KPMG: The Hidden Value of XBRL - Bivek Sharma
From March 2010, companies in the UK have to file their accounts and tax returns online in the electronic format known as extensible business reporting language (XBRL). This open-data standard is a version of the XML format used for the electronic transmission of data, which has been adapted for tagging specific information for financial reporting, and the UK is just one among many countries mandating or considering its use.
The problem this poses for corporates is that the use of XBRL seems largely to be forced upon them by regulatory bodies and is often seen, therefore, as just another compliance issue to add to an already long list. But is it right to categorise XBRL as a "must do" rather than a "must have"?
"XBRL was generated years ago as a reporting language and was adopted by some countries as early as 2004, and it is now coming into use in the UK and the US. Regulators wanted to standardise the reporting of financial numbers, particularly as we enter the world of IFRS, which sets one global accounting standard," remarks Bivek Sharma, partner, compliance and technology at KPMG.
"We are currently only at stage one or perhaps stage two of the XBRL journey. Yes, it is an international language for business reporting, because it has been adopted by so many countries and it is being adopted in anger by regulators in 26 countries in all, including Japan, Australia and the US. The next step will be to look at how it can be used for internal management reporting within an organisation."
In Sharma’s eyes, XBRL offers an opportunity to bring together the many different systems and databases an organisation uses for management reporting. It could greatly simplify the process and bring clearer information more swiftly to the business leaders that define corporate strategy, but he still feels that companies are a long way from realising this potential.
"Regulators are pushing software houses to develop such applications for corporates, but there is a long way to go before they are widespread. Now, in the UK, companies are struggling to see how XBRL will help them. They have their own processes for financial reporting. XBRL technology is fairly new, and it means they have to add an extra step to accounting processes that are currently quite manual," he says.
"As a result, the move to XBRL is often seen as a painful administrative burden. Regulators are demanding the change in process when the environment discourages investment, but as the technology evolves we will see more finance directors connecting to the benefits of XBRL."
Unearthing the advantages
Most UK companies, be they SMEs or multinationals, still use a number of manual processes to create their accounts. These processes must now be reworked to enable the XBRL tagging of financial information and online filing of accounts. Similar challenges have been, or will be, presented to corporates across the world as the number of XBRL mandates continues to grow.
It would seem, therefore, that embracing the new standard early would be an advantage for corporates working across many jurisdictions, partly because it presents an opportunity to streamline internal reporting processes, and partly because a global strategy for XBRL implementation could lower the eventual cost of bringing all jurisdictions onto the new standard. Yet these benefits have, so far, not been greatly emphasised.
One reason why finance directors as yet remain unaware of how the shift to XBRL can help with internal management reporting and cost management is perhaps that communications from regulatory bodies about the change have concentrated solely on how the new standard will simplify reporting to the regulators. XBRL is portrayed as a tool for the authorities, not the companies that report to them.
"The benefits seem one-sided. There is an obvious benefit to regulators of companies tagging information, but the burden is on corporates to make the change. Rather than extolling all its benefits, regulators have simply said "you must do this". Only a handful of corporates are using XBRL for internal reporting and many others are only making the transition because they have to," explains Sharma.
"Only when the software market catches up and vendors integrate XBRL will finance directors start to buy into it. It is too early for them to get excited about it yet."
Software vendors have been making efforts to develop XBRL capability. The US Securities and Exchange Commission has been pushing XBRL for years, and this has given impetus to the ERP and consolidation systems vendors to develop software solutions incorporating the new standard. Yet vendors still have a long way to go. For Sharma, development by software houses is vital to the future of XBRL, but there is also an opportunity for corporates to act on their own initiative.
"XBRL is an open standard, so organisations could use it to improve management reporting in a way that suits them. Large corporations typically have a myriad of information and systems to handle this kind of reporting. Consolidating that can be painful and they have already spent a huge amount of money to cleanse and consolidate that data," he says.
"In the UK, for example, the HMRC has identified the information it wants, so a company could simply start to tag more information for the XBRL warehouse. There are real benefits if the language is adopted, so finance directors should be excited about it."
Furthermore, those FDs who see beyond the mere compliance issues of XBRL and look to the long term stand to gain the most. Early adopters, especially if they are multinational corporations, could steal a march on their competitors and make the greatest improvements to the cost profile of transition to the new reporting language.
"Companies cannot afford to ignore it. They are already having to spend on XBRL in order to comply, so even for cost management reasons it is useful for large, multinational corporates to look at it on a global basis. Also, there is a good opportunity to incorporate the change as part of any scheduled overhaul of a company's ERP systems," notes Sharma.
Tipping the scales
There is no doubt that XBRL will shape the future of financial reporting around the world, and the inevitable prominence of its role has led a very few forward-thinking organisations to start looking for the internal benefits of the transition as well as the necessity of compliance. As these corporations realise the benefits that currently remain largely obscure to other companies, they will no doubt start a chain reaction similar to that already seen among regulators.
"There will be a domino effect. Many jurisdictions are rolling out XBRL initiatives, which will then cascade to other regulatory bodies. So, it will become the standard for financial reporting. That is why corporates should be pushed to use it for internal reporting eventually. It would be expensive for any company to do it on a country-by-country basis, so it could be better if they look at it globally and adopt a single strategy around XBRL," believes Sharma.
Fortunately, consultants like KPMG are ahead of the game. Advice is available not only to help with the nuts and bolts of implementation, but also to help reveal the strategic advantages of viewing XBRL in a wider context and gearing it towards management reporting.
"We are ahead of the curve. We needed a service offering to help our clients comply at first, but then also to help them with changing their internal reporting systems. Start with compliance as step one, but then look at what else you can do with XBRL. Now, the benefits are one-sided, that is true, but they will become more balanced in the long run," says Sharma. The new era of financial reporting is about to begin, and it could be greatly to the advantage of many FDs to meet the future with optimism about the opportunity XBRL presents rather than seeing it as yet another burden regulators have put on their shoulders.
"XBRL is the way of the world. It is coming and there is nothing anyone can do to stop it," Sharma warns.
"The early adopters will be the visionaries in financial transformation. They have already spent millions on consolidating financial information and XBRL will help them to realise massive benefits in the future, not only in terms of standardisation, but also cost."