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Failure Of XBRL; Few Takers, Many Fears

Tammy Whitehouse | April 11, 2006

Several weeks ago the Securities and Exchange Commission announced that its new extensible business reporting language had reached a milestone, with twice as many companies participating in this year’s pilot program as last year.

Unfortunately, the news also shows that XBRL has miles and miles ahead of it, too.

The pilot program so far has enticed 17 companies—a tiny fraction of the thousands of issuers that report to the SEC. Those trial companies would file their financial statements using eXtensible Business Reporting Language, or XBRL, a data-tagging methodology that would provide greater flexibility to users. Using XBRL, companies provide data to the SEC not in static blocks of text, but in a readily searchable format that eases comparison among companies.

The SEC first launched the pilot program in April 2005, and attracted only a handful of pioneers. Since then, Chairman Christopher Cox has made XBRL his pet project, talking often of his desire to see XBRL become more widespread. This year’s larger test group is one step in that direction, but not a very big one.

What’s the holdup? As has been covered extensively in Compliance Week over the past year (see related coverage in box at right), key obstacles include a lack of perceived ROI on the part of corporate executives. Complexity of processes, combined with the fact that most XBRL tools are still considered somewhat rudimentary, may also be hindering participation. Also, many companies are still contending with fallout from Section 404 of Sarbanes-Oxley, which may be making other IT initiatives—like standardization of accounting systems—higher priorities.

But there may be other obstacles as well. Robert Kugel, vice president and research director for Ventana Research, says companies fear that regulators will see the technology as a way to bring greater uniformity to the line items in a financial report—a prospect that could greatly reduce companies’ flexibility to conduct financial operations as works best for them.


Kugel

“Some are reluctant to adopt XBRL because they are afraid it will be a back door to regulating the structure of corporate charts of accounts, a concern that has some merit,” he wrote in a recent research note. Regulators need to give companies some sign, he continued, that they don’t plan to use XBRL to create a standard chart of accounts.

Yosef Newman, senior manager in the assurance practice of Deloitte & Touche and a member of the XBRL International consortium developing the technology, stresses that the technology itself doesn’t create a standard chart of accounts. Instead, it is intended to allow the same measure of flexibility as companies now have under U.S. Generally Accepted Accounting Standards.



Newman

“XBRL is not about bringing everyone into conformance with rigid, limited reporting standards,” Newman says. “It’s about taking what we report today and moving it from application to application without rekeying. XBRL is not an accounting standard, and it’s not a standard chart of accounts. It just looks at the number, knows what it is, and moves it from one place to another.”

XBRL is based on a system of “taxonomies,” which in essence are definitions for each piece of data found in a corporate financial report, according to Miklos Vasarhelyi, an accounting professor at Rutgers University. Several tags can be associated with a single piece of data—company, date, account name, and unit of measure, such as millions of dollars, and so forth—to place the figure in the correct location in the XBRL format, he explains.



Vasarhelyi

“Taxonomies for XBRL are basically a big dictionary for how information correlates to the basic financial statement,” Vasarhelyi said. “Taxonomies in XBRL can be nearly translated to a chart of accounts.”

Mapping taxonomies for public companies is a big challenge, Vasarhelyi says, because of the wide range of companies, their different reporting methods, and the flexibility they have within GAAP, especially with footnote disclosures.

Classification Of Fears


Tankersley

Michael Tankersley, partner with Bracewell & Giuliani, says companies fear losing that flexibility. “XBRL sounds great, but when you get into the details of how you put financials together, each public company is a highly unique animal,” he says. “GAAP allows some flexibility on which numbers go where, as long as you disclose it. Companies have a reasonable degree of freedom to describe their business as they see it.”

Tankersley says companies generally view XBRL as mandating categories to make the numbers comparable. Says he: “You can’t pick up the nuances of the footnotes in XBRL. It’s too much one-size-fits-all for companies.”

Kugel says companies worry the Financial Accounting Standards Board will decide to regulate “how specific XBRL-tagged accounts roll up into financial statements,” a fear he says is not without basis. “Classification and measurement have become a battlefield between companies and FASB in recent years,” he wrote. “Accounting rules have produced an inconsistent patchwork of mandated complexity and conformity that does not always impart true comparability.” Kugel says companies will warm up to XBRL if FASB, the SEC and the Public Company Accounting Oversight Board provide assurance to the contrary.

For its part, Newman says, the XBRL consortium has done an exhaustive analysis of hundreds of live balance sheets to assure the taxonomies capture the nuances that companies want to continue reporting. “The taxonomies relate to every item that companies are really reporting,” he says. “A standard chart of accounts would mean 75 to 150 accounts. XBRL taxonomies are 2,000 and counting. It’s not normalizing data; it’s capturing it, every item reported.”

Bradford Homer, XBRL Technical Manager for the American Institute of Certified Public Accountants, says XBRL is not as limiting as skeptics in the corporate world believe. “It’s not about forcing companies to use a standard chart of accounts,” he says. “ ‘Extensible’ means you can take the basic pieces and move them around to fit the way you report.”

The banking and financial sectors have already adopted XBRL, and Newman says the technology has already provided measurable benefits; banking regulators “are absolutely ecstatic” about what its meant for the reporting process for financial institutions, he says.

In a recent white paper describing the outcomes of those sectors’ transition to XBRL, the Federal Financial Institutions Examination Council said data is moving faster and more accurately than ever before. “Improvements to the data collection process have reaped immediate benefits in the timeliness of high-quality data for the banking agencies,” the report says.

Newman said banking regulators have a much tighter grip over what banks and financial institutions must report, making the sector the “low hanging fruit” for XBRL implementation. The SEC has the same regulatory mandate, but over a much more diverse group of entities, making adoption for capital market issuers “the Holy Grail” of XBRL implementation, he said.

Much work remains ahead in tweaking the XBRL taxonomies to apply their use to public companies, Newman says, but he’s confident the process is moving at a reasonable pace.

Homer agrees, but says the pace of adoption is appropriate to today’s circumstances. The market is still recovering from the Sarbanes-Oxley and trying to keep up with new rule changes, he says, and he compares XBRL to the adoption of bar code technology: “As simple as that seemed, it took a decade to get it into place.”

“XBRL is fundamentally capable of being adopted on a widespread basis today,” says Homer. “There are kinks to work out and we’ll learn things along the way, but there aren’t any fatal flaws in the system.”