A new system Featured

8:00pm EDT May 26, 2009

Numerous businesses across the country have begun making changes to their financial reporting process to use the eXtensible Business Reporting Language (XBRL). XBRL was proposed last year by the U.S. Securities and Exchange Commission to encourage public companies and mutual funds to use interactive data, making it easier for investors to use and receive information from SEC filings.

Companies using U.S. Generally Accepted Accounting Principles with a market capitalization of more then $5 billion — approximately the 500 largest U.S. companies — were required to begin making these financial disclosures for fiscal years ending in late 2008. All public companies are required to change over to the new system by 2011.

“With these Web-based applications, investors can find, view, download and even analyze financial and other information more quickly when the information is submitted as interactive data instead of text,” says Ernest A. Capozzoli, associate professor of accounting and information systems at Kennesaw State University, Coles College of Business.

Smart Business spoke with Capozzoli about what XBRL is, how these changes benefit companies, what problems can occur when changing to the new system, how to prepare for the changes and how exactly to file an XBRL financial statement.

What is XBRL?

XBRL is part of the eXtensible Markup Languages that provide a standard means of communicating information electronically between businesses and on the Internet. Each disclosure item, or number in the financial statement, is assigned an electronic tag. These tags are standardized and published in taxonomies according to standards established by XBRL International and XBRL U.S.

XBRL enhances U.S. GAAP financial filings because it makes data interactive. Previous financial filings were done using plain text, requiring extensive manual re-entering of the text into a format suitable for financial analysis, such as a spreadsheet or database.

XBRL is an international effort. Taxonomies are being developed all over the world in countries such as China, Spain and Japan. In the U.S., all companies filing with the SEC, more than 10,000, will be impacted. Private companies not required to file with the SEC are unaffected by XBRL.

How do these changes benefit companies?

Data associated with financial statements is structured in an electronic format that makes it easy to use. Financial reporting in an interactive format relies on computer tags that function like bar codes to identify each item on an income statement or balance sheet. With every number individually labeled, investors, analysts, financial journalists and others can easily use the information within spreadsheets and analytical software. The ease of producing analyses is expected to generate many free and low-cost new services to investors on the Internet once financial information is reported this way.

What types of problems might businesses face when changing over to these new standards?

There will be a learning curve for using XBRL tools and the taxonomy. Companies will have to incorporate the necessary controls into their processes to ensure XBRL documents are valid. For example, a company would have to know what a taxonomy is and how it is used, what an instance document is, how an XBRL tool creates an instance document, and how an instance document is validated and submitted to the SEC. An instance document is a XBRL-compliant document that contains tagged financial data and is created from taxonomies. A company’s set of annual financial reports is an example of an instance document. Companies will also have to change internal control processes to accommodate the use of XBRL in the creation of instance documents.

How can businesses begin to prepare for this change and train employees on these new standards?

Employees need to be trained in the use of an XBRL tool like Rivet Software’s Dragon Tag and proper use of the U.S. GAAP taxonomy. The taxonomy contains more than 15,000 elements, more than 12,000 of which are financial concepts like cash or accounts payable. Training will be important and can be obtained by independent XBRL consultants or most large accounting and consulting firms. Companies should begin training employees immediately in XBRL if they haven’t already begun.

How do you file XBRL financial statements?

? Download the appropriate taxonomy. A taxonomy is a dictionary of terms available for tagging financial data. In order to file with the SEC, taxonomies must be approved by XBRL International.

? Tag the financial statement with elements in the taxonomy using software. This can be found at www.xbrl.org/TechSupport. The user must be familiar with the taxonomy, software and underlying financial accounting data in order to tag the data properly.

? Extend the taxonomy if necessary. At times, companies face situations where they have financial statement information that does not fit into one of the available tags. You can extend the taxonomy by creating a newly defined tag. Table type data contained in disclosures, such as debt, will require taxonomy extensions.

? Create an instance document. This file, along with any company specific extensions, is submitted to the SEC.

? Review the instance document for completeness and consistency prior to filing.

? File the instance document. Once the financial information has been tagged and reviewed, it is ready to be filed. The package sent to the SEC will consist of an XML document and any company specific extensions if needed.

Ernest A. Capozzoli is an associate professor of accounting and information systems at Kennesaw State University, Coles College of Business. Reach him at (770) 423-6304 or ecapozzo@kennesaw.edu.