Tuesday, October 7, 2008

Who's afraid of XBRL?

Would the adoption of XBRL in Canada help or hinder IFRS conversion in Canada?

The title of this post is based on the song "Who's afraid of the big bad wolf?". In the illustration of Little Red Riding Hood by Walter Crane shown here, she does not really seem afraid of the big bad wolf. Clearly she should be! In the 1933 movie "The Three Little Pigs" the big bad wolf was the star and he was the subject of the well known song.

These stories have given wolves a bad name. Is XBRL suffering from a similar syndrome? Has it been given a bad rap?

Hold on to your hats! I am going to go over XBRL and some of the benefits and costs in some detail. Sorry this is longer than my usual material. Please stay with me.

There was quite a bit of discussion at the September 23, 2008 Economist Conference on IFRS about the IT implications of IFRS conversions. Some companies are making very major system changes especially in response to the need to recognize enhanced depreciation of components of PP&E under IFRS rules.

I have written about XBRL in previous posts on this blog. The question is – “Would it not be a good idea to incorporate data tagging for XBRL as part of the system specifications? “ This question was asked at the Economist Conference and received little (virtually no) support in the room.

In the USA the SEC has put forward a proposal for the “furnishing” of XBRL financial information. The SEC has also proposing a Roadmap to move to IFRS. As of today, the SEC has yet to issue the written details of the proposed IFRS Roadmap for comment.

Now go Fast Forward to the day after the Economist Conference, September 24, 2008. A Conference was held by XBRL Canada and the Canadian Securities Commissions (CSA) in Toronto. The written presentations from the XBRL Canada segment are available here. The CSA two-hour web cast is archived here for your viewing.

What is XBRL?

Liv Watson Director, IRIS India, called XBRL “Bar Codes on Steroids”. Instead of tagging a can of peaches with key information one tags a financial data or other elements with key information.

There are some useful videos on how XBRL works collected by me on my You Tube Channel.

Once the data is tagged all kinds of reports can be developed, including, of course, financial statements.

According to the CSA Website, XBRL stands for eXtensible Business Reporting Language. XBRL is an emerging business reporting language that is designed to make it easier to share and analyze financial information.

An XBRL taxonomy, according to the IASB website, is an electronic description and classification system for the contents of financial statements and other business reporting documents.

What are the benefits of XBRL?

Once you have tagged a piece of information you have “one version of the truth” that can be shared with other systems and applications. Systems can speak with each other and you can reduce the frequency that you ask for the same information on forms supplied by clients and others.

Reports compiled using this technology will be internally consistent and arithmetical errors are substantially reduced. Transcription of information to paper reports and the PDF format is error prone and there have been examples of errors in published and filed paper based reports. Those of us who have been in business for some time have our own war stories about this but we would rather not talk about it!

Once the financial data is tagged it can easily be associated with translated versions so that foreign language versions of reports and financial statements can be easily prepared. This is quite a benefit in a global economy. The Chinese have embraced XBRL using the IASB taxonomy and have seen benefits from the ability to quickly prepare reports in other languages in a speedy and cost effective manner.

XBRL technology can enhance the ability of financial analysts to do their work. It should remove some of the drudgery and provide easy access and flexibility to data. We are not there yet (see my post on the SEC’s IDEA initiative).

If everyone uses the same definitions (taxonomies) it will become easier (in theory) to benchmark with competitors. The US taxonomy has approximately 13,000 tags. Mr David Blaszkowsky, Director, Office of Interactive Disclosure, SEC, noted that the extensive number of data points in the US Taxonomy was largely in response to requests from specific industries. Clearly benchmarking was an objective in making such a request.

XBRL tagging can be useful to drive regulatory and tax reports. The British Inland Revenue will require company tax returns to be filed using XBRL for returns due after March 31, 2011. This is a two edge sword – ease of filing once the system is up and running but also ease of performing analysis by the authorities to find areas to look at on an exception basis.

Data tagging has future potential applications for internal management decision-making and internal control. With some development work tagging could be expanded beyond regulatory and external reporting into the realm of internal management. Again we are not there yet (although some may have experimented with this).

How much does XBRL cost?

The cost of XBRL depends to a great extent on how it is implemented and whether existing systems have XBRL capability.

Implementation approaches run a spectrum from Full service approaches to Enterprise solutions. See the presentation from Sue Childs.

Under the full service approach one submits paper base reports to a full service company that will then do the tagging for onward submission for regulatory reporting. Of course, not all the benefits of XBRL would be achieved under this approach. But it can be very cost effective if XBRL is seen more of a compliance exercise.

At the other end of the spectrum the tagging can be incorporated into a company’s systems. The “Enterprise Solution” builds the XBRL tagging into ERP systems – mapping to the general ledger.

United Technologies has fully embraced XBRL in an Enterprise Solution. Simon Hecht, from United Technologies, reported at the Conference that the cost of implementing XBRL in that company was $40,000. This did not include internal labour that amounted to 1,000 hours “over a number of years” of specialist reporting time. United Technologies sees a number of internal benefits from the exercise from processing time savings and see future benefits from being able to produce customized internal reports.

Use of XBRL for IFRS implementation

The IASB has a license free taxonomy for IFRS. It does not include industry extensions, according to Trish O’Malley, the Director of Implementation Activities, IASB.

One particular advantageous feature of the IFRS taxonomy, according to Ms. O’Malley, is the ability to distinguish between standards that have been adopted and are effective from those that have been promulgated and are not yet effective. XBRL would be useful in mapping situations where companies are interested in early adoption of a standard if such was permitted.

According to Gerald Trites, Project Director at XBRL Canada, XBRL Canada is working on a mapping from Canadian GAAP to IFRS taxonomy. This might be useful in helping with IFRS conversions. No specific details were presented at the Conference. The results of this exercise are planned to be available in early 2009.

Will Canadian Securities Regulators require submission of XBRL information?

The SEC proposes to require the "furnishing" of XBRL information on a staggered time frame over the next few years. Note there appears to be a “safe harbor” of sorts here. “Furnishing” does not have the same force as “filing” – check with your US Securities lawyer.

Currently there is a provision for voluntary submission of XBRL information using Canadian GAAP on the SEDAR site. According to Cameron McInnis, Acting Chief Accountant, Ontario Securities Commission… there have only been three companies doing this. Not a large response.

In Canada, there is some reluctance to implement XBRL concurrently with IFRS conversion. According to James Turner, Vice-Chair of the Ontario Securities Commission, there are currently no plans to require XBRL to be implemented concurrently with IFRS. However, companies may wish to adopt XBRL as part of their IFRS implementations. (Apparently in Israel they concurrently implemented IFRS and XBRL).

What now?

It’s worth taking a look at XBRL. Perhaps you can join XBRL Canada and be part of the solution?.

The terminology sure is scary. XBRL certainly sounds like it would be very expensive. “Taxonomy” sounds complex and mysterious. It also sounds a bit like “Taxidermy” which of course involves being cut up, stuffed and reassembled. Surely XBRL is not as scary as that?

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