From the April 2008 issue of Treasury & Risk magazine

Time to Speak the Same Language

Almost four years ago, Financial Executives International CEO Colleen Cunningham listed conversion to XBRL--the interactive data format known as extensible business reporting language--among the top 10 issues on which CFOs need to keep current. At the time, the controller's office at United Technologies Corp. (UTC), the maker of Pratt & Whitney jet engines and Otis elevators, hadn't even heard of XBRL. "It was almost an epiphany," says John Stantial, assistant controller and director of financial reporting for the Hartford, Conn.-based multinational. "Once in it, we asked, 'Do we sit on the sidelines like everybody else?' If we think XBRL might be coming down the path as a requirement, should we continue to work with it?"

United Technologies decided to embrace XBRL. With business in 186 countries and 100 different general ledger (GL) platforms, the company has been pushing XBRL into its consolidated global reporting system. "We built our internal processes and learned as much as we could about the tool," Stantial says. "It's a single system and Web enabled, and we can push it out through the Web. We're working backwards up the funnel. If and when an SEC mandate comes, it would be a non-issue for us.''

More than that, mastering XBRL has turned into cost savings at United Technologies, reducing the time spent preparing quarterly reports by 20%. "We could literally free up a person over the course of a year, and that was just one deliverable,'' says Stantial. The assistant controller also talks up improving data quality and integration as advantages with XBRL that can make a sizable difference when companies are searching out acquisition prospects are working to incorporate a new enterprise. But what Stantial is breathlessly waiting for is the ability to use the tagged information in a whole host of government filings as well as internal management and benchmarking efforts. Until it becomes widely used, however, it's hard for companies like UTC to harness XBRL's full potential. "That's why we've been anxious for the SEC to mandate XBRL," Stantial says.

Despite the potential benefits, the encouragement from professional groups and, more importantly, the insistence of Securities and Exchange Commission (SEC) chairman Christopher Cox about the need to adopt XBRL, relatively few companies have followed the lead of pioneers like United Technologies and Microsoft Corp. According to a 2007 Bear Stearns & Co. report, just 54 of the more than 10,000 public companies in the U.S. have implemented XBRL voluntarily since the SEC began work in 2005 to expand XBRL taxonomies for converting filings under the U.S. Generally Accepted Accounting Principles (GAAP). In contrast, the report notes that China--which mandated compliance in 2003 after recognizing XBRL's usefulness in making data accessible to foreign investors--had approximately 16 times more XBRL filers in 2005 than the U.S. had at the end of last year. China today has 1,400 XBRL filers. "It's very difficult to move it into the mainstream when everyone's sitting on the sidelines,'' notes UTC's Stantial about the foot-dragging by his U.S. counterparts.

That situation in the U.S. will have to change--eventually. Chairman Cox has been pushing for mandatory adoption of XBRL by this fall, but momentum was stalled by an SEC advisory committee, which is not as convinced that moving fast is the answer; in a meeting in January, it recommended a phase-in period--predictions are for three-to-five years--rather than a date-specific mandate. Members wanted to wait for satisfactory U.S. GAAP taxonomy to be developed and the updating of the SEC's EDGAR e-filing system to accommodate XBRL tagged information. Even so, U.S. companies may need to move forward without a regulatory gun to the head--if only because XBRL is expected to make it easier for GAAP filers to switch in the not too distant future to International Financial Reporting Standards (IFRS) accounting--another Cox priority. A hold-up with XBRL could put a hitch in plans to move to IFRS, which some believe would put U.S. companies at a competitive disadvantage. "If ultimately, which is what it looks like, the U.S. is headed to adopting IFRS, it's better to have XBRL in place and operating at all publicly reporting market participants before it happens," says Dane Mott, an accounting and tax policy analyst at Bear Stearns & Co. in New York. "It's a tool that makes the transition substantially easier for the preparer and the investor.''

XBRL, often likened to a bar code for financial statements, is an electronically readable tag on each item in a financial statement. It reduces the chance of error and permits the automatic checking of information by eliminating the laborious and costly process of manual re-entry.

Each computer code corresponds to a specific accounting concept, and once companies tag financial data using a standardized taxonomy, investors and analysts are able to download financial reports formatted in XBRL directly onto spreadsheets and use other Web tools and specialty software to compare corporate performances in the same and different industries as well as the same and different parts of the globe. "Within that taxonomy, the definition of an asset, for example, might have a link back to the authoritative reference in IFRS and GAAP that defines what an asset is,'' says Diane Mueller, a vice president at software vendor Justsystems Inc. "What we're doing is changing the financial document into an interactive application. An investor or analyst can take information on assets from one document and drag them onto another browser page and have the audit trail follow it. It doesn't lose its source reference; it doesn't lose its asset definition when you cut and paste. That's really cool stuff. That capability is the 'wow factor.'"

In other words, computers treat XBRL data intelligently. For companies, XBRL becomes a vehicle to streamline processes for collecting and reporting financial information. With XBRL, corporate decision makers, regulators, investors and analysts can receive, find, compare and analyze data much more rapidly and efficiently. "XBRL facilitates how one works with financial data. It helps integrate that data, and make that data more accessible,'' says Mary Knox, research director for banking, investment and advisory services at Stamford, Conn.-based Gartner Research Inc. "In terms of implementing XBRL, it requires that one take a good look at one's financial reporting information and all those things create a framework or platform for migration.''

In the same way that HTML (hypertext markup language) revolutionized the Internet, XBRL presents the potential to revolutionize financial reporting. "What most people don't realize is that when they apply this inside their company they will gain incredible transparency,'' says Mike Willis, a partner at PricewaterhouseCoopers and founding chairman of XBRL International.

"From the CFO's point of view, it creates a lot of real opportunities,'' adds Olivier Servais, the team leader for London-based International Accounting Standards Board's (IASB) XBRL committee. Servais and his team are redeveloping IFRS taxonomies to reflect new versions of the international accounting system used by no fewer than 100 countries, and new XBRL technologies.

On the GAAP side of the equation, work on taxonomies has also been underway. In early December, the SEC's Office of Interactive Disclosure released for public comment a taxonomy based on 15,000 computer-coded elements, almost eight times greater than the GAAP taxonomies that existed before for public companies wanting to file quarterly and annual financial information using this electronic format. The final version is expected to be released soon after the public comment period ends April 5.

Non-financial data taxonomies are also in the works. The U.S., Japan, Australia and the Organization for Economic Cooperation and Development are collaborating to create taxonomies for such sections of financial reports as the management discussion and analysis (MD&A), the president's letter or footnotes.

Microsoft is leading the way when it comes to investor education. The company introduced a new XBRL-fueled Investor Central on its Web site in January that demonstrates how the technology can be used to provide investors with an accessible view of a company's business strategy and financial data. [See: http://www.microsoft.com/msft/ic] "It's what we did with it that is more important than what it is," says Taylor Hawes, controller of finance operations at Redmond, Wash.-based Microsoft. "When you surf the Web, you don't say, 'wow, that was a great HTML tag.' It's all about content. XBRL is an enabling technology. The real story is what we can do once it's enabled. We view this as an evolution in the accounting and treasury and reporting spaces.''

Another company that has seen the possibilities is Wacoal Corp., a Kyoto, Japan-based lingerie maker, with disparate legacy computer systems across 36 worldwide subsidiaries and no consolidated accounting management. Wacoal created a standardized XBRL general ledger and mapped it against their existing systems to create tremendous transparency throughout the entire organization.

Once Wacoal had XBRL GL set up, executives needed only to map the ledger against any new company Wacoal acquired, reducing the time to integrate from the typical two to four years to an exercise as short as two to four months. In Wacoal's case, the Japanese retailer reported that it completed the integration of its latest acquisition in six months for $50 million using XBRL GL, instead of an originally estimated three years and $150 million. "XBRL is designed to allow all of those disparate applications to communicate with each other in a seamless manner,'' says Willis. "Every company's ledger is different. You have to use XBRL, this language, to articulate what a ledger should look like in your company. It's not just the general ledger. It's the accounts payable, the accounts receivable ledger. It could be any ledger.''

The good news for companies: XBRL is relatively inexpensive to implement. Software packages cost less than $1,000 to implement. United Technologies, with annual revenue of $48 billion, spent $10,000 on its XBRL software. For its first filing, an 8K report, it spent just $300 on software to familiarize itself with XBRL. That same software now costs $900. "Even the smallest company can spring for $900,'' UTC's Stantial says. "People assume this is some major IT undertaking or costly endeavor, but it's really not. You just download a package from the Web for a license fee and work on your desktop and in a few hours, you can tag a basic financial statement.''

Some U.S. executives just don't feel like XBRL has matured sufficiently, given the level of taxonomy development still going on. But Stantial notes that early entry offers the opportunity to have an impact on the process. "The benefit right now is being [able to] influence its development," he says. "None of us wants another Sarbanes-Oxley process that's forced on you."

A bad taste from SOX implementation may be one reason U.S. executives--unlike their European and Asian counterparts--seem reluctant to move forward. "The fact that regulators are pushing it makes executives presume that it's an incremental cost idea,'' says PWC's Willis. "They don't realize that the reason regulators are pushing it is because the regulators are already generating enormous efficiencies within their own processes.''

In 2005, the Federal Deposit Insurance Corp., for example, mandated that all financial institutions file their quarterly call reports using XBRL. Since then, the regulator's data error rate fell dramatically to under 5% from 66%. Since then, 95% of the data the FDIC receives is clean, compared to just 66% before XBRL was implemented. The cycle time to perform analysis and validation went to less than two days from 45 days, and the number of people involved in the process fell to under 200 from more than 1,000.

A mandate to convert to XBRL can't come quick enough for United Technologies. "We've been very anxious for the SEC to mandate XBRL and for other agencies, such as the IRS, or the Department of Labor, or the Bureau of Economic Affairs, to start finding ways of using XBRL,'' says Stantial. "If all of those agencies allowed us to submit in XBRL, we figure conservatively that we would take out hundreds, if not thousands, of man-hours across our corporation on annual basis by automating the deliverables and taking all that manual effort out."

Adds Bear Stearns' Mott: "When XBRL is implemented, I put it up there with the productivity gains from Excel and the Internet and Blackberries because it's the type of thing that will change the way we work.''

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