Adaptation or Evolution: What Is Your XBRL Strategy?

Written by Gianluca Garbellotto Posted on December 8, 2006

Gianluca Garbellotto is a member of the XBRL Standards Board and an active participant in various XBRL Working Groups. He is a frequent and sought-out presenter on XBRL and XBRL GL topics, as well as the XBRL columnist for IMA's Strategic Finance magazine.

XBRL is here. It's not just a matter of growing interest, or more frequent discussions on upcoming implementations. XBRL is required for regulatory reporting in many countries, including the U.S. (in the case of banks), and many others are well on their way to mandating it. Certainly the major investments in this technology recently announced by the SEC cannot be only aimed at adding one more format to the many already available for filings.

Every major company needs a strategy for XBRL. There's no doubt that the major incentive for XBRL adoption comes from regulators that mandate it. This is obviously a great way for a technology to gain momentum; but it's also, in my opinion, the greatest challenge that XBRL faces. There are two ways in which companies (and other entities) can react to a mandated adoption. One is adaptation, the other is evolution.

Adaptation here means doing what is strictly necessary to fulfill the regulatory requirement, either using internal resources or through outsourcing. Most likely, the regulatory filing will be generated in the same format as before, and then it will be converted to XBRL using the original filing as a source. This approach seems appealing because it minimizes short-term implementation costs. However, a closer look may reveal unsuspected indirect costs, especially as XBRL mandatory filings become more numerous over time. To advocates of XBRL like me, adaptation represents a lost opportunity.

Evolution is the more effective approach in a changing environment. In this case, it requires two important actions by corporate management:

1. Understanding XBRL's true value proposition, beyond its more visible and familiar implementations; and
2. Conceiving a strategy that does fulfill the short-term regulatory requirements; but, at the same time, leverages the power of this very targeted and effective standard for business and financial data for purposes much beyond regulatory reporting.

Here is the challenge. The value proposition of XBRL for regulators, analysts, and entities in general that collect, process, and compare data from a large number of sources is evident, and that's why the adoption of XBRL is originating in the regulatory sphere. Individual filers do not currently see benefits for themselves in this process; they tend to think that XBRL is just another format for representing data, no different than a CSV or PDF file, but much more difficult to implement. (Of course, XBRL enthusiasts can relate the potential benefits of more transparent end reporting, as well as the new benefits that XBRL GL, the standardized Global Ledger, can bring, where end reporting can become a simple by-product of internal processes improved by XBRL.) And all this just to make life easier for regulators and analysts! Limiting the analysis to XBRL's most visible application can easily lead to underestimating its real potential.

XBRL for financial and regulatory reporting (XBRL FR) is a powerful and flexible technology to represent summarized information in internal and external end reports. XBRL GL is an agreement on how to use the XBRL technology to represent business and financial data at the detail/document level in a standard, consistent format, no matter in which application or jurisdiction it was generated or resides in. These two different faces of XBRL can be used separately or they can interact with each other. They not only broaden the value proposition of XBRL as a whole much beyond financial, let alone regulatory, reporting. They also offer the opportunity to change the way in which many crucial business processes are dealt with in a corporate environment.

Data archival, data integration, consolidation, auditing and compliance, generation of various internal and external final reports from the same underlying transactions, and automation of the related reconciliations are only some of the processes that XBRL can help make more efficient. It is the ideal payload for SOA (Web Services Oriented Architecture). Being a standard, both a technical format and more importantly in the semantic representation of documents and transactions, it makes seamless exchange of data and information within a business and between information-trading partners (not only regulators, but also auditors, and business partners in general) a reality.

XBRL is the key to a new, standards-based, cost-effective, vendor-independent way to deal with many crucial processes in every corporate environment. A comprehensive XBRL strategy can help your company turn a regulatory burden into a competitive advantage.