24 June 2009

Will a global accounting specific markup language triumph or fail?

By Daw Tin Hla

(Published in’Campus & Beyond’, a weekly column written by Swinburne academics in the Borneo Post newspaper)

Introductory accounting textbooks often assert, “Accounting is the language of business”. Following this metaphor, the international accounting language would then be the “International Financial Reporting Standards (IFRS)”. Over 100 countries around the world have begun using IFRSs as their national accounting standards since the early 2000.

With accounting standards moving towards the adoption of IFRS, accounting software language has also evolved. There is now an accounting specific markup language, known as the “Extensible Business Reporting Language (XBRL)” or “Extensible Markup Language (XML)” which has taken steps toward achieving globalization of cross-border reporting.

XBRL is the computer-based development of the XML created to standardise the process of exchanging and using business information. XBRL was first conceived by Charles Hoffman in 1999. Since then, the American Institute of Certified Public Accountants and other organizations related to financial information have been involved in its development and worldwide implementation to save costs and minimise multiple reporting by using a common standard syntax to the benefit of its users. XBRL allows financial information to be tagged and subsequently stored and retrieved from a financial database.

XBRL is evolving everywhere, but unevenly driven by various stakeholders such as governments, stock exchanges, banks and other industry sectors. XBRL or interactive data is an open information format standard that enables automated global sharing of business information as contained in company ledgers, income statements, cash flow, balance sheets, mutual fund risk and returns, as well as textual information included within footnotes and other requirements of business reporting. The computer files created in the tagging process is used to generate financial statement information for users in capital markets.

The United States has been taking a progressive and carefully documented approach to implement XBRL since 2005. Its Security Stock Exchange Committee has proposed a rule for the US equity markets that will result in the world’s most extensive implementation of XBRL.

In Canada, a voluntary XBRL filing program is now in effect, but most companies are waiting for the IFRS to take effect before switching to XBRL as the reporting language for communicating financial and business information.

The central banks are the main drivers of XBRL development throughout Latin America. Today, Chile’s capital markets are actively exploring XBRL.
Europe has developed an eye-opening array of government-wide and cross-border applications that can share consistently structured XBRL data. This began five years ago in Europe with stakeholders in the private and public sectors working together to develop XBRL taxonomies.

In 2008, XBRL Europe was organised to generate better consistency, knowledge sharing, and cross border inter-operability of XBRL implementations. According to the Information Technology Center’s web site information, Bank of Belgium, Bank of France, private companies in Germany, 900 consolidated companies in Italy, public sector in the Netherlands, Spanish banking industry, and thousands of companies in the United Kingdom have adopted XBRL in 2008.

In Asia capital markets, the stock exchange in China, Japan, Singapore, India and South Korea, have adopted XBRL filing system in 2008. In 2004, China became the first country in Asia that formally adopted XBRL reporting for its equity markets.

In the longer run, perhaps XBRL will reduce the cost of compliance with reporting regulations and data quality assurance. As reporting and data-quality assurance processes become standardised, economies of scale and scope will accrue; also perhaps XBRL will enable businesses to communicate more effectively with financial markets, thereby reducing their cost of capital.

One drawback is that XBRL is creating increasingly complex and dynamic business environments, which unwary, insufficiently informed investors fail to grasp, resulting in their downfall. Information users like fund managers and investors should also be able to predict the impact that XML and XBRL will have on business models. Moreover, investors need to evaluate carefully how well businesses have assimilated the business models that are best suited to an XML and XBRL environment into their own operations. Otherwise, they may make poor investment decisions.

Much accounting and finance research relies on the existence of large databases of financial information. The development and maintenance of these databases are often costly because of incompatibilities between data formats and information technology platforms. As a result, data might be often incomplete, inaccurate, and out of date; some data may not be easily accessible and others might incur high cost. XBRL ought to enable the construction of more extensive, higher quality, and less-costly databases of financial information.

XBRL data files created in the tagging process are supposed to translate financial statement information into the IFRS standard format with the goal of establishing a global accounting system. Investors and other information users are likely to demand some level of assurance about the tagging process and its compliance with technical specifications. The challenge in capital markets is to overcome each of these barriers and to provide more transparent, relevant and reliable company information; and to seek the appropriate level of assurance to garner trust and confidence in that information.

Despite its rapid development and spread over the last two decades, XBRL is far from set in stone. These are painful and tumultuous times for the accounting world, and for XBRL to be acceptable globally, its language must capture labyrinthine real-world workings. If it does not, it could go the way of Esperanto, an artificial language developed by L.L. Zamenhof in 1887 with not too many users. The verdict on XBRL remains open.

Daw Tin Hla is a lecturer with the School of Business and Enterprise at Swinburne University of Technology Sarawak Campus. She can be contacted at tdaw@swinburne.edu.my.