Josh's Weblog: Extensible Business Reporting Language (XBRL)

Extensible Business Reporting Language (XBRL)

BusinessWeek Online has an article, “After Sarbanes-Oxley, XBRL?” discussing Extensible Business Reporting Language (XBRL) and its effects on the financial reporting industry.

As a little bit of background, XBRL was announced by the American Institute of Certified Public Accountants (AICPA) jointly with Reuters and over thirty other organizations as a standard way to release computer-readable financial statements to the public. What is it's key value? The ability to determine the source of information in the released documents.

XBRL tags financial information so it, too, can be tracked, from the first interactions with vendors, to reports submitted to various operating divisions within a company, and finally to become part of a consolidated earnings release.

That's the core technology. What's the promise?

Eventually, XBRL will be the foundation for a whole new generation of financially oriented Web services that will make it easier for regulators to check for problems in financial data, executives to compare their company to competitors, and analysts to identify the best-performing stocks.

While it's a long time before modern financial data movers reach those ethereal heights, online services such as Edgar Online are offering tools to work with the data and software vendors like Rivet Software offer tools to sift financial documents for data that can be transformed into XBRL.

The adoption of the XBRL standard has not been made mandatory by the SEC, and the competition is already nervous. Standardization signifies a significant market change for companies like Standard & Poor's with their Compustat offering. S&P does their own data extraction and analysis, but if extraction gets easier then the value proposition leans towards the one with most comprehensive set of tools. The data extraction part would cease to add value.

At the moment the XBRL adoption process is hung up in committees trying to settle the standard. Extensive negotiations between competing software vendors, financial experts, and company CFOs has not produced a coherent standard. It may be up to the SEC, through the Financial Accounting Standards Board (FASB), to come in and adjudicate the various disputes.

Even so, progress has been made. In the past few months major decisions have been reached on the major “taxonomies” (essentially, the standard tagging structure for various types of industry) under discussion.

Now 90% of companies are covered, while extensions of XBRL for specific industries, like oil or banking, are still being developed.

On February 3rd of this year, the SEC adopted a rule establishing a voluntary program for publishing XBRL data on Edgar:

The primary purpose of the voluntary program is to assess XBRL technology, including both the ability of registrants to tag their financial information using XBRL and the benefits of using tagged data for analysis.

Many voluntary programs with the SEC become mandatory if successful. Like the recent roll-out of Sarbanes-Oxley, XBRL could be the next financial reporting resource crisis.

Josh Poulson

Posted Tuesday, Feb 8 2005 02:12 PM