How investors and management can take advantage of this new requirement
We are far from the days when an investor has to go through the trouble of ordering a record of reports from a printing house and get a stack of paper in the mail in order to review a company’s financial filings. As technology becomes more and more integrated with our everyday lives, the SEC is also taking steps to become more technically advanced in the process of financial filings and to provide more efficient ways for investors to review and analyze financial data. From the old school paper submissions to Edgar (Electronic Data-Gathering, Analysis, and Retrieval) filings, and now XBRL, people may wonder what the benefits of these new requirements are, other than saving trees. The fundamental purpose of accounting and financial reporting is to provide a better level of clarity and to help investors to better understand our business and industry. With the market becoming more and more globalized and financial reports becoming more extensive, the simple process of financial analysis is becoming more and more overwhelming for investors. However, with the new XBRL coming into play, investors are able to analyze financial data, and pin point what they need from thousands of numbers much easier with this new format of data submission.
Similar to Edgar submissions, XBRL (eXtensible Business Reporting Language) is written using a fundamental programming language, XML, using the XML syntax and related XML technologies such as XML Schema, XLink, XPath, and Namespaces. It is standardized and regulated by XBRL International, a global organization. Originally developed only for the purpose of exchanging financial data, business regulatory agencies such as the SEC and HMRC soon realized that it can offer much more than simple data communication and has since pushed for the adaptation of XBRL in financial reporting. In recent years, XBRL submission became a requirement for SEC filings of quarterly and annual reports for public companies in the United States. Many other countries are also making the commitment to implement this process in their reporting standards leading to a globalized standard of reporting.
The biggest difference of XBRL data from traditional data submission is that XBRL uses tags to separate each data entry to its own individual “data element” and then reorganizes these individual data elements based on the method of output. This means the raw data can be easily displayed in different formats without repetitive entries. This allows investors or management to be able to extract and display the financial data in any method they choose. It is also easily searchable, and since it is a language specifically written for business and financial reporting it eliminates the overwhelming inflow of junk data that a regular search engine would bring. The standardized Taxonomy used for the tagging provides standard definitions for terms defined by GAAP, which helps set a guideline for filing companies in reporting their data, making it much easier for investors to compare company’s year to year data or even to compare company to company data. The truth is, no matter how specific GAAP gets, accounts with the same items and same calculations don’t always have the same account names, but with XBRL, they will have the same tags. So, with a viewer software, investors will be able to not only view this data in the format they choose, compare and analyze specific data, review the definition of account names and terms, but will also have a quicker understanding of the companies’ financial position. When the XML files are imported into the viewer software, it will be recognized as individual data elements based on tags and the investors will be able to generate analysis based on their focus, such as a comparison of income statement items between company A and company B. Other than the basic viewer software offered by SEC on http://www.sec.gov, filing software companies such as Webfilings and Rivet Software all offer additional detailed XBRL viewer software.
XBRL not only helps the investors in data processing, but companies and regulatory agencies can also benefit as it provides a convenient way for them to manage data. Data from each year will be stored and can be traced back and compared easily. Generating reports and analysis from these data can be computerized and is much more efficient. The use of the standardized Taxonomy for tags will allow regulatory agencies to better review and audit the financials of the companies. The XBRL language serves as a standardized method for communications between the company, investors and regulatory authorities.
Even though XBRL application has been modified and tested for years, it is by no means a perfect process. The biggest obstacle for a successful global implementation is the learning curve. It will take some time for companies and investors to get familiar with reviewing data using XBRL. Another obstacle is in the development of the software. Currently, there isn’t an efficient way to convert and extract XBRL data, because it is a language used only for business reporting and not as widely used as other languages such as html, there isn’t a perfect way to complete this data process. XBRL data input currently still requires a large amount of time spent on manual tagging and editing and there is no direct converting method from accounting and ERP systems to XBRL data, but hopefully that will change soon.
Since the establishment of the XBRL language, there have been many changes in the details of this process. It is an innovative idea; this process and its application have great potential for further development and expansion. There are still many challenges and problems with the process and will have long ways to go before reaching its maturity, but with so many dedicated specialist and increasing number of interested users, this will definitely become the main stream financial data processing language in the near future.
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