To SEC Chairman Christopher Cox, XBRL (eXtensible Business Reporting Language) is the next revolution in financial reporting. The technology’s proponents assert that it will significantly reduce manual effort, strengthen internal controls, enhance financial statement comparability and level the playing field for all investors. Data that is trapped and lacking context, such as information within PDF or HTML files, can now be electronically accessed and manipulated in seconds from your desktop.

Sold? Apparently not. Despite its benefits, fewer than 100 of the 10,000 public registrants have submitted an XBRL filing under the SEC’s voluntary filing (VFP) or test pilot programs. Why the reluctance?

Our experiences at United Technologies Corporation (UTC) over the past two years as an early adopter of XBRL have led us to conclude that companies have been slow to embrace the technology for three principal reasons:

• A lack of knowledge or understanding of XBRL.
• Misconceptions regarding resources required, including cost and technical proficiency.
• The perception that there is little benefit to participating in the process.

In early 2005, we faced these same issues as we sought to determine the implications of XBRL on our financial reporting processes. Through the effort of tagging and furnishing our first document (an 8-K earnings release), we were able to gain a practical understanding of XBRL that we hadn’t been able to achieve previously and to dispel the misconception that the process is expensive and time consuming. But more importantly, we began to fully appreciate the capabilities and potential of XBRL as well as the benefits of early adoption.

In the two years since that original XBRL filing, we have tagged and furnished all subsequent earnings releases, a complete form 10-Q and all of Part II of our form 10-K. More importantly, we have built our internal processes and controls to support the ongoing tagging and filing as part of our standard financial reporting process.

What Is XBRL?

XBRL has been likened to a bar code for financial statements. An electronically readable tag (bar code) is put on each financial statement element, which provides additional context. Staying with the analogy, if you looked at the bar code on an item in the grocery store, the code would contain a series of bars with little relevance to you. However, with the proper tool to read the code, it would tell you the product, the size, the cost, the vendor and the expiration date. XBRL operates in a similar fashion. The electronic tag assigned to each financial statement element contains further information or context regarding that element.

If, for example, you apply the tag for gross margin to the gross margin line on your income statement, a tool that can read XBRL would tell you the line item is gross margin, how it is defined, what the balance is, what currency it is in, how accurate it is, what period it covers, and for what company. The electronic tags that are applied are standardized and are contained in taxonomies (essentially the dictionaries used by XBRL that define the specific tags for individual items of data) that have been developed and are maintained on the XBRL Web site. The tags are applied using a tagging tool that retrieves the tags from the standard taxonomies and applies them to whatever format your financial statements are created in, such as Microsoft Word or Excel.

The benefit to users of financial statement information is that they can now electronically retrieve data in a matter of seconds with the additional context that is provided by the tags and with greater assurance of accuracy given the standardized context of the tags. Although standardized, the expandability of the taxonomies allows company-specific and unique information to be captured and reported accurately. Because XBRL uses standardized XML technology, it can be read by multiple, diverse software systems.

Common Misconceptions on Cost

Not surprisingly, resistance to the adoption of XBRL often takes the form of cost or resource concerns; however, neither need be a valid obstacle. The only required out-of-pocket cost is for the tagging software, of which there are several options available and which cost as little as $1,000. Each of these tools is designed with the layperson in mind, takes very little time to learn and does not require a technical knowledge of XBRL (or XML — the language of which XBRL is a dialect).

Our initial effort at tagging and furnishing an XBRL document to the SEC consumed approximately 80 hours of an employee’s time. But to adequately evaluate this commitment, it is necessary to understand the scope and context of the effort. The hours included not only the time to tag the underlying document, but also the time to learn how to use the tagging tool, understand the requirements for filing under the SEC’s VFP, create tags that did not exist in the standard taxonomy, and to build a process that would allow the ongoing tagging and filing of documents. Our current effort to tag and file an 8-K earnings release is down to approximately four hours now that the learning curve has been eliminated.

Also important to evaluating the initial time commitment is the ongoing development of the tagging tools, the skills of the individuals involved and the extent of any custom tag development that may be required (known as “extensions” as they extend the existing standard taxonomy). Since our initial efforts almost two years ago, the tagging tools have become significantly more robust and comprehensive. This facilitates the tagging effort and allows for the efficient creation of new tags and the editing or correcting of previously tagged data.

Knowledge of XML would help the tagging effort, but it is not required. We have tagged and furnished our nine filings to date using internal staff, none of whom had, or have, a working knowledge of XML. Lastly, the current voluntary filing regulations only require the basic financials to be furnished; therefore, depending on how complex, simple or unique these basic financials are, you may be able to use only the standard taxonomies and not develop any extensions. For example, at UTC we report revenues and operating profit by business segment, so we needed to provide extensions for each of these segments.

Why Participate Now?

With the never-ending demand placed upon finance organizations, the need to prioritize and focus resources invariably arises. While individual circumstances will dictate how this is done at each company, there are several strong reasons to consider XBRL among these priorities.

Although the SEC has deferred responding to inquiries on whether XBRL will be mandated as a filing requirement, the agency has nonetheless taken significant actions that would suggest it is a strong likelihood, including the recent $48 million upgrade of EDGAR to accept interactive filings, and the $5.5 million project with XBRL US to fund the development of U.S. GAAP taxonomies. Given this potential, it would seem advantageous to set up processes and work through the learning curves now, in the open and relatively unconstrained environment provided by the VFP, rather than at some future point when the filings are subject to the content and timing requirements of current documents.

In a similar vein, the SEC has structured the VFP with an avenue for companies to provide feedback on the XBRL process. Therefore, by participating now, preparers, analysts, auditors or any other constituents in the financial reporting supply chain can help develop an efficient, effective and workable process that takes into account their particular needs and circumstances. As with the SEC, the tagging software vendors are eager to receive feedback on the ease of use, features and effectiveness of their tools.

Future Benefits

So, there isn’t a cost barrier, the tools are available, technical knowledge of XML is not required, the resource commitment need not be extensive, and there are a number of reasons to begin participating now. But this is all reactive information. The benefits to XBRL come in the future when tagged information is readily available from all companies and can be accessed electronically for analysis, benchmarking, reporting uses and financial modeling. Not only can XBRL enhance external financial reporting, but it can also be applied internally for cost accounting, performance measurement, analysis and decision-making purposes.

Analysts and investors will be able to dramatically increase their breadth of knowledge with data readily available that does not require hours of manual manipulation. The data will be much more accurate and comparable; and context to the numbers will be accessible, ensuring they are used correctly. While these attributes will benefit preparers, the integration of the technology into companies’ accounting and reporting systems will produce the real benefits, especially through significant reduction in current manual efforts.

John Stantial, CPA, is a contributing writer for the Journal of Accountancy. He is director of financial reporting for United Technologies Corporation. His views as expressed in this article do not necessarily reflect the views of the AICPA or the Journal of Accountancy.

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