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IFRS to XBRL: Is There a GAAP?

Deciphering the alphabet soup.

July 9, 2009
by Sukanya Mitra

First the U.S. Securities and Exchange Commission (SEC) was pushing U.S. companies to adopt eXtensible Business Reporting Language (XBRL). All of a sudden, they seem to have placed it on the back burner and shifted gears. They now want companies to shift from U.S. Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). Are these related? Can you or should you ignore XBRL? Is XBRL somehow connected to IFRS?

We recently caught up with Liv Watson, former VP at EDGAR Online and current Board Member at IRIS Business, to shed some light on these questions.

CFI: Now that SEC is pushing for convergence to IFRS, does that mean XBRL is taking a backseat where SEC is concerned?

Liv Watson: XBRL (eXtensible Business Reporting Language) is just a computer software language that is developed specifically for the automation of business information requirements, such as the preparation, sharing and analysis of financial reports, statements, and audit schedules. XBRL labels companies' financial and other data with codes from standard lists (taxonomies) so that investors, auditors and analysts can more easily locate and analyze desired information. XBRL taxonomy is a body of knowledge for some business domains and contains the experience, insights, rules, conventions and other insights and understandings of professionals which have an expertise within that domain.

IFRS and XBRL are not competitive at the SEC. The issue is if the International Accounting Standards Board (IASB) develops and funds commercial strength taxonomies that the market place can use and for the SEC to mandate that they be used. The IASB has not as of today made commercial strength taxonomies available to the marketplace. For example, IRIS Business Services recently tested the 2008 IFRS taxonomy for the Johannesburg Stock Exchange and found that the taxonomy needed a large set of extension. Based on our taxonomy experience, IRIS finds that more needs to be done in the area of taxonomy implementations by IASB to match the increasing pace of XBRL-IFRS adoption. The current status of the taxonomy does not meet the needs of today’s financial reporting practices.

Typically, financial reporting elements can be put into four categories:

  • Accounting Standard elements
  • Regulatory Reporting elements
  • Industry Specific elements
  • Company/Reporting Entity Specific elements

The IFRS 2008 taxonomy caters to the accounting standard elements sufficiently. However, it is inadequate for the reasons explained below:

  • Incomplete industry coverage for the taxonomy and incomplete depth in detailing the taxonomy. The IFRS taxonomy elements are strictly limited to the accounting standards defined in the bound volume. This limits the taxonomy coverage to a very small set of elements that a company typically reports. For any country to adopt the IFRS taxonomy, it is imperative to extend the taxonomy for including its country specific Regulatory Reporting elements. However, now the country will need to include generic Regulatory Reporting elements such as “Stockholder’s Equity, Director’s Interest and Shareholder’s Equity.” These requirements are common across all countries. The extensions would also need to include elements that are reported by companies common to an industry, across country borders. For example, elements such as “Cash with Central Banks, Deposits with Customers, Advances and many others” would need to be repeatedly extended by all countries adopting IFRS and XBRL.
  • Lack of built-in, hypercube-dimensional relationships. This requires extensive
  • XBRL technical knowledge by the reporting entity, which leads to a significant
  • increase in reporting burden. While converting the company annual reports using the IFRS-based extension taxonomy, IRIS observed that a well-trained analyst, with more than two years of experience converting document into XBRL instance documents, took close to 120 hours to complete the effort – 50 percent of the time was needed to generate link-bases to define the dimensional information. IRIS reduced the time needed by creating a template definition link-base for every industry specific and regulatory dimension dataset.

    IRIS created close to 1,100 taxonomy extensions for the eight companies across three industry sectors. This is in addition to the 445 Industry Specific extensions and 150 Regulatory Requirement extension elements.

  • Need for detailed documentation for the taxonomy elements. Documentation for an XBRL tag enables an analyst to pick the right tag for a reporting element and eases the task of deciding whether the taxonomy needs to be extended to include a reporting concept. It is the most preferred tool for the analyst. IRIS recommends that along with the IFRS 2008 documentation, the documentation for regulatory and industry specific extensions should also be made available.
  • Need for multiple languages support. IRIS is evangelizing the adoption of the IFRS 2008 taxonomy both in India and around the world to various companies implementing XBRL-based systems. Some of them are concerned about the delay in implementation that may occur, due to lack of a language label link-base that was previously available in the IFRS 2006 taxonomy.
  • Inadequate taxonomy release and management process. Version, release and change management procedures do not currently exist and need to be in place if participants are to rely on them. The taxonomies need to be categorized, catalogued, cross-referenced and documented for the user with extensive samples and guides. A formal feedback and errata process needs to be established to improve the quality of the taxonomies.

CFI: XBRL taxonomy was developed based on the U.S. GAAP. Will it need to be re-built because of IFRS? If so, what are the costs?

Watson: Taxonomies represent accounting frameworks so the taxonomy itself should not be a huge financial factor if the XBRL taxonomy becomes part of the accounting standard setting process. The convergences of both standards are probably a much bigger number and that is both a process and political so I feel that I am not sure able to give even a ball park figure. However, the XBRL part of the process is minimal if integrated into the accounting standard setting process.

CFI: When do you think private companies will be expected to use IFRS?

Watson: Within the next three years I think European Union (EU) will move towards a mandate to use the IASB standard for private companies. Another leading nation will be South Africa, in my personal opinion. They have always been a leader in being first to adopt international standards. The U.S. will lag behind, but hopefully, even they will wake up and see the benefits of one global standard.

CFI: Does U.S.'s embracement of IFRS mean the total demise of U.S. GAAP? If so, how long will the transition last that both will be accepted and when do you expect that GAAP will be obsolete?

Watson: The bigger question is what will accounting standard setting look like in the future and what  will be the role of FASB, in the global standard setting process? Will IASB and FASB Merge? Or will FASB still be setting standards? I think FASB will still have a role, a voice for U.S. needs but I think the landscape is going to look very different three years from now.

Conclusion

Interesting questions indeed. And possibly we will need till 2011 to find the answers. But till then, at least, it’s safe to assume that as the world gets smaller thanks to the Internet, a unified accounting standard will make life easier for the U.S. as well as the world at large.

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Sukanya Mitra is Managing Editor of the Insider™ e-newsletter group.