What is XBRL?
XBRL is another development that will soon add to the disclosure obligations of public companies. XBRL is eXtensible Business Reporting Language. If that does not assist your understanding, consider it as “interactive data.” It was developed from XML or eXtensible markup language. Please read on.
A description of XBRL that even lawyers can understand was given in a recent speech by Brian G. Cartwright, General Counsel of the United States Securities and Exchange Commission (SEC), to a Committee of the American Bar Association Section on Business Law. Here is a short summary of that description.
XBRL is a set of rules for attaching identifying codes to items of financial information. These codes are called “tags.” Mr. Cartwright, as others before him have done, describes the process as bar-coding for financial information. Once identifying codes have been attached to each item of financial information, computer software can search for and retrieve any of those items from a company’s financial statements simply by searching for the corresponding tag. The software can also search for the same tags in the financial information of other companies, and then make graphs, charts, tables, plots, summaries, calculations and lists comparing the data of the companies searched on a like-for-like basis.
One simple example is the identification of an item in the financial statements such as assets and their amount in dollars. Tagging involves putting a code called an opening tag immediately in front of the asset dollar amount, plus a code called a closing tag immediately after the amount. The opening code would be enclosed in angled brackets <assets>, and the closing tag would be the same but with a back slash after the first angle bracket </assets>. The back slash enables the computer to tell the difference between the opening tag and the closing tag. The tag might also include additional information, such as dates, definitions, arithmetic, relationships to other data, references to external resources, for example, accounting literature and language. The end result is financial information that is more than a block of text.
This tagging process would be applied to all items and sub-items in financial statements for all the accounting concepts embodied in generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). The entire tagging collection is described as a “taxonomy.” This taxonomy is then used to write the software to be used for the tagging exercise and for more sophisticated analytical software. Eventually, accounting software will have embedded XBRL tags. Taxonomies have been developed by not-for-profit organizations and approved by securities regulators, and are available at no cost to software developers.
Why is XBRL Important?
Regulators throughout the world have adopted or are adopting XBRL as a mandatory feature of financial reporting for public issuers. The SEC has recently published proposed rules intended to integrate interactive data tagging technology into its filing process.
XBRL’s implementation did not start in the United States. In fact, China was the first country to mandate XBRL reporting; China, Japan and South Korea are among the countries, including Spain, who are ahead of the United States in mandating the use of XBRL for public company financial disclosure.
The SEC assessed the merits of interactive data in 2004. Then in March 2005, it invited filers to provide financial disclosure in interactive data format, on a voluntary basis, as an exhibit to certain filings on EDGAR. On May 30, 2008, it published for comment its proposed rules for companies.
The rules will apply to domestic and foreign reporting companies that prepare their financial statements in accordance with US GAAP and to foreign private issuers that prepare their financial statements in accordance with IFRS. The rules will apply beginning with fiscal periods ending on or after December 15, 2008 for domestic and foreign large accelerated filers using US GAAP that have a worldwide public common equity float above $5 billion US as at the end of their most recently completed second fiscal quarter. As is the case for the voluntary filing program, the XBRL version of the financial statements will be filed as an exhibit (an “instance document”) to public filings on EDGAR, and the traditional text-based version of the financial statements in ASCII or HTML format would continue to be filed. The effective date for other filers will be staged for periods ending December 15, 2009 and December 15, 2010, based on issuer size. The SEC has asked for specific comment on whether the proposed rules should extend to a Canadian issuer’s financial statements prepared in accordance with US GAAP and filed in Form 40-F under the Multijurisdictional Disclosure System (MJDS).
In June 2008, the SEC issued a release proposing rule amendments that would require mutual funds to provide the risk/return summary of their prospectus to the SEC using XBRL as an exhibit to registration statements. This is a sequel to the voluntary filing program for mutual funds, which the SEC has also carried on since 2007.
In December 2007, the SEC made available its online tool enabling access to and use of a database of executive compensation information of 500 of the largest US companies. The SEC itself extracted this information from the companies’ proxy statement filings and tagged it in XBRL.
The Canadian Securities Administrators (CSA) introduced its own voluntary XBRL filing program in May 2007, similar to the one implemented in the United States. It invited optional XBRL filing of financial statements in SEDAR in addition to the required PDF filing. A Canadian GAAP taxonomy was developed by XBRL Canada, a not-for-profit consortium of leading Canadian companies, federal government agencies and organizations. The taxonomy contains both English and French terms. For the curious, a visit to the SEDAR website will permit viewing of the appearance of an XBRL based voluntary filing under the “Financial Statements — XBRL” document type.
In a speech in December 2007 to the 16th XBRL International Conference, David Wilson, Chair of the Ontario Securities Commission, compared the power of XBRL to permit analysis of financial statements of public companies to the transition from traders on the floor of a stock exchange to today’s electronic trading platforms. He noted that part of the challenge is to raise the awareness of XBRL in Canada. He also acknowledged that the cost of switching over to the new language would be relatively greater for smaller issuers than for large ones, at a time when the impending move from GAAP to IFRS will add further costs for Canadian issuers. We still have unhappy memories of assurances of the commercial availability of inexpensive software programs to implement the adoption of internal controls over financial reporting.