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XBRL (eXtensible Business Reporting Language) is a standard for the electronic distribution and exchange of business and financial information (ICAEW, 2010). Many claims have been made as to the advantages of XBRL, and this assignment critically reviews these claims.
Before considering the advantages of providing financial accounting information using XBRL, it is first necessary to look at why such information is provided, and the needs of the users of such information. In the Framework for Preparation and Presentation of Financial Statements (IASC, 1989), the International Accounting Standards Committee noted seven groups of users, namely investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. However, in 2010, the US Financial Accounting Standards Board ('FASB') and the International Accounting Standards Board ('IASB') agreed in Statement of Financial Accounting Concepts 8 ('SFAC 8') that 'The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit '(FASB, 2010).
These primary users need information about the financial resources of the reporting entity, its profitability and cash flow, in order to consider the entity's likely future financial performance, and also to review how well management has used the financial resources at their disposal (FASB, 2010). General-purpose financial statements normally contain four reports, namely: -
A summary of the assets and liabilities of the entity on the reporting date, called a Statement of Financial Position.
A list of revenues and expenses incurred during the reporting period, called a Statement of Comprehensive Income.
A list of the cash flows during the reporting period, called a Statement of Cash Flows.
A statement that reconciles the value of the owners stake in the entity between the beginning and the end of the reporting period, called a Statement of Change in Equity (Britton & Waterston, 2010).
Traditionally, assets have been valued in the Statement of Financial Position at their historic costs, although there is considerable debate about the use of current value (e.g. replacement cost, realizable value) and the International Financial Reporting Standards ('IFRS') now requires the use of a mixture of historical cost and fair value when preparing accounts, depending upon the nature of the asset (ICAEW, 2006). Much of this debate centres around which measures are more useful to users. The current position is broadly that different measures are used for different assets within the same set of financial reports, but there is consistency of treatment across different reporting entities (ICAEW, 2006).
SFAC 8 also sets out what it believes are the qualitative characteristics of information likely to be useful to primary users. The fundamental characteristics of such information are that they should be relevant and be a faithful representation. Relevant information must be material and be "capable of making a difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or already are aware of it from other sources". (FASB, 2010). To be a faithful representation, information should be complete, neutral and free from error. SFAC 8 also lists four further characteristics that enhance the usefulness of relevant and faithfully represented information. These are comparability, verifiability, timeliness, and understandability.
Investors and lenders are usually concerned about the future prospects of the entity, or in some cases, how much their assets are worth. Because financial accounts are essentially backward looking, they do not provide sufficient information to allow investors to consider the likely future earnings generated by the entity. This failing is recognized both in the UK (ICAEW, 2009) and globally (FASB, 2010).
In the twenty-first century, many companies market value (share price x number of issued shares) is a large multiple of their net asset value. In information age companies, the ability to make profits relies upon such intangibles as intellectual capital or the value of a brand, neither of which is captured by traditional financial accounts (ICAEW, 2009). While financial reporting can only provide a part of the information investors and lenders require (FASB, 2010), increasingly non-financial business reporting is seen as vital, and entities increasingly focus on non-GAAP measures in their press releases to measure their performance (KPMG Australia, 2010). Beattie and Pratt (2002) found that investors and analysts wanted greater financial and non-financial disclosure, in addition to what is provided in the annual accounts. Financial items included "market/customer profitability; revenue growth; return on capital employed; other ratios and economic profit". Non-financial items focused on corporate objectives and the strategies employed to achieve these. Users also want this information quickly, so it remains relevant. Numerous UK studies have shown that annual reports are not seen as being the most important information source for institutional investors/analysts (Bence, Hapeshi and Hussey, 1995; Barker 1998; Coleman and Eccles 1997). While many critics push for a better financial reporting model, professional investors, on the whole require additional financial and non-financial information, rather than major changes in accounting standards (PWC, 2007) This allows investors to decide, for example, what value to place on an asset in their own financial model, based on greater disclosure and transparency, rather than rely on a value judgement by the reporting entity in the formal financial reports.
There is also a concern about the process of converting local accounting practices into international standards. While these international standards should offer increased comparability and reduced information costs to investors, (Ball, 2005) the complexities of those standards may have resulted in them becoming less relevant to investors. KPMG Chairman, Tim Flynn, summarises these views: - "Things have become too complex from my point of view. In fact, they are so complex and so voluminous that we run the danger of financial statements not maintaining their relevance to our most important user - the investor. The real users of financial statements are shrinking. Companies do not use them to manage their businesses. In many cases, management does not use them to explain their financial results and I believe many investors simply cannot understand them." (KPMG Australia, 2010).
Finally, the format in which financial information is currently produced is inefficient for investors looking to use that information or compare it to similar information of other companies. Currently, financial reports are prepared in paper format, or using software such as Adobe Acrobat, allowing electronic viewing of 'pages' but not automatic extraction of financial data into a suitable format for analysis. Hence before analysis can be undertaken, the information needs to be manually transcribed, either by a third party data provider (Pawlicki, 2007) or by the analyst (Huh, 2006). Transcription errors, time delays and inefficiencies can result.
CLAIMS FOR XBRL
It is claimed that XBRL 'provides major benefits in the preparation, analysis and communication of business information.Â It offers cost savings, greater efficiency and improved accuracy and reliability to all those involved in â€¦ using financial data' (www.xbrl.org/WhatisXBRL/, 2010). These three claims will now be considered individually.
Over the long term, cost savings for investors should result from the use of XBRL, if all reporting entities produce accurate financial reports in XBRL format. To the extent that data can be automatically downloaded from the Internet into XBRL-aware analysis tools, this should minimize or eliminate the need for data transcription, reducing costs, speeding up the transfer of information and so making the data more relevant (Huh, 2006). Hence, benefits should accrue to the data collectors, such as analysts, stock exchanges and government agencies, which should no longer need significant resources to input the non-value added tasks of transcribing data (Canadian Performance Reporting Board, 2009). XBRL effectively tags data in financial reports so that the same data is recognised when it is moved from one application to another. This only works if both applications recognize XBRL tags and the same meaning is assigned to each tagged specific piece of data (Deloitte, 2010).
In the short term however, financial software providers need to amend their systems so that XBRL tags can be inserted. Entities need to go through an education process to understand how XBRL works. Analysts, lenders and data providers need to ensure their systems can accept and understand XBRL tags. All of this takes time and cost which will, in one form or another, be passed onto the user.
Globally, there are two different drivers for the use of XBRL. In Europe, regulators are mandating the use of XBRL for reporting accounts and tax filings. In the US and Asia, it is the capital markets that are to the forefront, with the Stock Exchanges in the US, Japan and China moving towards mandatory filing of financial information electronically via XBRL (Kernan, 2008). In the UK, all UK companies must file accounts with Companies submitted online using XBRL. This data is electronically validated, enabling Companies House to immediately check that the accounts are complete, without calculation and typographical errors. The user cannot file the accounts until any such errors are corrected. (http://ewf.companieshouse.gov.uk/help/en/stdwf/xbrl_validator.html#overview,2010)This provides significant cost savings in manual checking and efficiencies to Companies House in ensuring the submitted data is accurate. HMRC will require Corporation Tax returns to be similarly submitted by 2011.
The second claim is that XBRL will provide greater efficiency.. To the extent that primary users of financial reports receive usable XBRL enabled data faster and are able to focus resources on their analysis of the company rather than in transcribing data, efficiencies should result. It should also be possible to compare the same information across multiple companies easily and quickly, if they all use XBRL formatted reporting data. A limiting factor will however be the number of reporting entities providing such data. Relying on a voluntary reporting system would diminish the value of XBRL to primary users and only a limited number of Stock Exchanges have set timescales for mandated XBRL use. Such exchanges would however have the ability to more easily collate data and produce greater statistical analyses and products.
Although Government agencies are not primary users of financial information per SFAC 8, they have been quick to understand the efficiency advantages of mandatory financial reporting from companies using XBRL As with Stock Exchanges, this will allow them greater access to reported information and to collate statistics more efficiently, at a potentially lower cost (ICAEW,2004)
The third claim is improved accuracy and reliability. Other than for Government entities, where mandated financial data has to be provided in a set format, this is perhaps the most difficult claim to justify. At present, XBRL outputs are not externally audited, and where entities have voluntarily adopted XBRL, high error rates have been found (Bartley, Chen & Taylor, 2010). Added to this, Ball (2005) is concerned that although common standards might be applied internationally and hence XBRL tags applied, interpretations may vary substantially country by country, so that there will only be 'a veneer' of conformity that might confuse investors.
Such concerns may lead to unreliable information (Steinart-Threkeld, 2009) and could limit users acceptance of financial data, limiting cost savings, or even increasing costs in the short to medium term. A further possible limiting factor to the efficiency of using XBRL data is the reliance of investors on non-GAAP information, both quantitative and qualitative (PWC, 2007). Unless such additional quantitative information is also provided in XBRL format, efficiencies will be limited, and XBRL does not help with qualitative information. Such information may only be available quickly if reporting entities XBRL tag data in their internal management systems.
XBRL is based on XML, an open standard for tagging business information first introduced in the late 1990s. Although expected to revolutionise business-to-business ('B2B') e-commerce, XML still only represents 10-15% of all B2B transactions (Kraudel, 2009). Kraudel argues that there are three lessons to learn from the relative failure of XML. First, the focus has to be on adding business value. Secondly, XML has too many splintered standards, which makes interoperability more challenging, and thirdly, standards need to be kept open and free. The first two of these lessons are instructive for XBRL.
From a users perspective, there seems to be clear cost and efficiency advantages for Government entities and Stock Exchanges where use of XBRL can be mandated on reporting entities, although the start up difficulties should not be underestimated (ICAEW, 2005). However, so far, the business case for reporting entities to embrace XBRL is not overwhelming. Although this analysis does not focus on the advantages and disadvantages of XBRL from the provider's perspective, unless the reporting entity perceives a benefit in embracing XBRL, it is doubtful that XBRL enabled information will be any more 'relevant and a faithful interpretation' than the current reporting formats, especially if XBRL information is un-audited. Unless internal management systems are XBRL tagged, the ability to shorten the time needed to produce business information (whether financial statements or other business information such as achievement against Key Performance Indicators ('KPIs'), environmental accounting or strategy implementation measures will not improve and may increase if companies chose to outsource the preparation of XRBL statements, which may be likely (Mueller, 2009). There is also a question as to whether companies want to make available additional timely, sensitive business information. While it may help investors, it also could aid competitors (ICAEW, 2009).
The second lesson of avoiding splintered standards is a concern. A reporting entity may require to work with five (or even more) different taxonomies (e.g. for the UK subsidiary of a US parent, (i) UK GAAP, (ii) UK IFRS, (iii) HMRC Corporation Tax, (iv) US GAAP, and possibly (v) general ledger. Some of these are developed within XBRL Org, but others are developed by Government agencies. This complexity may hinder XBRL acceptance, particularly as XBRL Org is a voluntary non-profit organisation with relatively few full time resources to address such issues. In addition, XBRL does allow entities to self-define tags to capture items they believe are unique to their business. Some argue this lowers comparability of information and allows users to misrepresent financial information. (CAAP, 2009)
In summary, the claims for XBRL are likely to be realised for Government entities and Stock Exchanges, both of which have the ability to mandate compliance from reporting entities. However, for the primary users, investors, analysts and lenders, while some cost savings and efficiencies may result, the major savings and efficiencies which would result from complete and full compliance will only occur when either reporting entities all realise the advantages of XBRL tagging, or are required to do so. The information then needs to be accurate, so a mechanism to ensure accuracy, such as auditing will also be required. XBRL is an enabler for improved reporting, rather than a driver, (ICAEW, 2004), and until a compelling business case is put forward for reporting entities to accept it is in their interests to provide both required formal reporting and other financial information deemed necessary by investors/ lenders to fully understand an entity's financial and wider business outlook, then the claims of 'major benefits' will remain unfulfilled.
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