Recent revelations of shady accounting practices have fueled investor demand for more transparency in corporate reporting. New regulatory rules such as Sarbanes-Oxley are also driving the need for faster and more accurate reporting of financial results to investors and other stakeholders. Unfortunately, preparation and distribution of financial information to multiple audiences can be time consuming for reporting companies since different stakeholders require different levels of detail or format. Even the recipients of these financial reports spend considerable time retyping information into a spreadsheet or other database for aggregation or analysis.

An electronic language for financial reporting called Extensible Business Reporting Language (XBRL) has been in development for a number of years and is being utilized by several major corporations around the world to report financial results. With XBRL, financial data from internal systems can be expressed in a single specification, which can produce multiple outputs with no retyping required. XBRL is a relatively easy to use standardized format that is easily accessible and analyzed. While XBRL could benefit all companies that publish their financial results, we believe this technology is especially advantageous for small capitalization companies.

WHAT IS XBRL?

XBRL is a freely licensable electronic language for financial reporting which provides a standards-based method to prepare, publish and exchange financial statements of publicly traded companies. It can be used across any platform, software format or technology. It is important to note that use of the XBRL language in financial reporting will not result in additional disclosure from a company to its external constituents and will not require a company to change the way financial results are reported under current accounting standards.

In order to understand how XBRL works and its benefits to the companies and end-users, it would be helpful to describe how the current corporate reporting process works. In the pre-XBRL world, typical steps involved in corporate reporting include: 1) processing financial transactions and collecting data in operational data stores; 2) posting transactions to a general ledger system via a chart of accounts; 3) consolidating general ledgers from different units at a corporate level; 4) creating and distributing management reports to support management decisions; and 5) formatting consolidated financial information into various formats required by different external stakeholders such as the SEC, IRS, industry-specific regulatory organizations, printed annual reports and financial statements, PDF or HTML for publishing via the web, and credit applications to lenders. (1)

Obviously, preparing financial information for various external audiences can be very time consuming for the company as well as for the investor who needs to retype information for analysis and aggregation into a database, not to mention the typing errors that may get introduced during the process. Small-cap investors may have an especially difficult time obtaining full and accurate information for smaller companies due to the limited resources dedicated to small cap companies by third party data providers.

Many corporations spend an exorbitant amount of time creating financial statements with desktop publishing tools, web design tools, word processors, spreadsheets, and templates that check their Edgar filings. Companies generally need to use a combination of automated and manual systems to consolidate data for analysis and reporting. Changes in reporting requirements or the need to report in a second jurisdiction have been constant sources of frustration for public companies. Even as there has been increasing pressure to complete financial reports faster than before, corporations continue to use a multiple incompatible programs to create and edit financial exhibits for its various audiences. (2)

HOW DOES XBRL WORK?

XBRL is the financial and operational business reporting offshoot of the Extensible Markup Language (XML) that uses tags based on standardized accounting industry definitions called taxonomies to describe and identify each item of information in financial statements. Some compare "XBRL tags" to the bar codes used to track inventory and pricing information. Once XBRL tags are applied to the data within financial reports, that data can be quickly distributed in various formats without the need to retype. A single XBRL document can be converted to printed material, fed into an SEC database, published on the Internet, or sent to a creditor for analysis. Users can leverage those tags with XBRL-enhanced tools to automatically search for specific historical data in company financial reports.

XBRL COMPONENTS

XBRL is a relatively complex technology and a number of components are required to be in place in order for it to work. Once these various components are in place, financial information and supporting text from internal systems can be expressed in a single specification.

Taxonomy - A dictionary of data elements provides corporations reporting according to U.S. GAAP with the ability to produce financial statements marked up in XBRL. A series of taxonomies that represent an electronic description and classification system for the contents of financial statements and other business reporting documents are required. Data Tagging and Document Preparation Software - This facilitates the tagging of raw data. An Instance Document - This is the term used for an XBRL-tagged document. Schemas - Schemas are used to validate XBRL-tagged document that follows the tagging rules for that document's taxonomy. Stylesheet - This allows the XBRL-tagged document to be read or viewed in human-readable format. Linkbases - There are five different linkbases including: Calculation linkbase, Presentation linkbase, Definition linkbase, Label linkbase, and Reference linkbase. These linkbases for each taxonomy file contain rules that define the manner in which tagged elements relate to each other and how calculations or presentation elements should be handled. Application Software - This should be able to load multiple data sources created using various tools and provides quick comparisons of that data to the user.

Source: XBRL.org

BENEFITS OF XBRL

As a result of the XBRL rollout, the efficiency and effectiveness of all business reporting processes are likely to increase substantially. Forrester Research estimates that $402 billion is spent each year in retyping financial information. In the investment community there are many constituents that will benefit from eliminating those costs through the adoption of the XBRL technology, including the reporting companies, investors, analysts, regulators and the media.

For reporting companies, reports that previously took weeks to prepare can be completed at a fraction of the time and cost using XBRL. Since XBRL is a consistent language across all

XBRL could also benefit the media. The media receives a deluge of information from hundreds of companies, often at the same time. With XBRL, the media will be able to immediately and automatically extract data from financial statements and earnings releases into spreadsheets allowing the media to easily report on new developments in a company while being able to focus on the big picture contained in the Management Discussion and Analysis section of SEC filings.

It is likely that XBRL will reduce data gathering costs for third-party information aggregators such as Edgar Online and Yahoo Finance. Currently, given the costs and limited resources, there may be more emphasis placed on getting information for larger cap companies than for smaller caps since information on large caps may be more in demand. More efficient data collection should lower operating costs associated with custom data feeds and reduce errors while allowing these institutions to concentrate on adding value to the data.

THE STATUS OF THE XBRL IMPLEMENTATION

Based on the U.S. Securities and Exchange Commission's recent proposal, SEC registrants would be allowed to file their financial information using XBRL. On November 2, 2004, the XBRL International Steering Committee approved the release of the Financial Reporting Taxonomy Architecture (FRTA) guidelines which became an official recommendation of XBRL International. XBRL International is a non-profit consortium whose members include 250 of the world's leading accounting, technology, financial services, and government agencies concerned with business reporting. The FRTA guideline is a set of requirements and best practices for the production of taxonomies that are used in financial reporting. Currently, the U.S. chapter of XBRL International is developing specific taxonomies for financial reporting purposes for broker-dealers, investment management, banking, oil and gas, and commercial and industrial users among others.

It noteworthy, that strong support for the XBRL standard appears to come from vendors of financial reporting software. XBRL is an open standard with no proprietary interfaces or hidden costs that might otherwise impede adoption. Thus we see software vendors moving to the XBRL standard in developing and upgrading software packages. Systems integrators are beginning to work with their various suppliers to enable a smooth transition to the standard, including discussion of XBRL in promotional material and white papers. Thus it would appear that some vendors believe they can make an adequate cost-benefit argument in favor of adopting an XBRL-based reporting solution.

CONCLUSION

XBRL is gaining momentum and popularity in the financial community and could someday be the electronic standard for financial reporting on a global basis. Today, approximately 250 member organizations, including the FDIC, Fidelity Investments, Dow Jones, Reuters, and other participants from both in and outside the United States are involved in the XBRL initiative. As evidenced by their involvement in the XBRL adoption, there appears to be a growing level of interest in the financial community, especially by information aggregators like Standard & Poors, Reuters, EDGAR Online, and Moody's, largely due to the expectation that XBRL will facilitate collection, aggregation and publication of financial data of publicly held companies. While the XBRL initiative currently enjoys the support of a large number of major organizations, it is unclear just how extensive XBRL's use and adoption will be. We believe wide spread XBRL adoption is worthwhile, especially for small-cap companies. While there are many constituents that will benefit from the adoption of the XBRL format, we believe small-cap companies and their investors are likely to be the biggest winners. Even smaller companies would likely experience a reduction erroneous data entry and the elimination of some costs for composing and processing internal and external financial reports. Yet for companies that may have been neglected by third-party aggregators of financial information, the increased visibility in the capital markets is even more valuable. The availability of easily digested financial data on the small-cap company should help in raising investment capital and gaining research coverage. Such "small-cap" advantage would be an ironic twist in an environment where regulatory and policy reforms are often implemented with little consideration for the adverse affects on smaller public companies.

ENDNOTES

(1) "XBRL: Enabling Faster, More Transparent Financial Reporting", John O'Rourke and Michael J. Malwitz, Hyperion 2003. (2) "How XBRL Will Change Your Practice", Eric E. Cohen and Neal Hannon, The CPA Journal 2000.
About the Author

Hillary Cacanando is a free-lance, buy-side analyst with extensive experience in the capital markets from small-cap to large-cap segments. Most recently she served as Investment Banking Senior Valuation Analyst for Goldman Sachs. Previously she had been Equity Research Analyst for both UBS Investment Bank and Credit Suisse First Boston. Ms. Cacanando received a Bachelor degree in accounting from Baruch College and a Master of Business Administ