By many accounts, XBRL technology will be the must-have financial reporting technology of the future. But if that prognostication is true, it's still news to many firms that offer public securities and file financial reports. It's even more remote to companies that advise public mutual funds, despite the urging of regulators to dive into XBRL filings.
XBRL, or eXtensible Business Reporting Language, is a dialect of sorts to other XML languages and is an open standard for businesses to communicate over the Internet. No one owns the rights to XBRL, so there are no proprietary or licensing fees to pay. XBRL International and its domestic arm, XBRL-US, are both consortiums that are coordinating efforts to standardize the use of XBRL for financial reporting, and educating people on its uses and benefits. Members now total 300 companies.
Defining XBRL
The XBRL format allows for key information from financial reports to be specifically coded (called "tagged") for ease of use by both internal users and external users, such as mutual fund portfolio analysts or managers who analyze companies' financial reports. It's also intended for use by regulators who review documents, said Michelle Savage, vice-chair of the XBRL-US Steering Committee and chair of its Adoption Working Group. Savage is also vice president of investor relations services for the New York information giant PR Newswire.
"The goal is to get as many organizations as possible filing in XBRL," she said. "The real benefit of XBRL is in analyzing volumes of data."
Tags are created according to specially created dictionaries (called taxonomies) that are being built for the needs of various industry sectors. A US GAAP taxonomy was created to facilitate filings by public companies, and this past June XBRL-US released an approved version of the new US GAAP - Investment Management taxonomy that can be used for mutual fund filings.
While standards are being created for companies to follow, the "extensible" label refers to the flexibility with which companies can then build in variations for their own peculiar needs, including notes and footnotes.
"Extensible means an individual company can use the existing taxonomy, then extend that to tell its own story," said Walter Hamscher, independent consultant to PricewaterhouseCoopers in Boston and vice-chairman of XBRL International.
The standards were also built to allow for variations for different languages and different financial reporting rules for varied countries.
The XBRL technology was born when Charles Hoffman, then an auditor with a small accounting firm, sought a better way to extract financial data. He took his concept to the American Institute of Certified Public Accountants, a national organization of certified public accountants, which recognized the benefit and threw its weight behind the idea.
Although many initiatives are coming to fruition behind the scenes, which will pave the way for the broader adoption and use of XBRL technology, few U.S. capital markets' participants have embraced the format. As of now, only 10 companies in the U.S. have filed their financial reporting documents via XBRL.
What's more, to date not one single mutual fund sponsor has filed a fund document using the XBRL format, nor has any public mutual fund advisor taken the plunge, said David Copenhafer, director of EDGAR services at Bowne & Co., a financial documentation firm in New York.
"XBRL is a marvelous, robust technology, but at the moment it is locked in a Catch-22 that is hard to break open," he said. "Right now it is hard to get any document marked up and submitted to the SEC."
That's because for all of its benefits, which include fewer errors and greater cost benfits because data needs only to be entered once, the process of tagging all data and converting it into an XBRL-compliant "instance document" is still quite complicated, Copenhafer admitted. It could take a team of four different individuals with skills in finance and accounting, software, XBRL-specific knowledge, etc., to make it work, he added. The good news is that once the template is in place, future filings would be a piece of cake, he said.
Easing the Transition
There are companies that are working to make it a snap for even laymen to translate complex financial data into XBRL instance documents, Savage said. Dragon Tag, from Rivet Software of Englewood, Colo., for example, allows companies to do-it-yourself within a Microsoft Office-based environment.
Adoption has been additionally slowed, Hamscher offered, for cultural reasons.
"Some just don't see the connection between the transparency of their reporting and the perception of the market," he said.
Moreover, skepticism abounds.
"A lot of companies want to be sure that if they move to this format, that there's no consequences over time and they won't be left with no way to go back," Hamscher added.
"We certainly are aware of it," said Brian Lewbart, a spokesman for T. Rowe Price in Baltimore. But the firm has no current plans for taking XBRL technology for a test drive. Ditto, said a spokeswoman for Franklin Templeton in San Mateo, Calif.
SEC Endorsement
Amid resistance, fund firms are definitely getting a firm push from regulators to step up XBRL adoption.
On Aug. 8, the Securities and Exchange Commission expanded to mutual funds its voluntary program of allowing companies to file financial reports in XBRL. Funds are encouraged to file annual reports to shareholders and quarterly listings of fund portfolio holdings via the technology.
"The SEC could have gone out to create its own standards," Savage said. Instead, the SEC took its time to test out XBRL, see how data was tagged and see the benefits, she said. "We see the SEC program becoming mandatory at some point."
Just don't expect the adoption of XBRL formatting to have any great pay off for your average mutual fund investor, experts cautioned. While some more sophisticated investors may become XBRL fluent and zip down a multitude of comparative info across different mutual funds, most won't bother.
"The value of marked up fund financials or portfolios doesn't seem to translate into a utility for retail fund investors," Copenhafer commented.
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