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XBRL
- 1. eXtensible Business Reporting Language (XBRL) David Naseem
- 2. Why is XBRL needed? Problems with Current Financial Reporting Paradigm User Friendliness Reluctance to use electronic statements Different File Formats Financial Statement Layout Search Engines Not viable – Low accuracy Modified for different Purposes Traditional statements need to be modified for different purposes
- 3. Introduction and How XBRL works Based on eXtensibleMarkup Language (XML) Used for all business communications At its most basic level it is a ‘tagging’ mechanism Grants the ability to ‘tag’ data inside financial reports Financial and Non-Financial data is tagged based on universal taxonomies Examples of tags are: ‘Cash’, ‘Equipment’ etc. Taxonomies A bit like dictionaries – contain tags, tag definitions, XBRL specification and the relationship between tags Many different available based on data: USGAAP, IFRS etc.
- 4. Introduction and How XBRL works Implication: Allow all users to understand financial statements Open source – supported by the XBRL consortium Platform independent Currently required in: China, Japan, Korea, Singapore and Spain Will be required in Canada after fiscal 2011 Partially required in the USA, full implementation in 2011 Supports both financial and non-financial data
- 5. How XBRL works Four documents that are key to understanding: (1) XBRL specification; (2) Taxonomies; (3) Instance Documents; (4) Style Sheets XBRL specification “the fundamental technical definition of how XBRL works.” Taxonomies Instance Documents Cannot be read by humans – only machine-readable Style Sheets Convert instance documents into human-readable statements
- 6. The XBRL process Final Output
- 7. Impact of XBRL on the CA Profession Remember AFM 401? What is the primary objective of accountants? Reduce information asymmetry Study findings (Yoon et al. 2011) XBRL reduces information asymmetry in markets Statistics: coefficient -0.05, p-value 0.00 Implication: allow CA’s to fulfill their overall goals Assurance implications Audit Approach – Control reliance necessary
- 8. Top Management and Practitioner and Industry concerns about XBRL CFO views Increase costs – no benefit to internal processes Benefits relating to XBRL adoption are unlikely to be seen for several years Not one taxonomy is robust or flexible enough for all businesses Ability to form a ‘custom taxonomy’ – large risk Huge issue – analysts will not obtain any benefit Errors in tagging – take a lot of effort/time to correct ‘Tag management’
- 9. Assurance Issues and XBRL Plethora of assurance issues Lack of auditing framework Current guidance from AICPA and PCOAB is inadequate Need a new methodology for auditing XBRL documents Traditional audit concepts break down under XBRL Risk of material misstatement/Materiality Sampling – only gives # of incorrect tags
- 10. Recommendations For most issues best course of action is to wait However there is guidance from academic sources if conducting audits Data-Level Assurance Provide assurance on individual tags Overall, need guidance from professional guidance before auditing.
- 11. Thank you
Editor's Notes
- Hi everyoneMy name is DavidNaseem and the topic that I will be covering in this slide cast is
- User FriendlinessWidely regarded as not as user friendly as paper statements.Reluctance to use paper statementsTakes time to find statements, extract relevant data and then analyze it.Companies use many different formats to publish their financial statements on the web.Such as PDF, MS Office, HTML and some companies even use flash to render their statements for interactivenessThis makes converting between formats very difficult and sometimes instead of figuring out how to change a PDF to an excel file it is almost easier to just deal with paper copiesAnother problem could be the financial statements themselves, say you are an investor looking for information about a company’s receivables, the company could have information scattered throughout the annual report regarding them, in the MD&A, financial statements and also the notes.Therefore unless you read the full report you cannot be sure that you have got all the information regarding receivables. Therefore now you might think, hey why not use search engines. Believe it or not this practice has alreay been tried and it has not worked very well. The problem is that for a search engine to be able to index across the different file formats it must be a full-text index search engine. These search engines are known for their low accuracy. Further, even if a search engine was accurate, the layouts of the financial statements still makes it difficult to find related information like disclosures or additional information.Traditional financial statements need to be modified for different purposes and users such as, the SEC, Investors, Banks and the company’s own internal purposes. Companies spend a lot of time and energy doing this which does nothing to help the actual business and wastes valuable resources that could be spent elsewhere.Therefore, we can clearly see that there are significant problems with the current financial reporting paradigm. These all have given rise to the need for a new standardized reporting format, XBRL.
- Based on eXtensibleMarkup Language (XML)It is a language specifically designed for business communications.Unlike the current formats mentioned before, XBRL can be used to communicate both financial and non-financial information.At its heart XBRL is a tagging mechanism that gives users the ability to ‘tag’ data inside financial reports for easy retrieval, data extraction and manipulation.Anyone who has used facebook is familiar with the concept of tagging, in facebook you can tag somebody in a picture and then when you want to see all the pictures of that individual you can see all their tags.The financial context is not very much different except that all tags are based on pre-determined taxonomies. Some examples of tags can be CASH EQUIPMENT etc. corresponding to line items on a balance sheet etc.Taxonomies are a bit like dictionaries as they contain all of the tags that can be used to tag data, the definitions of those tags and the XBRL specification which is the actual XBRL language and its syntax etc. The taxonomies also contain the relationships between the tags for example some of the relationships can be the relationship between COGS and Inventory or the classification sttructure of the financial statements that CA are a subset of Total assets which must equal Equity + liabilities.There are many different taxonomies available based on the types of data being tagged for example, there are taxonomies for USGAAP, IFRS etc.
- An implication of what I have been talking about is that XBRL will allow all users to understand financial statements since the taxonomy and linkbases define each tag and the relationships between them. This means that anyone can pick up a set of financials and understand how well the company performed in the period. XBRL is completely open source and does not involve paying for any additional software.It is also supported by the XBRL consortium which is an organization that is in charge of developing the XBRL platform.XBRL is also platform independent meaning that it will work across all software platforms, The XBRL consortium has been sucessful in persuading countries to use the platform, with large markets such as China, Japan, Korea, Singapore and Spain that require the use of XBRL. XBRL will be required in canada after 2011 fiscal year ends. This was done to give a break to companies as 2011 was the year for full ifrs implementation.In the US there is currently partial requirement, large corporations with a market capitalization of $5bn or more are required to file statements using XBRL.
- There are four main documents that are key to understanding how XBRL works, these are the XBRL specification, the taxonomies that we have already talked about, instance documents and style sheets.The XBRL specification provides documentation about XBRL, the framework of XBRL and explains the syntax needed to create instance documents. The current version of the specification is 2.1 and it is available free from xbrl.orgTaxonomies we have already discussed before, they contain the tags/relationships between tags, the defintions of the tags etc.Instance documents are essentially the coming together of the specifcation and taxonomy used on financial data.Say a company prepares its balance sheet for december 31 2010 and then tags it using the USGAAP taxonomy with the current taxonomy. The resulting data with the tags is known as an instance document. However this document cannot be read by humans as it is meant to be read by machines/software.Style sheets convert the instance document into human-readable financial statements, that don’t look very different from the paper financial statements that we are used to.
- - This is a visual representation how the XBRL process works. Please feel free to pause the cast at this point to review this slide if anything that I described earlier was unclear.
- I will now discuss the impact of XBRL on the CA profession.Remember back to AFM 401, we learned that the primary objective of accountants was to reduce information asymmetry. There are numerous studies done that confirm that XBRL reduces information asymmetry. The most recent study done by Yoon 2011 finds that XBRL reduces information asymettry and they found very significant evidence for the above, the coefficients were -0.05 and the p-value was 0.00 suggesting highly significant evidence was found for the decrease in information asymettry. The implication of the above is that XBRL will allow accountants to reduce information asymmetry and fulfil their overall goals.Currently the SEC and Canada do not require any assurance over XBRL documents, but this will change going forward as more and more corporations use XBRL. CA’s will be called upon to provide assurance on these documents, this will increase the role that CA’s play in the financial markets even more. CFA institute did a survey of all its members and only 3% felt that assurance over xbrl documents would add no value, so there is a high likelihood that CA’s will be called upon to provide assurance over XBRL documents. Further the audit approach will be fundamentally changed as well. Currently auditors have two main auditing approaches, control vs substantive approach, since auditors will be called upon to provide an opinion on the XBRL documents, this will mean that CA’s will have to increasingly rely on controls to complete the audit.
- Practitioner and industry professionals are also concerned about XBRL and some share similar feelings as top management. That is that they are not very excited about XBRL. The first reason is that the benefits relating to XBRL adoption will not be seen for many years. If you ask any analyst they will tell you that the real benefit of XBRL will be when there is tagged financial and non-financial data over a number of years. This is unlikely to happen for the next several years because, Canada will only require XBRL after 2011. and in the US the SEC has given companies a grace period of 1 year before they have to tag non-financial information such as the MD&A. Usually SEC rulings are persuasive and canada is likely to follow what the US is doing.The next concern relates to the taxonomies used, there is no one taxonomy that is flexible and robust enough for all businesses.Currently xbrl allows users to add their own data tags etc. to the taxonomy to form a ‘custom taxonomy’. This is a huge issue because if this is done then most companies will choose to make their own taxonomy. Analysts will not realize any benefits and due to the sheer number of different taxonomies that will exist. There is also the potential of needing to correct mistagged items which will waste a lot of time and effort to fix. There is also the issue of tag management where a company can mistag certain items deliberately to mislead investors. i.e. tagging some debt as equity etc. Two investors one using paper statements and another using XBRL may arrive at different ratios.
- Lastly I will be talking about assurance issues. There are many assurance issues but I will only be covering 2 in this slidecast. First issue is that there is a lack of auditing framework for XBRL documentsThe current guidance from the AICPA and PCOAB has been to ensure that the paper statements and xbrl statements look the same.Just because the statements look the same, does not mean that the company has tagged all items appropriately. There are new rules in the works that will make it mandatory for auditors to test the appropriateness of tags. Unless there is a framework of assertions and objectives, the audits will not be adequate. The next issue that I want to cover is that a new methodology is needed for auditing XBRL documentsThis is because everything we know from auditing financial statements does not necessarily apply in the XBRL context.The risk of material misstatement and materiality are based on the amount that will cause a user to change financial decisions. This concept cannot be translated to XBRL audits because companies have the ability to show extracted information to users. SO an amount that could be fairly stated within the context of the financial statements as a whole, may not be fairly stated by itself. so the concept of materiality breaks down.Further sampling does not work either, if we sampled tags, it would only give the approximate number of tags that are inappropriate in a given sample. It is easy to think of a scenario where a large number of inappropriate tags may be immaterial and equally easy to think of a scenario where only a few tags can make a material difference. If we don’t sample and test 100% it could cost an enormous amount of time and money and it will not be feasible from a cost benefit perspective.
- For most of the assurance issues that I found I thought the best course of action is to just wait until there is adequate guidance to providing assurance for XBRL documents. There does exist academic guidance, in my report I found some papers that developed an auditing approach and methodology. There is also another type of assurance that has been proposed. Data-level assurance, in this type of assurance the auditor will attest to individual tags for their accuracy. So overall CA’s need to wait for adequate guidance regarding XBRL audits.
- Thank you very much for you time, this concludes the slidecast.