XBRL – Future of Reporting

10 November 2010

By Manish Jain,
Industry principal - Finacle
Infosys Technologies

Kumar Kudidhi
Lead Consultant - Finacle
Infosys Technologies

Background and Significance

Financial institutions and business houses make their financial statements and other corporate information available to various stakeholders like investors, regulators, and analysts as part of statutory and market compliance. This information may take the form of a printed paper document or soft copy in a predetermined format. Since the reports required by different stakeholders vary, issuers have to repeatedly process the same data to generate separate outputs. Also, with the close integration of international markets, corporate institutions have to meet with multi-geographic compliance mandates for financial reporting and disclosure.
This entire exercise proves laborious and costly for the issuers, besides involving considerable effort on the part of investors and regulators towards mining and analyzing complex information.

For example, imagine that you are a financial investor analyzing a corporate institution’s balance sheet. Naturally, you are interested in assessing the performance of the company for the current fiscal vis-à-vis that during the previous year. You would need to open an electronic spreadsheet and feed in the company’s key financial figures for both years to derive meaningful performance ratios. Since you would also like to compare the company’s performance against other players in the same segment and industry, you end up filling a few more worksheets with the numbers of the peer firms.

This is clearly a tiresome exercise. An option is to search analyst portals for industry reports, but you are unlikely to find one tailored to support your customized analysis. The answer lies in procuring information in electronic or digital format and using a computer to organize, comprehend and process it suitably.

Financial Reporting – Current Stage and Necessity for a New System

The current practice of extracting financial reports using data from the General Ledger and data warehouses necessitates repeated processing in order to comply with different reporting requirements. For example, a typical balance sheet would need to be individually processed for Securities and Exchange Commission (SEC) filings, placement in the annual report, external auditors’ examination, and management analysis.

Companies need to manipulate data in order to re-position the output from their financial systems to meet the needs of diverse users. Hence, they need to adopt innovative reporting tools which not only extract multiple dynamic reports customizable to diverse needs, but do so accurately and consistently.

XBRL – eXtensible Business Reporting Language

XBRL, belonging to the family of XML languages, is used for electronic communication of business and financial information. This is a great leap forward in financial reporting, a far cry from prevalent print and text-oriented practices. By virtue of its electronic from, it offers greater flexibility and other benefits in the preparation, storage, analysis and communication of business and financial information.

A simpler analogy is to compare the ease of analyzing a company balance sheet published in a printed format against one in Excel. XBRL extends this logic in identifying each and every part of the business and financial information (like profit, current assets, liabilities, capital etc) with a unique, standardized code which is computer readable online in its same spirit.

XBRL standardizes the communication of business and financial information resulting in accurate and reliable reporting to the user group.

The introduction of XBRL tags enables automated processing of business information by computer software and takes much less time and effort compared to manual operations. Computers can easily read XBRL data tags, recognize the tagged information, and analyze and present it to suit diverse user requirements. The underlying principle of XBRL is to bring an interactive approach to financial reporting.

Benefits to Key Stakeholders in the XBRL Process

Key stakeholders in the XBRL framework can be categorized under three heads:

1. Issuers of information(corporate firms, banks etc)
2. Investors and analysts (equity holders, depositors, portfolio managers)
3. Regulators (Company Law Boards, Stock Exchange Commissions, Central Banks)

While XBRL has wide applicability across industries as a mechanism for financial and corporate information reporting, this paper focuses on its relevance to banking and allied sectors.

1. Issuers

In an era of growing compliance and regulatory control, issuers such as banks are expected to share corporate and financial information with multiple agencies including central banks, company law boards, exchange commissions etc. There may be different information requirements for each, forcing the banks to process data multiple times to generate compliant reports. This is a redundant, laborious and costly exercise susceptible to the risk of inconsistencies and errors creeping into the data, with potentially serious consequences.

With the integration of financial markets worldwide, banks have expanded to different geographies. Accounting and other reporting standards differ significantly across markets (example US GAAP, IFRS accounting methods). A bank listed in US and European markets needs to do its financial reporting according to both US GAAP and IFRS standards. With XBRL, issuers can slice and dice, and re-use information to enable financial reporting under different standards. However, it must be noted that XBRL is not an accounting package which generates financial statements; it only converts reported information into an instantly reusable computer-readable format and helps in developing a comprehensive and deeper analytical model.

By migrating to XBRL, issuers can improve the storage and management of corporate financial data, and eventually reduce the costs associated with compliance. This should help banks and corporate entities to access, produce and review financial statements across different reporting periods with ease and consistency.

2. Investors and Analysts

The key requirement of an analyst or investor is to collect financial and other corporate information published by issuers and analyze the same before the market discounts it. In the current system, the ability of an investor to speed up the collection and analysis of financial data decides the effectiveness of his / her decisions. Since information is available in text or physical form, those who leverage their infrastructure to speed up collection and analysis are at an advantage.

Moreover, since analysts mainly depend on third-party agencies to collate financial data published by issuers, they run the risk of carrying forward any data inaccuracies into their analysis.

XBRL eliminates all the above issues by making financial information available to investors and analysts the instant it is published. It also reduces the cost of data collection and analysis.

3. Regulators

Of all the parties involved in financial information sharing, regulators stand to benefit the most from the advent of XBRL technology. Since most statutory filing of financial and corporate information is in plain text, regulators have a hard and time-consuming task of compiling, analyzing and verifying the data.

XBRL enables them to detect existing and potential fraud easily from the submitted financial information. For example, a constant credit/ deposits ratio without an accompanying net increase in deposits could be an indication of stickiness in loan receivables and fresh deposits being used to retire existing liabilities. A company that consistently reports similar long-term loan amounts advanced over several accounting periods could be siphoning funds out of the business, and hence liable for legal action. It is hard to conduct this kind of online analysis across a series of accounting periods when the data is in text format.

XBRL also enables central banks to detect patterns like the flow of credit to different sectors, inflationary trends and so on more easily on a real-time basis, thereby improving macro-economic management.

By ensuring that the issuers of financial information are fully compliant with reporting and disclosure norms, a strong regulator can guard against large-scale corporate failure.

Current Status of XBRL Usage in Different Geographies

While the US and few Asian countries have adopted XBRL mainly in financial and capital market reporting, Europe has extended it to government functions such as income tax filing. China, one of the first Asian countries to adopt XBRL in financial reporting, is moving towards using it in all mutual fund operations and IPO approval processes. In India, however, XBRL is yet to find its way in financial reporting.

In the US, adoption of XBRL is progressing slower than anticipated due to legal and technical complexities. However, the SEC is striving hard to make it mandatory for all corporate firms and mutual fund companies to do their financial reporting using XBRL in the near future.

Implementation Challenges

Although XBRL has several benefits, there are significant challenges in its global implementation, some of which are listed below:

• Definition of taxonomy: The definition of a globally identifiable taxonomy is made difficult by the differences in financial reporting worldwide. To enhance the scope of XBRL, taxonomy must be defined for each specific area, which is cumbersome and time consuming.

• Creating user awareness: Educating users on how to identify the taxonomy to map a particular piece of information – for example, identifying a unique code to represent each financial item, such as sales – is a challenge. Any mismatch in reporting would distort the financial statements.

• There is a need to develop software which converts existing standard reporting templates. This converts each financial item into XBRL codes, to enhance the scope of XBRL’s application.
XBRL- Reporting for the Future
XBRL is a great tool for bringing an interactive approach to financial and corporate reporting. It fosters accountability among issuers, empowers regulators, and by providing accurate information, enables key stakeholders to take better decisions. Its scope of application may be extended to other areas in the financial markets domain as listed below:

• The entire process of submitting MIS returns to central banks can be made XBRL compliant so that reported data is consistent and accurate. This will enable the central banks to make correct assessments.

• If Basel II reports are made XBRL compliant, they can be efficiently supervised by central banks under the purview of Pillar II. Some of the central banks in Europe have already made significant progress in this regard.

• Some of the day-to-day banking functions of a centralized operations environment (one processing centre and many branches) can be handled through XBRL. For example, instead of scanning the entire account opening form, a bank branch can enter minimum mandatory information such as the client’s name and address using unique XBRL identifiers, so that the processing centre can access these details online and open the account. This would not only save time and effort but also computer memory needed to store scanned documents.

• All income tax returns can be filed using XBRL, making it easy for the authorities to retrieve and review the particulars of an individual or a company.



References:
1. http://www.xbrleducation.com/edu/finpro.htm - XBRL Education.

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