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The Simple Complexity of XBRL

Use of interactive data is spreading, promising simpler access to data. But it still faces some complicated challenges.

The Securities and Exchange Commission’s push for interactive data is intended to make it simpler for people to use financial information. But as with any innovation intended to simplify life, it also comes with potential complications.

At the recent SEC and Financial Reporting Institute Conference in California, Robert Herz, chairman of the Financial Accounting Standards Board, said that one complication involved with implementing eXtensible Business Reporting Language (XBRL) is the difference between U.S. accounting standards and those abroad. That means that both U.S. GAAP and IFRS have different data “tags,” which adds to the cost and confusion of using XBRL.

Ideally, XBRL could help eliminate those differences, and standardize financial reporting from different continents. That is what the incoming CEO of XBRL International is hoping. “The benefits of XBRL are that people use as standard a taxonomy as possible,” says Tony Fragnito, who is leaving his post as CFO and deputy director of The Federation of American Societies for Experimental Biology (FASEB). “There are a lot of efforts underway to map the like data elements” between U.S. GAAP and IFRS, he says.

Another potential stumbling block for XBRL is that some companies may view it as competition. “The revolutionary change [of XBRL] will be that data will be free, and free of any restrictions on use,” says Christopher Whalen, managing director of Institutional Risk Analytics. Providers such as Bloomberg, Reuters, and Thompson Financial make a living selling financial data that cannot be redistributed. XBRL — which is intended to make data easy to access, sort, manage and compare — could eat into such businesses.

In theory, XBRL will also make data e available to investors faster, allowing individuals who rely on financial portals such as Google and Yahoo — where information is often delayed — to have “real-time” access. In a speech last month at the Federal Reserve Bank of Chicago, SEC Chairman Christopher Cox argued that very point, saying, “Just as banking regulators are now enjoying clean, real-time, comprehensive data from their reporting banks in a readily digestible format, interactive data can be used to allow banks to enjoy the same advantages vis-à-vis their customers.”

Cox has been an ardent champion of XBRL as a technology solution to help people do their work “faster, cheaper and better.” During the last two years, 8,200 financial institutions have begun using XBRL and basic math errors in quarterly filings have fallen from 30 percent to none, according to Cox. Further, the numbers of call reports that need to be recalled for clarification have dropped from 34 percent to 5 percent. XBRL has also made analysts more productive, says the Federal Financial Institutions Examinations Council (FFIEC), which reports that analysts using XBRL can handle up to 33 percent more cases and can deliver assignments up to 15 percent faster.

Riding upon that success, the SEC expects to consider allowing mutual funds to submit prospectus information about investment objectives, costs, risks and historical performance using XBRL, said SEC Commissioner Kathleen Casey at the International XBRL Conference in Munich last week. This would allow investors to compare more than 8,000 mutual funds while sitting at their desks. The SEC will also be using XBRL to keep a closer watch on executive pay. Casey said that a new executive compensation viewer will soon be launched to turn pay information from proxies into searchable, graphable formats for comparison. The technology is even spreading into alternative sectors such as microfinance, allowing improved transparency of lenders who make small loans to entrepreneurs in developing countries.

Although feedback from the SEC’s pilot XBRL program has been largely positive, Whalen predicts that there could be unrest if interactive data becomes too cumbersome and is made mandatory. “Once you put footnotes into the mix and you get a full-blown taxonomy this is going to become a lot more complicated,” Whelan says. “CFOs will need to have help and companies might need to get additional assistance to put a filing together.”

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