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XBRL streamlining financial reporting. (Reporting Practices).

Studies by the FEI research foundation examine how XBRL can help companies around the globe deliver critical financial reporting information--more effectively and efficiently.

Recent corporate governance changes required by the Sar banes-Oxley Act and the Securities and Exchange Commission, as well as proposals from the New York Stock Exchange and Nasdaq, have called on financial executives to deliver critical information more effectively and efficiently. Though Internet usage has certainly resulted in more timely financial information, it has also led to concerns regarding how such advancements can best be used to facilitate the delivery of financial information.

Studies by the FEI Research Foundation examine a solution -- eXtensible Business Reporting Language (XBRL) -- and explain how financial executives can effectively address the need for financial transparency and create a level playing field for anyone to obtain financial information. The studies also note how the technology can enhance communication with internal management and external stakeholders and increase operating efficiencies.

Zachary Coffin, the study's coauthor and author of the forthcoming book, Introducing XBRL: Decision Making in a Digital Economy, calls XBRL "the first attempt ever to translate financial reporting into an Internet language. Unite these two communities [preparers and users of financial information] with XBRL, and you have the most significant development in financial reporting since the birth of the Internet."

How It Works

While XBRL was introduced a couple of years ago, usage is still in its infancy. Essentially, XBRL is a royalty-free, open specification subset of eXtensible Markup Language (XML), the universal language for defining and naming data over the Web. Now broadly incorporated into databases and software products, XML allows data exchange between disparate software applications by providing a framework for defining tags (called taxonomy) and the corresponding relationships (called schema).

XBRL applies the XML metamarkup standard to specifically express financial information. XBRL tags each value of data within a document. For example, on a document, application, industry or global basis, a financial metric, such as gross margin, would be defined as <GrossMargin>$2,500,000</GrossMargin>. Though the tagging methodology is relatively straightforward, open standards -- similar to those developed by the World Wide Web consortium for HTML and XML -- should be developed in order to maintain consistency across all organizations.

Once a standard format has been established, a company can digitally report all types of financial information for a variety of users -- regulators, banks, investors, etc. -- in a variety of ways, without having to reenter information into multiple formats or systems.

The FEI Research Foundation study compares XBRL to the Universal Product Code (UPC), which allows manufacturers to track merchandise and analyze consumer buying, which, in turn, led to improved product supply chain management.

Through the data tags, XBRL allows each financial component to be distributed at any level in the information supply chain. As long as each item is "bar coded," data need only be published once to be accessible to many. Furthermore, the data reliability is enhanced, since users need to receive information only from the original source.

Taylor Hawes, assistant corporate controller of Microsoft Corp., sees clear benefits from the technology, "Manual preparation of SEC filings can be automated through simple tagging through the general ledger," he says.

"Consistency of classification and reporting is a non-event when leveraging standard taxonomies. The use of XML reporting leveraging XBRL structure will become a standard in the near future. Linkage to policies, footnotes and other detail disclosures can become simply a right mouse click away."

How Financial Executives Benefit

But what does the technology mean to financial executives and their companies? To obtain an understanding of the practical benefits of XBRL, one can view the financial executive role from two primary standpoints: as a consumer and as a preparer of information. From a consumer point of view, executives must receive timely and accurate information in order to make the most effective business decisions. In some instances, this poses a challenge, since gathering data often involves extraction from multiple sources--sales or payroll departments or systems such as subsidiary ledgers or ERP systems. Standardized XBRL tagging can allow seamless integration of information, regardless of its source, meaning that valuable time once used for data compilation can be used for data analysis.

From a preparer standpoint, the benefits are even more evident. XBRL for the general ledger can increase the speed and reduce the cost of consolidating information for business and regulatory reporting. Through direct downloads across systems, reporting is not only quicker but better, removing the element of human error associated with data entry. Consequently, preparers can better meet the needs of both internal and external users.

Furthermore, by developing specific taxonomies based on a country's accounting standards or a company's industry or internal reporting needs, preparers can control what level of detail will be available to each user.

"Companies today are faced with very time-consuming and labor-intensive processes just to create and format various reports. With XBRL, they are able to create a single piece of business information that can be reused and delivered in any format they need, be it for Web pages, regulatory filings or internal management reports," says Rob Blake, Group Program Manager at Microsoft.

Making Strides

The XBRL effort is being led by XBRL International, an international consortium of 170 organizations, including leading accounting, technology, government and financial services bodies. The group is committed to developing a consensus-based standardized framework for general use and is making significant progress towards a more widely used format.

The group is comprised of financial services and information providers, professional services firms, technology enablers, government and not-for profit institutions, and accounting and trade organizations. Notable members include Deutsche Bank, the Federal Deposit Insurance Corp., Fidelity Investments, Fujitsu Ltd., Hitachi Ltd., Hyperion Solutions Corp., General Electric Co., IBM Corp., Morgan Stanley and Thomson Financial, to name a few.

Companies such as EDGAR Online have posted XBRL versions of financial statements on their Web sites, with Reuters recently reporting XBRL-based interim results. Deutsche Bank has begun using XBRL to process loan information and streamline its credit analysis process, with Bank of America piloting XBRL for the same purpose. Other companies, such as Microsoft, have taken the technology a step further. The company has posted XBRL files of 2001 and 2002 SEC filings on its Web site and filed an 8-K in September incorporating XBRL into its Form 10-K.

"Delivering SEC filings through XBRL enables Microsoft to deliver financial information efficiently and quickly. Having a common schema enables many consumers of financial information to have a standard and consistent way of looking at financials. As more and more companies adopt the standard, the ability to compare companies, industries and sectors will be simplified," says Hawes.

Demonstration Available

Other XBRL initiatives include a demonstration--jointly developed by Microsoft, PricewaterhouseCoopers and Nasdaq--of how the market and individual investors can more efficiently consume and analyze reported information. It consists of actual company data tagged in XBRL, a Web service providing the data presented to the Internet and a Microsoft Excel worksheet that uses selected data from the Web service.

The organizations also collaborated on a white paper, The Road to Better Business Information: Making a Case for XBRL, that reviews the benefits of XBRL from the market, the company and the public perspectives. In the paper, John Connors, Microsoft's senior vice president and CFO, provides some insight on Microsoft's implementation of its own XBRL Builder, which is used to transform financial data to XBRL.

Internationally-based organizations are also demonstrating the tangible benefits of using XBRL. The Australian Prudential Regulatory Authority (APRA) became the first banking regulator in the world to use XBRL to monitor Australia's 12,000 superfunds, insurers and banks required to report to it on a regular basis.

The technology not only enhanced transparency and reduced the filing burden, but it also improved the exchange of information with the central bank and statistics agency. Though Australian taxonomies are still in the process of development, APRA will be generating interim taxonomies that will be replaced when the framework is finalized.

Development of Australian taxonomies may be further advanced, since the comment period for the proposed International Accounting Standards (IAS) Primary Financials Statements (PFS) Taxonomy recently ended on Oct. 29. It is widely expected that the International Steering Committee of XBRL International will consider the taxonomy as a candidate for "recommendation" status soon afterwards.

In the interim, the IAS Taxonomy Working Group and the International Accounting Standards Committee Foundation (IASCF) are continuing to work on the development of the IAS Explanatory Disclosure and Accounting Policies (EDAP) taxonomy that complements the IAS's PFS taxonomy. Such developments would likely increase the transparency of reporting worldwide and lead to a more straightforward comparison between U.S. and international companies.

At a Tokyo conference this month, XBRL International is also expected to announce major milestones such as new taxonomy releases for reporting under U.S. GAAP, new tools for XBRL application development, expanded supply chain demonstrations and integration of XBRL FS (Financial Statements) and XBRL GL (General Ledger).

The growth of the initiative, Coffin says, demonstrates the benefits on an international level. "In just a few years, XBRL has grown from a project in one country with a dozen companies into a consortium in five continents with a hundred companies totaling over $2 trillion dollars in market capitalization," he says. "The reason for this growth is simple: XBRL can be used by every company, in every industry, around the world. And it will be, because every organization knows the importance of effective reporting and analysis."

Cheryl de Mesa Graziano is manager of research for The FEI Research Foundation. For more information on XBRL, order the Foundation's report on Corporate Reporting and the Internet--Understanding and Using XBRL at http://www.fei.org/rfbookstore/ or Ask an FEI Researcher at www.fei.org/rf/library/libraryform.cfm.
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Author:Graziano, Cheryl de Mesa
Publication:Financial Executive
Date:Nov 1, 2002
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