The X files
1 Mar 10
eXtensible Business Reporting Language – or XBRL to you and I – is the way forward in financial reporting, but what does its adoption mean for accountants and auditors?
by Anthony Harrington
Just as the ubiquitous web language HTML allows a huge range of devices to display web pages, financial reporting now has a “language” all of its own. Does this matter? Absolutely. Analysts, investors and the whole community of users of company accounts have the opportunity to take financial accounts and automatically strip out the information that most concerns them.
We are talking here about machine readable information that can be manipulated by computer software, not end users cutting and pasting items of text from a Word document or an Adobe PDF file.
The magic ingredient that makes this possible is XBRL, or eXtensible Business Reporting Language. XBRL is not so much a language as a taxonomy, or collection, of tags with items of data all getting their own XBRL tag, assigned to them by the accounts creators in accordance with a standard XBRL taxonomy. Each XBRL tag acts like an electronic bar code, providing all the descriptive rules about the data item, including what it is and what can be done with it.
This is a bit like the party game where someone sticks a note on Fred’s back saying “Hi, I’m Fred, kick me!” That tag tells a bunch of party guests how to behave in relation to Fred. The neat thing about this analogy is that it points up a particular feature of the relationship between the item of data and the tag. They are two very separate entities, with the tag being layered on top of the data item.
A policy statement by the Federation of European Accountants (FEE), XBRL – The impact on accountants and auditors, makes it clear that turning a set of accounts into an XBRL document requires some skill in using XBRL tags, otherwise, just as in our example, the data item could end up getting used inappropriately.
If this sounds like it requires a standard setting body to formalise the XBRL taxonomy, or universe/library of tags, it does. The International Accounting Standards Committee has almost completed its XBRL taxonomy and plans to release it in April this year.
FEE is feeding its contributions on XBRL directly through to the International Auditing and Assurance Standards Board. FEE points out that as more and more entities file their financial statements, tax returns and other data in XBRL format, accountancy firms are going to see a very marked pick-up in client demand for assistance in this area.
Ronan Langford, data director at Deloitte, has been following the progress of XBRL for some years now. In his view, what is now putting XBRL on to corporate agendas in the UK, in a much more substantial way, is HMRC’s decision to mandate XBRL for all company tax filings for the financial year ending March 2010 and onwards. “It is perhaps ironic that a technology development that is meant to benefit user groups and management is being driven in the first instance by regulatory regimes,” he says. XBRL is now in its second year of being mandatory for the US Securities and Exchange Commission filings.
Langford points out that there are some issues with XBRL to do with the fact that it is still a young technology. Chief among these is that the taxonomy of tags is likely to mature over time, which by definition means that it is not as strong now as it will be. Also, there are at least three issues in applying any taxonomy to real corporate figures. These are:
• the knowledge gap on the part of preparers, who might not yet be fluent in all 4,000 tags, say, in the HMRC taxonomy
• issues of interpretation of accounting terms and their application to tags
• gaps in the taxonomy where preparers of accounts really want to identify specific items in XBRL.
The first issue comes back to skill on the part of preparers. Langford points out that there are bits of XBRL software from software vendors which will take accounts and auto translate them to XBRL, and there are also expert XBRL coding houses to which companies can outsource preparation.
Langford illustrates the second point, ambiguities of interpretation, in the following way. If a particular item is just tagged as “inventory”, for example, instead of as “inventory work in progress”, or it says “fixed asset” instead of “short-term asset” or “long-term asset” the picture of the accounts is skewed. If the amounts are material, that matters and expert users, such as analysts will get annoyed.
Not being able to find an appropriate tag is an issue of the maturity of the taxonomy, but that, he points out, is something that time will fix.
“When you file for the first year in XBRL, some interpretation will have to take place, but the taxonomy will continue to get richer and more credible. This is where convergence of the various GAAPs to IFRS really helps because it indicates that we will have a single standard to build a single taxonomy on,” he notes. The US could be aiming to adopt IFRS by 2014, and that will be huge for XBRL.
There will always be a sensible boundary to the number of tags you want to have in a taxonomy. In an ideal world, as XBRL develops, we may have multi-level tags, with subsidiary levels allowing users to drill down quite deeply into the general ledger. However, Langford points out, this project is Star Trek territory for the current state of XBRL and would, in any event, run into deep difficulties with preparer companies, who would not be keen on releasing too much information to the wider world, which would inevitably include their competitors.
What will user communities make of XBRL as it develops? For analysts, more data is always better, and higher-quality data is better still. If XBRL delivers that in an easy-to-use format, they will use it. For the big investment houses who buy huge amounts of data in, XBRL might well offer them a cheap access route to information on small and mid-cap companies and allow them to concentrate their data spends on the FTSE 100, for example. For management of large, diverse organisations, XBRL offers a unified reporting tool which they can mandate to all subsidiaries.
For small investors working from home, being able to grab XBRL accounts and dump information directly into spreadsheets will put them on more of a par with the big investment houses in terms of access to data. Now that HMRC has thrown its hat into the ring, the fortunes of XBRL definitely look set to improve…
ANTHONY HARRINGTON is a freelance business journalist.
CASE STUDY
Over the last few months my company, IRIS, has held a series of meetings with many of its customers where we have discussed iXBRL and other topics concerning the profession.
The reaction of practitioners is varied. Many are already used to filing tax returns on line and view the 2011 deadline as a logical step. Many of these, however, do not realise that the software they currently use may not be compliant for the new standard.
The mandatory filing of accounts using the new standard is causing more concern among the accounting community. There are many practitioners who are engaging with these changes very proactively; however, there are a significant number who have yet to come to terms with the impact this will have.
IRIS is working with HMRC and Companies House to minimise the impact on practitioners. All our software solutions will be compliant with the new standard at least six months before the deadline. Those using Word and/or Excel will face the greatest challenge and we are working hard to introduce solutions for these practitioners too.
PHILL ROBINSON is managing director with IRIS Accountancy Practice Solutions.