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The Danger of XBRL

New standard could become a back door for regulating the chart of accounts.

VentanaView™

Summary
The eXtensible Business Reporting Language (XBRL) promises to make management reporting and analysis of external financial statements much easier. But public companies, already burdened with Sarbanes-Oxley work, have been slow to take it up, partly because the U.S. Securities and Exchange Commission (SEC) has given them more time to adopt the technology. However, some are reluctant to adopt XBRL because they are afraid it will be a back door to regulating the structure of corporate charts of accounts, a concern that has some merit. Ventana Research believes any such regulation is a bad idea. In our view, both the Public Company Accounting Oversight Board (PCAOB) and the Financial Accounting Standards Board (FASB) should make it clear this is not their intention.

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The eXtensible Business Reporting Language (XBRL) promises a revolution in sharing financial data. Based on the almost universally accepted XML standard, it enables users to pull information into spreadsheets quickly and accurately or to automate analyses and report generation, in either case saving considerable amounts of time and money. Rather than having to re-enter numbers into spreadsheets in the proper order, format and classification, users of XBRL would simply import the data; the XBRL tags attached to each number would sort out where they belonged automatically, whether or not the user of the data employed the same reporting method as the creator. For example, a user could automatically convert a detailed fiscal-year report to summary-level information shown on a calendar-year basis, making much simpler the task of comparing the results of several companies that had different year ends.

A few years ago, XBRL seemed to be right around the corner, but adoption has been tepid. What's not to love? Well, some senior finance executives believe XBRL easily could become a back door for more tightly regulating the chart of accounts. While there is widespread agreement on higher-level accounting captions such as "accounts payable" or "property, plant and equipment," defining which specific accounts should be included under these captions becomes increasingly problematic as one dives deeper into the chart of accounts because of fundamental differences among types of businesses. The U.S. Securities and Exchange Commission initially was enthusiastic about requiring XBRL tagging of corporate information filed by public companies, but recently it began to pull back from mandating its adoption in response to resistance from companies already harried by Sarbanes-Oxley requirements.

Some companies simply do not want XBRL required for public companies if it leads to any regulatory definition of the chart of accounts. They believe the best organization of the detailed account structure will vary according to the specific business. They fear the Financial Accounting Standards Board (FASB) will not see it that way and will decide to regulate how specific XBRL-tagged accounts roll up into financial statements. Ventana Research believes these fears are well-founded, since issues of classification and measurement have become a battlefield between companies and FASB in recent years. Accounting rules have produced an inconsistent patchwork of mandated complexity and conformity (there are more than 150 separate revenue recognition models and rules for their use) that does not always impart true comparability. We believe it quite possible that such concerns will delay internal adoption of XBRL for company reporting for many years.

Assessment
Part of the solution to XBRL adoption is at hand, in the form of third-party tagging. Edgar Online has started coding and publishing XBRL-tagged financial information of public companies on its own. So far, this company's work involves mostly higher-level accounting classifications and is valuable mainly for the traditional users of public financial statements: investment professionals. To ensure that corporations adopt the technology as rapidly as possible, however, Ventana Research thinks FASB and the Public Company Accounting Oversight Board (PCAOB) should make it clear they do not believe their mandate includes defining the corporate chart of accounts.

About Ventana Research
Ventana Research is the leading Performance Management research and advisory services firm.  By providing expert insight and detailed guidance, Ventana Research helps clients operate their companies more efficiently and effectively. These business improvements are delivered through a top-down approach that connects people, process, information and technology. What makes Ventana Research different from other analyst firms is a focus on Performance Management for finance, operations and IT. This focus, plus research as a foundation and reach into a community of over two million corporate executives through extensive media partnerships, allows Ventana Research to deliver a high-value, low-risk method for achieving optimal business performance. To learn how Ventana Research Performance Management workshops, assessments and advisory services can impact your bottom line, visit www.ventanaresearch.com.

© 2006 Ventana Research

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