XBRL: are we missing something?

Is XBRL the future of financial reporting asks Tom Selling in the title of a recent post on his Accounting Onion website, immediately answering his own question with an exuberant “YES!”

Here’s part of his argument:

  • “..the FASB should take it as a given that XBRL will be a game changer for accounting standards. For example, the question of “net income” versus “other comprehensive income” fades to insignificance so long as an analyst can make her own pro forma reclassification that automatically flows through to ratios and valuation models – with just a few clicks on a web page.
  • Another policy implication is that the FASB should be ensuring that users have access to enough quantitative data to unwind a stinky accounting treatment and/or to obtain a more profound understanding of reported earnings and changes in financial position. I have mentioned on more than one occasion that detailed reconciliations (roll-forwards) of balance sheet accounts combined with XBRL data tagging would be just the ticket for shedding light on financial results — without having to resort to manual deciphering of obscurantic narrative disclosures. If the FASB does not put XBRL front and center in its disclosure framework project, then it is doomed to fail miserably.”

A company called Thinknum provides the following summary of what’s usually regarded as one of the primary benefits of XBRL:

  • “A major pain point for most analysts is spending hours building and updating models in Excel. These models are used to project a company’s earnings and hence that company’s valuation. We have watched investment bankers and traders spend countless nights poring over PDF documents to update their spreadsheet models. Using XBRL, we designed software that enables analysts to build cashflow models that are updated as soon as a company’s filings are released. Our clients have applied these models across hundreds of companies, greatly adding leverage to an analyst’s work. Automating these tedious tasks affords analysts the opportunity to focus on making better judgments about the quality of the numbers reported and other economic factors that are critical to successful fundamental investing.”

(For the uninitiated, I’ll drop in a brief description of the concept, lifted from the CSA website: “XBRL is a business reporting language that organizations can use to share financial information and investors can use to analyze data. Instead of treating financial information as a block of text, XBRL assigns an identifying tag to each item of data. For example, XBRL assigns tags to individual financial statement items, such as “revenue” or “cost of sales”. These tags allow systems and analysis tools to process the information automatically. For example, XBRL-enabled software can perform automated financial analysis for multiple companies over multiple years with XBRL data, eliminating labour-intensive manual data re-entry and verification. As a result, XBRL can increase the speed of handling of financial data, reduce errors and make it easier to analyze information.”)

How are we managing without it?

I have no idea how real these theoretical advantages are in practice, but the point is, Canadian authorities don’t seem to have any idea either, and have apparently lost interest in finding out. There was a time (predating the conversion to IFRS) when XBRL was regularly mentioned in speeches by some senior OSC management: in 2007, then-Chair David Wilson envisaged that while XBRL “may not be quite as revolutionary as the Internet has been, it will be so successful that people will wonder how we ever managed without it.” In that same year, the CSA launched a voluntary filing program to “help the Canadian marketplace gain practical knowledge and experience in preparing, filing and using XBRL information” and help “the CSA assess the usefulness of XBRL as it considers whether to make filing in this format a requirement.” This program hasn’t taken off, to say the least: in the last six months as I write this article, only eight documents have been filed under the program, by just five entities.

From this it might seem that XBRL has missed its moment in Canada, but the XBRL Canada website indicates a near-blizzard of ongoing activity, including recent encouraging moves from the House of Commons Standing Committee on Finance and a recent poll (not seemingly very scientifically valid though) in which 50% of respondents stated XBRL should be mandatory for Canadian entities. Many Canadian entities are already embedding XBRL into their filings for US purposes, a process that’s reportedly rather hellish initially but much easier thereafter. It’s very hard though to assess how much this has actually changed the practices of investors in a way that has a measurable benefit. That is: do the people that can move the market truly spend countless nights messing with PDF documents and updating their spreadsheet models, and if XBRL relieved them from doing that, would they really reallocate the time to activities that would lead to more successful fundamental investing? I mean, there’s plenty of evidence that analysts often don’t spend much time on many aspects of the financial statements, but given the complexity of investing and the multiplicity of elements that drive the market,, it might seem a bit glib to assert that effort saved in one place will automatically generate value somewhere else.

But the point is, we don’t know, and there’s no way we could know, because the organizations that could make a difference on this in Canada (if there’s any need to make a difference on it) have apparently lost all interest in finding out…

The opinions expressed are solely those of the author

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