grow easier to use, but right now “the awareness is pretty low.”

Rudimentary Tools

The SEC took its first step to elevate that awareness last month, when it began a pilot program to allow voluntary filing of documents in XBRL. Volunteers file their normal statements—say, an 8-K or a 10-Q report—and then file a second version tagged in XBRL, complete with an index of what the tags denote.

So far, only eight companies have filed XBRL-tagged financials to the SEC. All of those companies—including Microsoft, EMC, Bowne & Co. and others—stand to reap some financial benefit should XBRL go mainstream, generally by selling products or services to help other companies exploit the language.

Copenhafer

“Most of the companies that participate now are themselves technology companies,” acknowledges David Copenhafer, director of EDGAR services at Bowne & Co.

Which isn't a surprise—those companies could not only benefit by offering new services to public filers, but could streamline their own operations by centralizing the underlying data that gets distributed to shareholders via printed and electronic periodic reports. Companies that print annual reports, like Bowne and R.R. Donnelly, could benefit through a variety of production and analytical services. To those ends, most of the technology vendors are eager to get the ball rolling. "XBRL is an excellent step in the right direction, but I don't believe it's coming fast enough," says Raisch at RFIS.

However, even Copenhafer at Bowne concedes that the technology is “still very complex to almost any user,” and tools to use XBRL are rudimentary. “It’s not an easy task," says Copenhafer, a 15-year veteran of the SEC and a pioneer developer of the Commission’s original electronic filing system, known as EDGAR. “It takes a good technologist.”

Given the hassles CFOs have endured to comply with Section 404 of the Sarbanes-Oxley Act, Copenhafer’s comments amount to the last thing any financial executive wants to hear. Trevor Walker, spokesman for financial software maker Cartesis Corp., acknowledges that most CFOs aren’t even interested in hearing about XBRL. To wit, Walker notes that his customer calls are usually to lower-ranking financial executives, including vice presidents of finance or directors of financial systems. CFOs, he says, perceive XBRL as “having no value to him the CFO,” Walker says.

Two Years Of Testing

So why bother with XBRL at all? Because, argue insiders, eventually it will be worth the effort. Hawes at Microsoft provides the example of another Fortune 50 company—he wouldn’t disclose which—against which Microsoft benchmarks its operations. The company keeps 72 different ledgers using SAP, and needs 90 people to integrate them all into one consolidated ledger to close its books. Tagging all that data with XBRL could let the company convert its financials into GAAP statements automatically.

Copenhafer at Bowne envisions all sorts of theoretical benefits to companies—albeit, only if they tag every transaction as it happens. In that aggregate form, XBRL-tagged data would create an ease of analysis, scenario planning, and report generation that CFOs can only dream about today.

And Hawes touts XBRL’s potential payoff in dealing with external parties. Companies will have much easier interactions with analysts, where firms can “just suck in” a company’s XBRL-tagged financial statements. Bank covenants, insurance forms and federal filings could all also be automated, “and the amount of disclosure will still be what it is today.”

Despite all that potential, however, the technology to achieve that is nowhere near ready today. “There’s a huge chicken-and-egg problem here,” Copenhafer admits. “It’s hard to predict what needs to happen to push companies that far.”

Bowne tested XBRL for two years before filing an XBRL-enabled 8-K statement in April (which was just a copy of a regular 8-K it had filed in February). The company used a tool from Fujitsu and worked through the filing with its auditors; making the transition to XBRL “was a substantial commitment,” says Copenhafer.

For all those reasons, the number of corporations trying to implement XBRL is believed to be small. For example, Walker at Cartesis says that only three clients are currently integrating XBRL into their filings. All those companies are European, and want to use XBRL for filings with European regulators; two are financial-services companies and one is a consumer-products business.

The big question, of course, is whether companies will take the time to experiment with XBRL amid the requirements of SOX 404 and the renewed desire to hold down compliance costs. “It’s a very open question as to whether the project can overcome these pretty significant initial hurdles,” says Copenhafer.