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With the backing of regulators, corporates and market practitioners around the world, a new electronic language known as XBRL promises to streamline data collection and analysis in a way that will benefit all participants in the financial services industry.
Corporate reporting has been one of the last areas of the business world to be influenced by the digital age. Producing, reporting and analysing company information is often a labour-intensive and tedious process, largely because most companies still rely on disparate systems to store and deploy much of the needed data. The fact that those systems speak different languages creates an added burden, as does the fact that the collection, collation and formatting of the information needed for running a business can be slow, prone to error and extremely costly.
However, this is rapidly changing with the development worldwide of a new way to assemble and distribute corporate information - from a variety of sources - to be used across different systems, both inside and outside a company.
 | A New Language
Short for eXtensible Business Reporting Language, XBRL promises to transform the world of business reporting. Reports that took hours to assemble using any analytical application can now be prepared, distributed and consumed in seconds using XBRL tags.
This tool works by placing self-describing tags around discrete pieces of information. Once those tags have been assigned, it is possible to extract only the desired information, rather than having to download or print an entire document. XBRL is also a very flexible tool; it will work on any operating system or computer, and allows users to exchange/import financial data created by different accounting packages.
As a result, business information can be identified, extracted, and presented in whatever way the user requires, with improved data accuracy and reliability. More information can therefore be gathered and analysed at little or no additional cost. In turn, that allows regulators such as Hong Kong Exchanges and Clearing Limited (HKEx) and the Securities and Futures Commission (SFC) to focus on regulating, rather than validating and consolidating information.
It is important to emphasise that XBRL is not a new accounting standard and it does not require any changes to existing accounting standards. Finance management still controls the level of disclosure; XBRL will not cause the company to make additional disclosures. Instead, XBRL allows more effective communication of what is disclosed and makes the information more manageable.
Gaining Traction
Companies such as Morgan Stanley, Reuters and Microsoft are among the many global names that have begun deploying or planning the deployment of XBRL, mainly in response to the expanded reporting requirements, tighter reporting timeframes, increasingly severe sanctions for data errors and imminent deadlines for new accounting rules.
XBRL is also becoming an integral part of the global movement towards e-government, in which government agencies increasingly leverage the internet to lower costs, operate more efficiently, enhance their performance and make valuable contributions to market-based business information supply chains.
Industry regulators, in particular, are embracing XBRL, requiring entities under their purview to submit their filings using the new standard. The regulators' aim is that XBRL will help them to: reduce information collection and processing costs; increase their focus on analysing and using information; enhance value by providing feedback to regulated entities in key areas that affect each particular industry; leverage other taxonomies (reporting standards and concepts) to reduce the cost of managing and maintaining proprietary information standards; and broaden dialogue with regulated entities through collaborative development of XBRL standards and taxonomies.
Among the regulators that already require or allow companies to submit filings using XBRL are: the US Securities and Exchange Commission, the UK Inland Revenue; the US Federal Deposit Insurance Corporation; the Australian Prudential Regulation Authority; the National Tax Agency of Japan; and the Bundesbank in Germany.
Financial Services Benefits
Because of the high volume of financial information prepared and processed by the financial services industry, it is in a unique position to leverage the new technology. For example, apart from streamlining their own business reporting processes, banks can use XBRL to radically reduce the time and costs associated with key business processes such as credit analysis and monitoring.
Credit is the most fundamental risk that many financial institutions take and manage. Traditionally, credit processes within different business units are supported by stand-alone information systems and reporting sub-systems that help manage credit analysis, decision-making and limit monitoring.
However, transferring information (such as financial statement data) from counterparties to in-house systems as well as from one standalone system to another normally requires inefficient, tedious and time-consuming re-keying and/or re-formatting of information. Such mechanical processes increase the risk of inputting/classification errors and reduce the efficiency of credit assessment and monitoring. In many cases, 80% of process time is allocated to data management with just 20% left for analysis.
The same challenges exist within the securities industry. Analysts face the same obstacles when they take financial information from listed companies and import it into in-house analytical tools. This too is an inefficient and time-consuming process, with more time spent on data capture than analysis. Worse still, because financial information from different companies is structured and organised differently, analysts need to "normalise" such information. That process is often based on the subjective judgement of the respective analyst. The unfortunate effect is that listed companies, having gone through extensive effort of preparing their financial information, sometimes find that it has not been accurately or completely reflected in the analyst's reports.
XBRL can address this limitation, resulting in more time for valuable decision making or in-depth analysis. Because XBRL provides users with a structure and procedure, it facilitates consistent analysis and reporting. It also helps ensure better data quality and data integrity, leading to clearer and more accurate business reporting. Information received can be directly recognised, manipulated and formatted, leaving users to concentrate on analysis and management, not on low-value-adding tasks such as collection or re-classification of data.
If all public companies filed their financial statements using XBRL, securities analysts could easily extract, aggregate, compare and analyse financial statement data much quicker, and straight from the source.
The benefits of XBRL at a glance
For companies that publish financial statements:
- more efficient preparation of financial statements;
- increased integrity of financial statements; and
- consolidated internal information stores.
For analysts, investors and regulators:
- better distribution and usability of existing financial information;
- quicker analysis and easier information retrieval; and
- versatile formatting, helping to tailor financial information to specific analysis and regulatory requirements.
For financial data publishers and data aggregators:
- efficient and streamlined information supply chains;
- lower operating costs associated with data collection and aggregation (for example unreliable or erroneous data feeds); and
- higher-value data.
Progress in Hong Kong and Mainland China
After a slow start, XBRL is now being promoted in Hong Kong by both the financial regulators and the business community. As part of a coordinated effort, a Preparatory Working Group (PWG) was set up in April 2005 with the support of the SFC and HKEx to help develop the technology in Hong Kong.
The PWG's aim is to identify regulatory and business applications of XBRL for financial reporting and to come up with a timeframe to implement this. With various steering committees to lead and direct the initiative, workshops and training sessions have recently been held to promote the use of this information standard.
Other jurisdictions have already moved ahead in the application of XBRL for financial reporting. For example, Mainland China has been actively adopting XBRL since 2003. Under the leadership of the China Securities Regulatory Commission, a number of pilot projects were initiated by the two stock exchanges. Since the end of 2004, China-listed companies are required to file summary half-annual and annual reports in XBRL format. The use of XBRL is likely to be broadened to cover non-financial and other ad hoc reporting by listed companies.
Because Hong Kong prides itself on being a major international financial centre, to maintain its status as an investor-oriented market it is necessary for it to seriously consider adopting XBRL, particularly since major exchanges and regulators around the world are increasing their pace of XBRL adoption. While the benefits for the consumer of financial information are clear, the push for information providers (such as listed companies and funds) to adopt XBRL will likely need to come from regulators or market forces.
However, before broad adoption is possible, it is first necessary to develop a Hong Kong XBRL taxonomy that supports Hong Kong Financial Reporting Standards and the disclosure requirements set by the Hong Kong Companies Ordinance and the Listing Rules. A possible pilot project could be considered with commitment of key listed companies on the HKEx (including the Exchange itself) to adopt XBRL as part of their annual and interim filings. Such an approach could be useful to show other companies the potential benefits and cost savings of adopting XBRL.
Who is driving XBRL?
XBRL International is a collaborative consortium of about 250 organisations, representing virtually all components of the business reporting supply chain. Consortium members have also committed to incorporate the consortium work into their products and services. Within individual jurisdictions, local jurisdiction bodies are set up to promote adoption and facilitate the development of local taxonomies and other supporting infrastructure. XBRL is available worldwide under a royalty-free license. For more information about XBRL, please visit XBRL International.
Long-term Benefits
Experience of XBRL projects worldwide to date suggests that those with the most chance of achieving long-term success often share the following characteristics: a strong and clearly articulated value proposition in terms of better, faster and cheaper reporting - a vision that requires much more than just technology; leadership from a single agency with participation from more than just one agency; and early, proactive and continuing outreach to the private sector to articulate the benefits.
The securities industry is one of the main sectors that stands to benefit most from adopting XBRL, and it is important to work in collaboration both locally and internationally to realise the benefits of reducing the cost while improving the quality of producing financial information. Leading private sector participation with strong regulator sponsorship is key to the success of XBRL adoption.
This article was first published in the January/February 2006 edition of the Hong Kong Securities. |
