Many businesspeople have never heard of extensible business reporting language (XBRL). Even among those that have seen the acronym or, perhaps, read an article about it, many would be hard-pressed to say what it is, much less how it works. Yet Ventana Research predicts that within five years, all large public companies in the United States will be using XBRL. So will a majority of midsize companies, as well as any company that must file financial statements with a bank or a finance company.

If it sounds like the move to XBRL reporting has happened quickly, it hasn't. When the reporting language was launched in 1998, there was a flurry of promotion suggesting it would be the next big thing, but most of what has gone on since then has been the difficult task of putting together a workable worldwide set of standards and methods that are both robust and flexible. Now XBRL is approaching technological maturity, and this ripening -- along with the growing understanding of the substantial benefits it will bring to all users of financial and business information -- will cause adoption to accelerate soon.

How Does It Work?

XBRL facilitates the electronic exchange of business and financial data, regardless of how the sender created it, so that the receivers can view and work with it in whatever format they wish. To take a simple example, today a press release with a company's income statement or a public company's filing on the United States' EDGAR or Canada's SEDAR database communicates the corporation's results, but if you want to store these numbers in your own framework or do some analysis, you have to re-enter the numbers into a spreadsheet. This is both time-consuming and error-prone.

Instead, the process can be automated if the generator of the financial data you're interested in will attach an XBRL tag to each piece of information in the financial filing. The number 389, let's say, might have a tag that identifies it as the total R&D expense for XYZ Corporation for the three-month period ending April 30, 2007, expressed in thousands of U.S. dollars. The tag could also confirm that the classification of R&D expense conforms to U.S. GAAP and that R&D and other operating expenses add up to a calculated number called "Total Operating Expenses," which is subtracted from "Gross Profit" to produce "Operating Income."

These tags are metadata, and their structure and definition are set out in taxonomies that are standard among all users of XBRL. These taxonomies capture the definition of individual reporting elements (such as types of assets or sources of cash or expenses), as well as the relationships between elements within a taxonomy and with those in other taxonomies. There are taxonomies set up for the U.S. GAAP and the European International Financial Reporting Standards (IFRS), among other reporting standards. The taxonomies are extensible, which means it is easy for people to create custom tags when necessary.

How That Will Benefit Business

At Ventana, we expect XBRL to achieve the most use over the next five years in three areas: public companies' external reporting, internal reporting in corporations, and financial statement data exchanges between companies of all sizes (for example, in commercial lending). In each of these areas, it should make life easier for finance and IT professionals.

Public reporting. When companies release their results each quarter, professional analysts and individual investors currently either retype the numbers into a spreadsheet or copy and paste them. Alternatively, XBRL enables users of financial statement data to pull it quickly and accurately into spreadsheets and other XBRL-enabled tools set up specifically for the analysis of that data and generation of reports on it. This can save considerable amounts of time and money. Having such an easy, accurate, and consistent way to collect financial data from various sources will encourage companies that are not already doing so to track the performance of their competitors and customers, as well as industry trends. Likewise, the availability of such data will make it easier for companies to use external benchmarks to assess their performance. Financial regulators, too, will benefit from XBRL. When data comes in marked up with XBRL tags for easier analysis, regulators can focus on finding and managing exceptions rather than slogging through each submission or auditing a random sample.

Momentum is growing worldwide behind the use of XBRL for financial filings and financial institutions' regulatory submissions. For example, companies listed on the Shanghai Stock Exchange already report their financial results in XBRL, and the Bank of Japan is collecting information from more than 500 financial services companies using the technology. The U.S. Federal Deposit Insurance Corp. (FDIC) began requiring banks to file their periodic call reports in XBRL format in 2005, replacing a forms-based system that had been around for years.

The U.S. SEC has had a voluntary XBRL filing program in place since early 2005. It also is funding the necessary finishing touches on the U.S. GAAP taxonomy and an overhaul of its EDGAR Web site to make it easier for investors to use -- not just access -- the information in the filings. The improvements to the EDGAR system will allow investors to do basic analysis such as comparing the results of several companies side by side or looking for trends. Such an analysis currently takes either extensive effort or an investment in third-party software to make the data readily accessible.

The SEC has made XBRL tagging voluntary because it is reluctant to add another regulatory burden to public companies coping with the Sarbanes-Oxley Act and the SEC's own shorter filing deadlines. However, tools that make the tagging process relatively simple are becoming available. Ventana Research recently tested some software that tags basic financial statements. We estimate that the process of doing the initial tagging of these statements will take most companies less than 20 hours, including the time required to train an individual to use the tagging tool. After that, periodic filings should take a small fraction of that time. (See Making XBRL Mandatory.)

With the cost-benefit ratio of XBRL tagging shifting, we expect the SEC to make its voluntary XBRL filing program mandatory within three years. When the SEC imposes mandatory tagging, the requirement will likely cover only the basic financial statements (much like the current voluntary program) in quarterly and annual corporate filings. Over time, though, the requirement should expand to cover information in the footnotes, proxy statements, S-1 (the registration statement that precedes an IPO), and periodic disclosure statements (Form 8-K). As more and more tagged information enters the public domain, companies will increasingly have incentive to make it accessible and useful to investors. For example, it's also likely that online brokers and personal finance publishers will offer analytic packages that enable individual investors to structure their own historical analysis of a company's financial data and create forward-looking models.

Interbusiness communication. Regulators will not be the only ones to require financial reporting using XBRL. Commercial lending, factoring, and financing businesses routinely collect information from existing and prospective borrowers. Usually, the borrower transmits this information either on paper or by attaching a spreadsheet to an e-mail message. The data may eventually find its way into a central bank software system, but often only after it has been manually keyed in. The information is just as likely -- particularly in smaller institutions -- to never make it to a central data warehouse, but to remain fragmented and generally inaccessible. The financial services industry tolerates this situation because loan officers or others reviewing the numbers do only simple analysis of borrowers' financial data to uncover red flags.

Nonetheless, commercial financial services companies will begin to find it advantageous to use XBRL in the collection and analysis of financial statement information from their customers. This will not put a burden on the customers; the institutions can provide them with a spreadsheet or simple electronic form to fill out that will automatically tag the numbers for them. But these tagged forms will change the economics of how financial services companies use the data. When borrowers begin to provide data by filling out XBRL-based forms, financial services companies of all sizes -- not just major banks -- will be able to automate data collection and to do exception reporting to increase the productivity of the people who review the data and make decisions based on it. It also will be possible to look at the data in aggregate to spot trends as they develop, rather than seeing them only after the fact. For example, delinquencies in a business sector or geographic region start with the weakest businesses but can spread to the rest. Spotting such a trend early would enable a lender to take appropriate action before the credit-quality problem proliferates.

Another use for XBRL in this sector is applying it to standard business transactions, such as invoices, purchase orders, or other regular communications between businesses. While business-to-business transactions may see the first application of XBRL tagging, mortgages and online consumer finance will not be far behind. The advantages of having already tagged information to speed processing and facilitate the use of collected data will be too great to ignore.

In a related area, privacy issues may need resolving as companies and individuals increasingly submit sensitive financial information in ways that make it more traceable and trackable. To be sure, most institutions already have privacy policies in place, but some countries or other jurisdictions have stricter regulations than others as to who may view what information. Moreover, new regulations may appear once XBRL tagging becomes common. One of the advantages of XBRL, as noted earlier, is that it is extensible. In this case, tagged data can incorporate information that determines who is allowed access to it.

Internal reporting. Business professionals use spreadsheets extensively for analysis and management reporting, even in companies that have invested millions of dollars in sophisticated business intelligence (BI) systems. Typically, they take numbers from periodic reports generated by these systems, drop them into a spreadsheet, and perform analysis. Many companies deploy expensive BI systems in order to have a consistent single version of the truth. But once a piece of data has moved from the enterprise system into a spreadsheet, its context is easily lost. Is that "sales" number gross or net? Was the division's marketing expense taken before or after corporate overhead allocations? The person who pulled the number from the BI system may know, but those who use spreadsheets to subsequently analyze the data probably do not. Moreover, even within the company's enterprise software systems, the metadata defining the meaning of a number may be vague, particularly in cases where the number summarizes a group of general ledger accounts (does "cash" mean just that or does it include short-term investments?), where there are both gross and net amounts (e.g. revenues), or where overhead expense allocations may be included for some analyses but not others.

For all of these reasons, as well as the potential for errors if data is entered manually, using spreadsheets to analyze performance data pulled from BI systems gives rise to the situation typically referred to as dueling spreadsheets. Using XBRL to tag the data going into periodic reports and even recurring ad hoc analyses would make it much easier for people to reuse the information or do further analysis with confidence that they know exactly what each number in their analysis represents. It also would improve the quality of the data in desktop spreadsheets companywide.

Companies will have many options for how to tag their internal data. One way is by applying XBRL tags to the numbers once they are in periodic or ad hoc reports -- in other words, when they are about to be exported from the company's internal systems. Another option would be to do the tagging further upstream in the company's financial database.

Initially, many companies will find it easier to tag reports than to tag information at the database level. But we expect just about all BI software vendors to support XBRL tagging within two years, so any company with a BI system will be able to generate periodic reports that have the data already tagged. It will be possible to copy information from these reports and paste it into spreadsheets in a way that retains the XBRL tags, which will make it easier for organizations to maintain consistency in the meaning of the data they use in subsequent analyses. "Easier" is the operative word here. It still will be possible for people manipulating this data in spreadsheets to mess it up. Moreover, the systems will not automatically tag information in truly ad hoc reports (although reports generated on demand from a menu of choices could have a tagging option).

Another alternative will be to tag the financial data in the company's ERP system, either as part of the periodic close or as each transaction is entered. For a company using XBRL in ERP, each account in the general ledger will have its own tag that conforms to the XBRL-G/L taxonomy, or is an extension of it. The XBRL-G/L taxonomy for a specific company or corporate entity will define how the individual accounts roll up into higher-level accounts. Tagging the data at the point of entry will facilitate consolidation, closing, and reporting. For external reporting, tagging data at this level could make it easier for a company to generate its financial statements using multiple standards, such as the U.S. GAAP and the European IFRS. However, companies that have multiple general ledger structures are going to find managing the consolidation of these disparate structures an ongoing challenge, just as they do today.

It's in the Software

What do you have to do to prepare for XBRL? Know that it exists and get ready to integrate it into your finance operations as soon as is feasible. Used properly, XBRL will be largely invisible. To cite a parallel, there was a time when people routinely had to bring their cars to the shop every few months for a tune-up. Today we take for granted that we don't have to do that. No layperson needs (or wants) to know why. It's all happening under the hood.

To a large extent, we expect this to be true for XBRL: Most of what makes it work will be invisible to users. XBRL and automated tagging of data will become features people take for granted in enterprise BI and finance software. These applications, as well as spreadsheets, will handle XBRL tags. People will have to learn a few new tricks to use the software effectively, but they will not have to know about taxonomies to make use of XBRL.

Today very few people have even heard of XBRL. If the software industry does its job well, that will still be true five years from now, when millions will use it daily in their jobs.

Making XBRL Mandatory The SEC has had a voluntary XBRL program under way since 2005. But just how burdensome would it be if the SEC required all public companies to include XBRL tags in their filing documents for the basic financial statements (income statement, balance sheet, and cash flow)? The answer, based on an assessment we recently completed, is not very. For that reason, Ventana Research thinks the SEC should make tagging mandatory within the next two years. To see how long it would take to create the tags for the basic financial statements, we used seven public companies' quarterly filings, representing a range of industries and from large and complex corporations to smaller and simpler ones. They were Administaff, Boeing, Brush Engineered Materials Inc., General Electric Co., Gerber Scientific Inc., Gray Television Inc., and The Kroger Co. One reason for choosing a range of industries was to see how often we had to create our own tags because there was no appropriate one in the standard taxonomy. XBRL was designed from the start to work with nonstandard tags (that's how it is "extensible") in order to achieve maximum flexibility. However, in our judgment, using custom tags for public company financial statements negates an important feature of XBRL tagging: enabling easy comparisons across companies' financial statements. We had minimal training, mostly in the form of short demonstrations of the tagging sofware we used. Realistically, we expect it will take from one to five hours of initial training to prepare people who understand accounting and financial statements to use these tools. There is no need to have a deep understanding of taxonomic structures or of XBRL or XML coding. Knowing how financial statements work is far more important. It took us under four hours to tag the first company's (Boeing's) quarterly income statement and balance sheet. It took an hour and a half to do the last (Brush Engineered Materials). Of the group, General Electric was the most difficult, taking five hours because its statements are more complex. Based on our test, we estimate it will take a person five hours (plus or minus an hour or two) to become familiar enough with the tagging tool and the process itself to achieve basic proficiency. It will then take them another five to 10 hours to do the initial tagging of the basic financial statements. Once established, though, it should require no more than an hour or two each quarter. In addition, layers of review by internal resources and external auditors and initial setup time with the company's financial publisher will consume some additional hours. The cost of the tagging software will be trivial (around $1,000 for a single license). In other words, we believe it would not be a burden if the SEC required all accelerated filers to tag the basic financial statements with XBRL.

Robert D. Kugel heads up the financial performance management (FPM) practice at Ventana Research, focusing on the intersection of information technology and the finance organization. Ventana Research is a premium content partner of Business Finance and Business Performance Management (BPM) Magazine.