As XBRL continues to permeate the corridors of our financial system, who better to bring some clarity to the table than America’s accountants? With the recent announcement of a three-year deal between the developers of XBRL and the nation’s leading accountancy association, the XML language is in good hands for its next stage of expansion. XBRLglobal spoke to American Institute of CPAs (AICPA)’s President and CEO, Barry Melancon, and the Financial Accounting Foundation (FAF)’s President, Terri Polley, to get their views on the range and limitations of XBRL applications for the accounting profession.
After wooing the US Securities and Exchanges Commission (SEC), XBRL US now has its eye squarely on the accountancy profession with a three-year joint research project announced in April this year.
The project – in reality, an extension of an ongoing relationship - aims to further develop the interactive data tags developed by XBRL US for financial statements.
Under terms of the deal, the two sides will “foster the continued high quality and effectiveness of the US GAAP taxonomy, and promote interoperability and consistency between future versions of that taxonomy... with other financial reporting taxonomies that XBRL US will develop and implement.”
An industry blogger, Bill Sheridan, of the Maryland Association of CPAs (MACPA), called the deal a “little more protection against the next financial meltdown,” with its focus on bringing greater transparency to the industry. He later went as far as claiming the move could “redefine our financial system.” Speaking to XBRLglobal, a more measured FAF President Terri Polley described the deal as being “an unmissable opportunity to build a more transparent market using XBRL taxonomies.”
The research agreement builds on work already undertaken between the gatekeepers of the XML standard, XBRL US, and the American accounting profession body. “We’ve worked together since 2006 to apply XBRL to US GAAP accounting standards, with the focus being on allowing companies to digitally ‘tag’ complex financial statements using a common language,” explains Polley.
The partnership was obviously a success, as within three years, the US Securities & Exchanges Commission felt confident enough in the 15,000-strong tagged language to issue rules requiring public companies to begin using XBRL in the preparation of their financial statements.
“After the success of our partnership with the SEC, they asked us to take over the maintenance of the taxonomy. With the first version already off the ground, it made sense. We needed to ensure that US GAAP and XBRL stayed on the same page, and there was a lot of scope for sharing of expertise,” explains Polley.
For XBRL US Labs, the research and development arm of XBRL US, the deal also made good sense. “It allows us to continue to support and provide the technical expertise, while making sure that the taxonomies develop in a way that is in line with the expectations of the accounting profession,” says Barry Melancon, President and CEO of the AICPA, who also chairs the XBRL US board.
Interoperability and consistency
The next stage, according to Polley, is to promote interoperability and consistency between future versions of the FAF-developed GAAP taxonomy and other financial reporting taxonomies that XBRL US will then develop and implement. “It’s not about XBRL handing over the reins; it’s about a partnership between our two organizations and about bringing together technical expertise with the kind of network the accounting profession brings,” explains Polley.
Melancon agrees, “the collaboration between XBRL US and FAF is a powerful combination of technology applications and accounting standards. We’re building on an already solid and tested foundation to expand XBRL adoption in the public and private sectors.”
For Polley, it’s not just about expanding XBRL tags into new avenues of financial or business reporting; FAF, she believes, also plays a key role in the understanding of national and global standards.
“First and foremost, we see XBRL as a critical and central component for shaping and better informing the standard-setting process. A better standard-setting process results in better standards. Better standards result in better information,” Polley says.
On a practical level, and parallel to raising general awareness of the value of standard-setting, Polley says the focus of FAF will remain firmly on GAAP. “The beauty of GAAP is that you know where you’re heading. The information is out there, but what we’re seeing is that it’s not being provided in a very efficient way. XBRL pulls it together. We currently have some 15,000 tags and we’re looking to enlarge this footprint and bring greater clarity to financial statements.”
Melancon also believes in keeping XBRL focused on what matters to the profession. “GAAP is and was the priority behind the expansion of this partnership between XBRL and the FAF. It is the solid base from which any expansion begins to flow.” Melancon, however, cannot resist looking ahead of the curve. “While GAAP is a key focus, if it was just about GAAP it would not be as interesting. It’s about broad and multifaceted uses of XBRL” adds Melancon.
Facing the critics
XBRL’s development has not been without its critics. A common perception is that the tagging of data is an additional burden on the provider of the source information.
“This isn’t something that we’re imposing on people. It’s a combination of market forces and regulatory pressure and support,” says Melancon.
Moreover, Melancon points to the need for more clarity, especially in the face of the global financial crisis. “The global financial crisis has certainly given us more focus. The financial industry is shifting and we’re seeing more economic and political impetus to improve accuracy, accountability and transparency.”
Polley is equally resolute. “We need to communicate strongly the benefits of XBRL. It’s a win-win for all participants in the capital markets. More information is readily available, better analysis can be made and better capital allocation decisions can be made.”
“We look at it from both sides of the information cycle, and with this enhanced provision of information, the supply side and the demand side are better off.”
Melancon remarks on the strong support that XBRL has already garnered. “The major accounting firms were on board from day one. They’re on the XBRL US board, and they’re effecting change via their wide networks of service providers and clients.”
However, some detractors reference a lower level of interest among smaller firms. Melancon notes,
“It’s a natural progression to see the larger firms leading adoption, especially with the likes of the SEC
mandating the use of XBRL, but we need to be mindful of the next tier of industry players. We’re now working on XBRL taxonomies for non-profit foundations, which are typically served by the smaller firms. If this is successful then we can scope broader XBRL tax applications. Ultimately, we believe XBRL will be used for financial reporting for private companies, as well as public companies.”
“Once people fully understand these benefits, we know the demand for XBRL information will continue to
increase,” adds Polley.
Other areas for development include extending XBRL’s reach outside the US via the ongoing convergence of the US GAAP with the International Financial Reporting Standards (IFRS). “XBRL International, an extension of XBRL US, has been very active in developing similar taxonomies for IFRS,” says Melancon.
A pragmatic approach
Polley agrees: “We’re taking a phase in approach. We’ll go at the pace that the industry wants, based on supply and demand, but GAAP is already well established among international bodies and regulators, so this would be a natural progression.”
It seems a sensible approach and one that has so far kept much of the profession onside. Turning back to Bill Sheridan, the MACPA editor takes a similarly pragmatic view. “Am I saying XBRL is a magic financial bullet? Not at all. But it couldn’t hurt, could it? The demand for accurate, timely and transparent financial information is as high as it has ever been, and XBRL promises to deliver that information and make it easy to understand. From where I sit, it’s hard not to look at XBRL and be intrigued.”