Ready or Not, XBRL Is Coming

The SEC and FASB are gearing up for XBRL, suggesting it's only a matter of time before its use becomes mandatory.
Tim ReasonApril 27, 2006

Testifying before the Senate Banking Committee Tuesday, Securities and Exchange Commission chairman Christopher Cox found it difficult to keep from straying onto his pet topic. “I’m tempted to go off on a riff on all the benefits of interactive data,” he said in answer to one question about mutual funds.

He refrained, but by then his testimony already had been peppered with plenty of plugs for interactive data. By that, Cox is referring to XBRL, the Internet-language method of tagging financial data that he believes would greatly improve transparency. Many of Cox’s public speeches — a third of them, by one count — have also heavily emphasized the ease with which public companies could be examined and compared if they all were to use XBRL.

Which raises an obvious question: Just how long will Cox stick to the bully pulpit before the SEC simply mandates that all companies adopt XBRL?

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Last October, SEC deputy chief accountant Andrew Bailey told that the SEC might indeed want to make XBRL mandatory. That makes Cox’s current campaign sound like a clear message to Corporate America. “It’s pretty difficult to see the chairman of the SEC give XBRL that much play and not get the message that this is coming down the pike and it is not going to be optional,” says Dan Roberts of Grant Thornton. Roberts is chair of the XBRL-US Steering Committee, part of an industry consortium working to develop XBRL in the United States.

So far, that work has been voluntary — and slow. Although XBRL, which stands for eXtensible Business Reporting Language, has been under development in this country for more than five years, it has yet to have much of an impact on financial reporting. “The United States is, to its potential detriment, significantly behind other major markets in its adoption of XBRL,” says Roberts.

Indeed, a pilot program by the SEC to encourage companies to report their financial results in XBRL has attracted only 17 companies. And while International Financial Reporting Standards include a full taxonomy — that is, XBRL tags for all major financial reporting line items — the tags for items involving U.S. generally accepted accounting principles are still being written. By some counts, that project, which includes some 3,000 tags, is less than half complete.

That may soon change: The Financial Accounting Standards Board appears poised to significantly increase its role. FASB Chairman Robert Herz has repeatedly expressed support for XBRL. Indeed, while it is clearly Cox’s initiative, he and Herz have both been beating the drum for XBRL as part of Herz’s much broader public campaign to reduce accounting complexity.

“As you know, Chairman Herz is fiercely committed to exploring matters that would seek to reduce complexity and improve the financial reporting process,” said FASB spokesman Gerard Carney. “Along these lines, the FAF continues to discuss how interactive data can be used to improve financial reporting with other interested parties. With respect to those discussions, no definitive plans have been formulated.” (FAF, The Financial Accounting Foundation, oversees and funds FASB and chooses its members.)

There are signs, nevertheless, that FASB is ramping up its efforts. Until recently, FASB was represented on the XBRL-US consortium by FASB fellow Jennifer Moriarty, a KPMG auditor. According to its website, the board is now in the process of hiring a permanent XBRL staffer. However, says Carney, “The XBRL manager position is not a new one. We have had it for some time to keep us abreast of issues on the XBRL front.”

The job posting on the board’s website says that the board is looking for someone who will be responsible for coordinating FASB participation in the development of XBRL GAAP taxonomies and will work closely with XBRL-US, the SEC, and the International Accounting Standards Board.

Roberts says he believes FASB recognizes the need for its involvement “at more of a leadership level.” In particular, he says, that means that whenever the standard setter issues new accounting pronouncements, it should also issue the relevant XBRL tags. That’s a task that will likely be made easier by FASB’s commitment to jointly issue all significant pronouncements with the IASB, which already issues such tags.

One recent example of why it’s necessary to issue tags along with new accounting dictates is FAS 123R, FASB’s standard requiring that companies expense stock options. Companies involved in the SEC’s voluntary XBRL filing program, says Roberts, could not find the taxonomy elements they needed to properly tag that information, forcing them to create their own. If individual companies took that approach to all future accounting pronouncements, notes Roberts, it would undermine the comparability of XBRL-tagged financial data.

“If FASB is not releasing taxonomies concurrently with accounting pronouncements,” he says, “there’s a risk that all the companies impacted will be custom-extending the XBRL taxonomy.” Custom extensions are allowed, even encouraged, under XBRL, he says, “but not for something that is fundamental to all firms.”

Of course, that raises another question: If FASB does get involved in setting XBRL standards, where does it stop? Beyond a base taxonomy shared by almost all companies, how granular would FASB get?

“GAAP is designed to allow companies to add individual line items if they feel there is something unusual about their company,” observes PR Newswire’s Michelle Savage, who is vice-chair of the XBRL-US Adoption Committee. “XBRL is designed to mirror the flexibility of U.S. GAAP.” Savage welcomes the momentum that the SEC and FASB are likely to provide, parrying the suggestion that their involvement will lead to new regulation. “Does that mean they will start dictating how taxonomies will be developed, [or] will try to standardize all of the tags?” she asks. “FASB hasn’t done that with U.S. GAAP, why would they do it with XBRL?”

Yet even in its nascent state, XBRL is already sparking debate over the degree to which companies should be allowed to customize — or extend — the official taxonomies.

“XBRL documents filed with the SEC use company-specific XBRL taxonomies which do not allow for the automated processing and comparable analysis that has been promised to the marketplace by XBRL,” complained Eric Linder in a recent post he sent that had appeared in the Analyst’s Accounting Observer blog.

Linder, a member of XBRL International, is president of SavaNet, which makes XBRL reader software. He says that even though the companies in the SEC’s pilot start with the same base taxonomies, “they have the unlimited ability to add new items and re-do the calculation relationships of existing items.” That, he says, renders the data useless for the kinds of analysis Cox has been promising.

Of course, as a maker of software that would compare XBRL financial data from different companies, Linder has a vested interest in a higher level of standardization, than, say Grant Thornton’s Roberts. “The ‘X’ stands for extensibility,” says Roberts. “We are not going to give people a standard chart of accounts.”

Then again, as an accountant, Roberts too has a vested interest in how XBRL develops. He says it will be up to the accounting profession to determine whether a company’s XBRL extensions legitimately represent an item unique to that company’s finances or whether they were created simply to obscure the item. “Then it would be incumbent upon the auditor to say this does not ‘fairly represent,’ because it specifically uses XBRL to inject opacity into an otherwise highly transparent environment.”

Neither Linder nor Roberts represent preparers or end-users of financial statements. As more companies begin using XBRL data, and as analysts seek compare them, the debate over what is and is not a legitimate extension is only likely to grow louder. Whether the SEC and FASB can — or should — stay out of that debate remains to be seen.