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Standardizing business reporting language

A simple strategy for increasing transparency in your financial statements

For corporations eager to remain on the leading edge of financial statement transparency, the time is ripe to adopt a standard description and classification system for financial data — known as taxonomies — for your public disclosures.

In a bid to ensure greater transparency and accessibility to their financial reports, most public companies today make their financial statement information available online. It is widely acknowledged this addresses the needs of regulators and benefits investors and other financial market participants.

Yet, despite best intentions to improve financial reporting processes, many companies publish their traditional financial reports in inflexible formats, like PDF files. As a result, users of financial information still experience difficulty locating and extracting key financial data from online statements.

To further complicate the issue, few companies adhere to standardized financial statement "taxonomies." Essentially these are dictionaries that provide a standard description and classification system for financial data. By failing to adopt common taxonomies, companies make it that much harder for analysts, investors, regulators, and other interested parties to effectively compare data from disparate organizations or calculate useful trends and ratios.

The good news is there is a simple solution: Extensible Business Reporting Language, or XBRL, a royalty-free, open standard for business reporting that may be on its way to revolutionizing the way financial information is created, shared and analyzed.

Using taxonomies to improve transparency
Both creators and users of financial reports are well aware of the disparate ways financial data can be disseminated. Not only is corporate financial data used to create financial statements and other external reports, it must generally be provided to regulators, tax authorities, banks, and governments. It is used in the filing of loan applications and credit risk assessments, in marketing materials and press releases, and internally among a company's international divisions.

While each of these business reports serves a different purpose, much of the information contained in them has common elements. But because no common terminology exists among a company's various reports, nor among reports issued by different companies, it hinders an information consumer's ability to understand the company's financial position and compare it with others.

XBRL closes this information gap by enabling companies to use a common taxonomy to define their financial statement terminology. XBRL taxonomies are essentially dictionaries that define specific financial terms (such as "net profit" or "cash") in a common way. In Canada, an XBRL taxonomy exists that conforms to Canadian Generally Accepted Accounting Principles (GAAP), although several other national jurisdictions have their own financial reporting taxonomy.

How XBRL works
To use an XBRL taxonomy, companies "tag" each of the financial terms that appears within their financial statements, rather than treating financial information as a block of text. The tag acts as a financial statement "bar code," enabling organizations to automatically gather tagged information fragments from their various internal technology systems to compile their financial statements.

Once those tagged statements are posted online, or filed electronically, consumers can easily extract the coded information from a company's financial statements, allowing them to share, analyze and manipulate the data without having to manually re-enter it for comparison purposes.

Advantages to corporations and their stakeholders
There are numerous advantages to adopting financial statement taxonomies, both to corporations and their stakeholders.

Companies can use XBRL to automate their data collection across their disparate financial systems. With XBRL tags, information can be quickly pulled together for a variety of different reporting purposes without the need to use manual data entry processes. In addition to streamlining data compilation, XBRL software enables companies to validate their data, ensuring errors are quickly identified and rectified.

Users of financial information, including investors, analysts, regulators, and financial institutions, can receive, find, compare and analyze XBRL data much more rapidly and efficiently. By simplifying the analysis of corporate financial data, improving its accuracy, and eliminating financial statement ambiguity, XBRL better positions information consumers to make informed decisions about a particular company's financial health.

XBRL gaining ground around the world
Given its potential, XBRL has been gaining momentum around the world. In the U.S., the Securities and Exchange Commission recently adopted a voluntary XBRL filing program. Other global government agencies and financial institutions have also begun to accept XBRL-tagged documents and financial forms.

 
Revolutionizing financial reporting

XBRL is a type of Internet-based language with real potential to deliver business benefits:

  • reduces data entry errors
  • streamlines data analysis
  • enables comparisons between external data
To explore the option of creating your financial statements in XBRL, visit www.xbrl.ca or www.xbrl.org to download the Canadian taxonomy. Instructions explain how to implement XBRL-aware accounting software systems that will allow you to insert XBRL tags into your financial documents.