Brief: Never underestimate the value of a common language. In September 1999, for example, NASA scientists controlling the Mars Climate Orbiter failed to convert crucial navigational data into the metric system. The result: The $125 million spacecraft crashed into the Red Planet.
While XBRL won’t avert those sorts of dramatic disaster, proponents of the metadata language believe XBRL will improve the speed and accuracy of corporate reporting. What’s more, the single standard will give financial analysts, lenders, and investors the flexibility to do a better job of sizing up companies. Given what’s gone on the past few months in, that’s not exactly small potatoes.
What It Is: XBRL (extensible business reporting language) is a Web-based programming language that tags financial data and gives it context. In that sense, XBRL is similar to XML, the extensible markup language that enables programmers to do such wonderful things on the World Wide Web. According to Liv Watson, director of XBRL for Edgar Online Inc. and infomediary chair of XBRL International, once financial data is tagged, its value increases exponentially.
Skinny: What’s so valuable about XBRL data? Well, it’s open protocol ensures interoperability. In case you didn’t go to MIT on a mathematics scholarship, interoperability simply means data can be used by any software program, across any platform, in any country.
That’s pretty impressive stuff. Moreover, the standardization of financial data allows for an apples-to-apples comparison of numbers — something analysts, investors, regulators, and lenders are clamoring for these days.
Greg Adams, CFO at Edgar Online, says XBRL standardizes data in a company’s general ledger (the data that is eventually rolled up into SEC filings). The common language also takes the pain out of preparing tax returns for multiple units, he asserts. When fully embraced by corporates, XBRL will make it easier for bankers and investors to benchmark a company’s financials with other businesses in that sector.
Because XBRL uses precise tags, notes KPMG partner David vun Kannon, financial information can flow between far-flung corporate divisions (or to regulators or investors) without having to be manually rekeyed or shoved through translation middleware. For example, U.S. dollars don’t get lumped in with Italian lire, and systems can successfully separate “cash” entries under GAAP from those considered cash under U.K. accounting standards.
What’s more, experts say XBRL takes the sting out of reconciling the books after a merger or acquisition. Why? Because financial data fits snuggly into existing financial statements, or it’s spit out as an aberration.
Interestingly, both Watson and vun Kannon believe such aberrations can be useful. They point out that a CFO can manipulate the XBRL taxonomy to highlight certain entries unique to that finance chief’s business — like tagging the value of a patent so it stands out among other intangible assets.
Microsoft and Reuters are already using XBRL for financial reporting, and Edgar Online is gearing up start reporting with it before year’s end. An even surer sign of the language’s impending arrival on the financial scene: The Federal Deposit Insurance Corp. is requiring banks to submit their call reports in XBRL by next year. That should prod most financial institutions to adopt the language.
Meanwhile, Bank of America is promising an incentive to clients that are XBRL-compliant. Vun Kannon explains that the speed and flexibility of the standard helps the bank in processing loans and other financial instruments.
Whether the SEC will adopt XBRL remains a subject of congressional debate, but the issue is currently on the table. In addition, investment house Morgan Stanley is working with the commission to see if creating an XBRL addendum to standard corporate filings makes sense.
Of course, XBRL won’t really take off until software makers begin to release XBRL-compliant products. In some cases, says Watson, adopting the financial language will be as easy as clicking on a dropdown menu and selecting “save as XBRL.” Her prediction: XBRL will be part of the mainstream in 6 to 18 months, depending on the rollout of conversion tools by software companies.
ETA: One year.