Written by Bob Schneider     Posted August 7, 2007

In my two last posts, I have argued with the views of Philip Broadley, Group Finance Director at Prudential and one of 11 financial leaders whose thoughts on key accounting issues were discussed in a recent KPMG report. My July 18 post refuted the idea that XBRL will bias users against half-yearly statements and toward the shorter time-span quarterlies. My July 25 article asked whether Broadley’s fear that XBRL will make users focus on the numbers alone rather than an explanation of the numbers is well-founded.

In this final post on his comments, I want to discuss a question that Broadley asks in this excerpt from page 11 of the report:

“You need to report what management thinks, not just the numbers. I’d rather focus on getting the narrative reporting right than follow the XBRL approach.” It is down to the culture again. “Will XBRL information from a company in Malaysia say the same thing as the information from a company in France?”

Given Broadley’s sentiments toward XBRL, I think his answer would be “No, it won’t. Interactive data will reinforce national accounting differences, making company data less comparable among firms in different countries.”

I may be unfairly characterizing his position; in fact, it’s unfair of me to wring so much meaning from a single sentence.  I will grant that — whatever Mr. Broadley’s views — his question is an important one. So leaving aside the equally compelling issue of whether some national accounting differences are not only inevitable but necessary, let me address the question: Will XBRL work to perpetuate national differences in financial reporting and make cross-border financial statements less comparable?

A major focus of the KPMG report was to measure the progress in adopting International Financial Reporting Standards (IFRS).  The authors found that “Reporting in each country still bears the hallmarks of its previous national GAAP.” As John Hegarty, Manager, Financial Management, Europe and Central Asia, for the World Bank states:

“German pharmaceutical companies will be more like German car companies than they will be like French pharmaceutical companies. The actual differences remain. We have to be realistic and accept that all of this won’t work perfectly from today. It will take time.”

The Economist had an interesting report on the issue in May:

Whether pure IFRS or not, all countries are prone to interpret the rules in ways that reflect their old national accounting standards, according to KPMG, an accountancy firm Kuwait and other countries in the Middle East, too, are said to be adopting IFRS with certain peculiarities. The worry is that if enough countries seek to tailor standards to their liking, there could be hundreds of different versions of IFRS instead of one set of international rules, which is the whole point, says Sir David Tweedie, the head of the IASB.  We have to nip this in the bud.

Now how does Sir David view the role of XBRL in attaining the IASB’s goal of a single set of international accounting standards? Here are his remarks at the Philadelphia XBRL conference last December:

Where does XBRL fit into the IASB’s efforts on the standard-setting front? As I mentioned earlier, the IASB is committed to developing standards that meet the needs of users of financial accounts, in particular the investor community, to enable them to make rational economic decisions. We at the IASB and the IASC Foundation (our oversight organisation) view XBRL as an important tool that will enable these users to take full advantage of the increased comparability and transparency offered by IFRSs.

For Sir David, clearly XBRL is part of the solution, not part of the problem.

Let me turn to the views of Charles Hoffman, who is widely considered the George Washington of XBRL. In his book Financial Reporting Using XBRL (UBMatrix, 2006, p. 159), here’s what Hoffman says about interactive data and comparability:

XBRL is comparable to the extent that users of XBRL in a certain situation desire to have comparability. Comparability is not an XBRL issue; it is a domain issue; how much comparability does a specific domain, or use, of XBRL desire. Comparability is a very emotional issue that people turn into a technical XBRL issue. It is a domain issue which will be determined by the domain.

I’m taking some liberties here in using this quote to support my argument. Certainly Hoffman isn’t specifically addressing XBRL vis–vis IFRS standards, and clearly “domain” has wide applicability beyond financial reporting. Nevertheless, could there be a more straight-forward declaration of his feelings on the matter than “comparability is not an XBRL issue.”?

Now you would think at this point that — delighted to find seemingly strong support for my position that interactive data will not hinder cross-border comparability from both the world’s leading accounting standards-setter and the Father of XBRL — I would have the good sense to claim victory and sign off.

Well, I may not be dumb, but I am stupid. Because I can’t help mentioning that I do see a way that the structure of XBRL could impede cross-border comparability of financial reports.

Describing the role of jurisdictions, XBRL says “Jurisdictions promote XBRL and organise or sponsor the creation of taxonomies, notably for the main accounting standards for business reporting in their area.”There are 20 jurisdictions Japan, Canada, Poland, etc. — including one for the IASB. Many if not all of the jurisdictions have created national taxonomies to reflect the accounting specific to their area.

As I reviewed the websites of the various jurisdictions, I came across this statement from XBRL New Zealand:

A draft taxonomy has been prepared in accordance with “old” New Zealand Generally Accepted Accounting Practice (NZ GAAP).  This taxonomy will not be developed further because after 1 January 2007 all financial reporting entities in New Zealand will need to prepare financial statements under New Zealand equivalent of International Financial Reporting Standards (NZ IFRS)…XBRL-NZ intends to replace this taxonomy with an extension taxonomy to the approved IFRS taxonomy developed by the IASCF to recognise unique terms in the financial statements of New Zealand reporting entities.

For me, this raises the question: Will all jurisdictions follow New Zealand’s example? Will all national GAAP taxonomies be allowed to gracefully decay as IFRS is adopted? Or do these GAAP taxonomies, in at least some jurisdictions, have constituencies that would like to see national taxonomies continue to reflect country-specific accounting practices, thus perpetuating the cross-border differences in XBRL-enabled statements that Sir David seeks to eliminate?

Comments from XBRL jurisdiction members, demonstrating that I’m both stupid and dumb, are most welcome.

Add to Del.icio.us | Digg this

This entry was posted on Tuesday, August 7th, 2007 at 8:54 pm and is filed under Financial Reporting, . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.