XBRL: The Inside Story

After years of development, data tagging seems little more than a minor financial-reporting requirement. Yet some now say it could transform internal finance operations. Is this XBRL's true calling, or just more hype?

After more than a decade of hype about the benefits of coding financial data with XBRL, the good news for companies now required to do so is that it seems relatively easy and inexpensive. While in the final analysis XBRL may not add much value, preparers say, at worst it is a minor inconvenience.

That's a somewhat deflating description. Former Securities and Exchange Commission chairman Christopher Cox staked much of his now-tattered reputation on the investor benefits of XBRL. Others claimed it would streamline international accounting convergence and render differences in financial-statement presentation all but moot. And it may yet do all of those things.

Now, however, advocates are pointing to a completely different area that may benefit from XBRL: internal management reporting.

Put simply, the premise is that tagging information in financial and other IT systems in a standardized format would make it easier for companies to share data across units and departments. That in turn would improve internal reporting, the argument goes. Notably, companies would be able to view performance as reflected in various line items on a continuous real-time basis, rather than waiting for the end of a reporting period to get the full picture. Better business decisions then could be made, and more quickly.

This month a major industry group, the Institute of Management Accountants, formed an XBRL Advisory Committee to build awareness that data tagging can do more than satisfy compliance requirements. "We're focused on moving XBRL down internally into organizations," Nevada State Controller Kim Wallin, the committee's chair, told CFO.com. "We feel it's a great tool for business intelligence, getting rid of spreadsheets, and improving internal controls."

Nevada is regarded as a pioneer for its use of XBRL to improve reporting on, and increase the efficiency of, debt collection and the awarding of grants. It remains to be seen, though, how soon companies generally might begin to realize any benefits. Tagging internal data would require additional development work beyond that done for public financials. For most, thoughts of using XBRL to improve the business are far off the radar screen, or at least have been stalled by the recession.

"Right now organizations are only funding projects they see as strategic," says John Van Decker, a research vice president with Gartner Group, an IT advisory firm, which recently issued a report that urged companies to work toward internal use of XBRL. "An XBRL initiative actually would be strategic, because it could improve management reporting, but I don't see that most companies understand what it can provide," says Van Decker. "It's just thought of [as] something that will need to be done for external financial reporting."

(The SEC has mandated that all U.S. public companies file data-tagged financial reports by 2011, starting with the 500 largest for periods ending after June 15 of this year.)

Software Shortfall

But even companies that have a high opinion of what bringing XBRL to bear internally could provide are not rushing in. At Microsoft — which began filing data-tagged financials in 2004, even before the SEC organized a voluntary early adoption program — there has been talk of using XBRL for a current project to upgrade internal reporting, but no action.

That, said Bob Laux, the software giant's senior director of financial reporting, is because vendors of enterprise resource planning and general ledger systems have not yet embedded XBRL functionality designed specifically for internal reporting purposes.

"In our opinion, these systems just don't make it as efficient as it needs to be," Laux told CFO.com. "Compared to the amount of information that's going to be reported externally, tagging all the information that a company has available internally will be quite a daunting task. It needs to be made easier — and I think it can be, through the software companies. So we're looking at it, but like other companies, we haven't implemented it."

XBRL's potential for internal efficiency "is pretty large," added Laux. "It's a daunting task, but not so daunting that you just ignore it. But I think it's going to take a few years."

According to Laux, "there's been maybe a lot of hype [from the XBRL community] and an overpromising of what can be done. I'm a strong advocate and think these things can be done, but they take time." For the software companies, he noted, there is an understandable Catch-22 factor: there's little interest in building the capabilities until demand increases, but there may not be much demand until the tools are created.

Gartner's Van Decker agrees. "Companies are waiting because the ERP vendors have not seen the demand," he says. Both Oracle and SAP, he notes, have formed partnerships with UBMatrix, an XBRL taxonomy firm. However, he says, "The XBRL capability they've inserted has been primarily for external reporting. They've tacked it on to the financial consolidation as opposed to building taxonomy values into the ERP and general ledger systems. The management reporting perspective is pretty much being ignored."

The Gartner report counseled companies to "monitor the market closely for developments in technologies that embed XBRL into business applications."

Asked to respond to Laux's and Van Decker's comments, James Fisher, SAP's senior director of solution marketing for enterprise performance management, wrote in an e-mail: "Aside from regulatory reporting, there are essentially no legal requirements for management reporting. This is a likely reason why XBRL adoption outside of financial statements is low. With SAP BusinessObjects XBRL Publishing, users can tag any data from any part of SAP, and create taxonomies as needed for internal reporting purposes."

Oracle, also asked to comment, did not respond by press time.

Meanwhile, a Gartner survey of 256 companies portrayed the low demand: less than 5% said they currently plan to use XBRL for internal reporting purposes. About half of the surveyed companies were privately held, and they were even less likely to report interest in internal usage, Van Decker says, though he notes that the benefits would be equal for public and private entities.

Even for public companies, the benefits would be more recognized if they took on the task of implementing XBRL for purposes of their public filings themselves, rather than outsourcing it to their financial-statement publishers, according to Van Decker. "I think public firms that are actively involved in XBRL projects will see the advantages for management reporting," he says, "but if they just let the publisher handle it, they won't see that opportunity." About 90 of the 100 firms in the SEC's voluntary adoption program took the outsourcing route, according to the Gartner report.

But Van Decker adds that he suspects demand will start to rise as business growth returns and more funding for new projects becomes available. If a few companies were to establish themselves as pioneers with models for implementation that could be emulated, adoption levels would rise dramatically, he suggests. "We need more examples like Nevada," he says.

Escape from Hell

Nevada's Wallin referred to the state's initiative using XBRL to streamline its debt collection, which is still in test mode, as its "spreadsheet from hell project." And, she noted, "every company has some spreadsheet hell."

State agencies turn over debts they can't collect to Wallin's office for transmittal to outside debt collectors. Historically, the information was provided on Excel spreadsheets, but in many different formats. "We had 71 different spreadsheets in the debt-collection area alone," she said.

So the controller's office would have to cut and paste data from certain spreadsheet cells into a master, single-format spreadsheet. Then as payments were received the process would have to be done in reverse, with information on the payments cut and pasted back into spreadsheets in the formats used by the individual agencies. "It was a lot of work and fraught with reconciliation issues, and also internal-control issues because we were manually manipulating the data," said Wallin.

The XBRL project is eliminating all of that, she said. Spreadsheets from the state agencies containing debt data are tagged and sent to a repository containing a debt-collection taxonomy. From there, Wallin's staff can generate XBRL-tagged reports on the debts and send the reports to the debt-collection agencies, which send back payment data on the same XBRL-tagged reports.

Data tagging is being used similarly to improve the reporting on state grants, which also formerly involved a laborious process of manually entering and cutting and pasting information.

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