The biggest barrier to full-blown change in financial reporting is the widespread boredom CFOs seem to display about XBRL and the issuing of non-financial business information along with the financials, many think.
The lack of enthusiasm may stem from the double-whammy of the increased costs and administrative burdens that might go along with the use of eXtensible business reporting language and enhanced business reporting (EBR).
But those are merely near-term concerns, says Bob Laux, Microsoft’s director of technical accounting and reporting. Once finance chiefs get hang of complying with Section 404 of the Sarbanes-Oxley Act and coping with related changes in the Public Company Accounting Oversight Board’s internal controls standard, AS2, they’ll hearken to the advantage of faster, richer reporting.
Indeed, Laux, a former Industry Fellow at the Financial Accounting Standards Board (FASB) who spent ten years managing financial reporting at General Motors before that, is a strong EBR advocate. As he pointed out in the E-mail exchange with CFO.com recorded below, in such cases as research and development, CFO can pluck their companies out financial-reporting entanglements by more robust reporting of nonfinancial information.
CFO.com: It’s been said that while enhanced business reporting and XBRL offer some obvious advantages for corporate finance executives, very few have expressed real interest in those subjects. Is this so–and, if so, why?
Bob Laux: I agree that, to date, there has been limited interest by corporate finance executives in enhanced business reporting and XBRL. However, I do not believe that is due to the belief that the initiatives will not produce advantages in the long run. Rather, I believe that the relative lack of interest has more to do with the intense focus that has been placed on complying with SOX, particularly Section 404. Given the current focus on revising AS2 and the pending SEC guidance for companies, I believe that focus will continue in the short-term. In the long term, I do believe corporate finance executives will express more and more interest in these subjects.
For example, corporate finance executives are concerned about the complexity of GAAP and, despite that complexity, GAAP’s lack of properly portraying the economic substance of certain items. Take research and development as an example, which, in general, is currently expensed under GAAP. A possible GAAP solution to show the value of research and development would be to capitalize R&D.
However, this solution would lead to numerous debates of what should be capitalized, over what period it should be amortized, and how should it be measured (historical cost or fair value). Solving these debates within GAAP would probably result in numerous complicated accounting rules. A better approach would be to use enhanced business reporting to supplement GAAP in this area with, for instance, metrics or key performance indicators providing information on a company’s success in research and development projects. This solution would provide what corporate finance executives believe is a more accurate depiction of the economics without having to further complicate the GAAP accounting rules.
Is there a chance that momentum is picking up or will pick up in terms of corporate interest in EBR/XBRL? What factors could drive that?
Momentum is definitely picking up with respect to XBRL due to [SEC] Chairman [Christopher] Cox’s leadership in the area and I believe that type of leadership will be needed for EBR. Corporate finance executives are not looking for regulation in these areas, but I do believe it is critical that regulators show leadership and encouragement for private market initiatives in these areas.
Is the cost of a major changeover in both the content and technology
of corporate reporting prohibitive for many companies?
The cost may be large, but I do not believe it is prohibitive. One has to balance the long-term benefits with the cost, and I believe the
benefits of EBR/XBRL will exceed the costs in the long run. I believe
it would be very shortsighted to ignore financial reporting and
technology improvements by just focusing on short-term costs.
How far away are companies from a complete change to a “real-time” model replete with non-financial reporting to go along with GAAP reporting? Is corporate resistance the main barrier to it?
I thing we all need to be careful when we use the term “real-time” reporting model because I believe so called “real-time” reporting could
lead to an even greater short-term focus on financial results. Rather,
EBR and XBRL allow for the “timely” reporting of information. An example would be timely reporting via XBRL of a long-term economic phenomena, a company’s success factor with R&D projects.