Written by Gary Purnhagen      Posted on February 22, 2008

Gary Purnhagen has more than 30 years experience in helping firms in diverse industries meet document processing challenges, including SEC disclosure. His engagements have included responding to the SEC’s EDGAR program, use of the Internet and other digital media for information dissemination, and most recently XBRL. Over the past three years he has given dozens of executive briefings on XBRL and spoken about the standard at a number of professional seminars.

Last Friday, the SEC added the ‘Financial Explorer‘ — which allows investors to view and visualize financial data in innovative ways –to its list of interactive data viewers. The Explorer presents corporate financial performance in diagrams and charts using information provided to the SEC in the XBRL format, thereby helping investors quickly and easily analyze the results of public companies.

Since December, when the SEC posted the Executive Pay Finder for compensation data, the Commission has had the Explorer listed as a “coming soon” tool. While I was intrigued with the possibilities of its capabilities, I also wondered if it would take the Commission the same eight months it needed to make the compensation reader available after announcing it back in April 2007. The fact that it only took the SEC less than two months to make the Explorer available points to the acceleration of milestones leading to the eventual mandate of XBRL by the SEC.

My hopes for the Explorer were warranted: this new viewer is cool. It uses interactive charts and diagrams, including atomic models, to represent data disclosed in financial statements — such as current assets, long-term investments, and goodwill, as well as the relationships among them — and compare these items between reporting periods. The SEC press release says the Explorer can provide analysis and comparisons across competing public companies, but this really isn’t the case at this point. Although these charts and tables do not take all of the work out of understanding the underlying financials, that is not the point of this compelling demonstration of the power of XBRL.

And as the press release states, the software does take the work out of manipulating the data by eliminating tasks such as copying and pasting rows of revenues and expenses into a spreadsheet. This allows investors to focus on analyzing the financial results through visual representations that make the figures easier to understand. And to that point the Explorer does demonstrate along with the other two online viewers the Executive Pay Finder and the Interactive Financial Report Viewer — the potential power of XBRL.

The Explorer presents financial statements visually in very interesting ways. It points to the future when we will have software created by designers who specialize in conveying dense information graphically interacting with a complete database of corporate information.

But that day will not come until there is a mandate for all companies to submit their financials, including footnotes and MD&A, tagged with XBRL. The famous movie line says it well: Build it and they will come. Once there is a compelling database of corporate disclosure, very powerful tools will emerge on the marketplace. But to get there we need Chairman Christopher Cox to continue championing this business reporting standard; to date, the 307 filings from 74 companies are not compelling and does not allow for in-depth data mining within a company’s financial disclosure or across an industry.

As with the Interactive Financial Report Viewer, the SEC will release under an open-source license the code for Financial Explorer to encourage developers to create other tools that take advantage of XBRL. While I applaud the Commission’s efforts here, I don’t think it’s going to make that much of a difference in the public awareness and adoption of XBRL. The compensation reader, which made the executive compensation data of the top 500 companies easily available, demonstrated far more effectively the power of XBRL and was largely ignored by the press and public.

But with all that said, the new tool is a welcome addition to the list of real-world demonstrations of the use of XBRL.

Written by Ralf Frank     Posted on February 15, 2008

Ralf Frank is Managing Director at DVFA (the German Society of Investment Professionals), a division of EFFAS, the European umbrella of investment professional societies with more than 14,000 members in 25 countries. He is EFFAS’s delegate on XBRL as well as a member of several internal and external bodies on financial reporting and financial communication. In this post he writes about investment professionals use of so-called non-GAAP data and describes two specific examples. You can read more about this topic in the white paper he co-wrote entitled XBRL for Financial Analysts and Professional Investors.

Accounting experts often use the term “non-GAAP” to refer to data items that are not governed by generally accepted accounting principles. Financial non-GAAP items include EBIT, EBITDA, and other earnings measures, while nonfinancial non-GAAP data may depict share-of-market, CO2 emissions, or staff turnover.

My colleague Chris Dreyer recently challenged me on the term financial non-GAAP by pointing out that, strictly speaking, for investment professionals the term financial non-GAAP does not apply. Why? Any calculation, KPI, or earnings measure based on financial GAAP data is nothing but a deduction or a derivative of financial GAAP data, since it is composed of line items from the standard reporting package (i.e., balance sheet, P&L, and cash flow statement). The idea that a corporate report includes an earnings measure but the constitutive elements cannot be traced back to the standard financial reporting package may be a common phenomenon but is certainly not desirable. Investors and financial analysts would always want to assume that earnings measures rest firmly on fully audited GAAP data.

Understanding what investment professionals can do with XBRL requires us to (at least temporarily) abandon some fundamental beliefs about capital markets. Do investors read the standard reporting package? Well, some may, but the majority manage portfolios and analyze stocks under stringent time-constraints. Typically, investors use Thomson, Reuters, Bloomberg, and FactSet for aggregated and ready-to-use information. Financial analysts may belong to the group of users that reads financial information in more detail and in fact mines deeply into reporting packages. Yet they typically have what I would call trails and pain points — in other words, areas they selectively read because that is where they may find weak spots in, for example, financial position.

Investment professionals are heavy users of financial non-GAAP data. Imagine the process of financial analysis as a pyramid: it starts with getting an outline of the financial performance of a corporation, as well as its business issues and stock data. Granularity is the applicable term. You need select GAAP data like revenues and margins, and you also look at financial non-GAAP items such as EBIT. Within the process you dig deeper into the financials, you look at certain (not all!) line items, you compare your spreadsheet-based model with actual performance, and so on. Chances are you never go through the balance sheet line by line.

Has all the good work done by the XBRL community, i.e., the taxonomies that are mainly focused on GAAP, thus been in vain? Clearly no! When we look at financial non-GAAP data (which is what I am proposing to the XBRL community to do), we clearly need GAAP data as the source. Here is an example.

The majority of listed companies have small market capitalizations as well as small floats. When brokers don’t see a chance to generate orders with a stock they will not cover it. Not being covered is equivalent to lacking institutional reach, which results in low liquidity a vicious circle. The majority of companies in our capital markets are covered by fewer than five financial analysts. This is true worldwide.

On the other hand, investors are always on the lookout for an undervalued company with a solid growth story, and they like it even better if they are first to discover the stock. Most global fund management companies systematically employ a function to screen capital markets for undervalued stocks. The process entails identifying lesser known stocks, developing their base profile (financials, performance data, non-GAAP data such as EBIT, stock data etc.), and bringing them to the attention of the fund manager.

What can small caps do to increase their capital market visibility? They should provide capital markets with an XBRL profile sheet that contains a sufficient number of financials including some GAAP items but mostly non-GAAP performance data to allow for a sufficiently granular profile of the company. A sufficient number would be some 20 to 25 items, including past-performance and forward-looking information. This profile sheet should sit on the homepage of the corporation and might be targeted at fund managers by simple email. An XBRL profile sheet would in colloquial terms serve as an entre or a business card. That is a neat and, as experts of XBRL tell me, relatively simple use of XBRL.

Investment professionals will love it. It would show that corporations understand the way investors work. And it could be the beginning of a long friendship. (No need to bother about providing more details by the way: should a stock whet the appetite of a fund manager, the fund management company would quickly identify a broker analyst who would provide equity research.)

Are there other examples of non-GAAP uses for XBRL? The European Federation of Financial Analysts Societies has set up a commission on environmental, social, and governance issues, or ESG. The job of the commission is to gather and define the requirements of investment professionals in terms of ESG reporting. ESG is in demand by many fund managers and financial analysts; however, integrating predominantly prose from corporate sustainability reports is simply impossible for financial analysts. The commission has coauthored a set of more than 25 KPIs for ESG jointly with DVFA, which have been surveyed globally with fund managers and financial analysts. These KPIs build a reporting framework of quantitative, measurable data which can be easily analyzed, compared against benchmarks, etc. A team of experts is currently working on creating an XBRL taxonomy for these KPIs so that corporations soon will report their ESG data in XBRL.

XBRL can do a lot with both GAAP data and non-GAAP data alike. As a trained marketing man and a proponent of modern financial reporting, I am hungry for real-world XBRL projects that provide substantial value-added to users. The XBRL community should continue to work on XBRL GAAP taxonomies as the constituent elements for the financial non-GAAP data investment professionals handle every day. At the same time, we should also think of smaller projects in less scrutinized areas. ESG, intellectual capital, corporate governance, and stock selection are just a few examples that offer rich possibilities.

Written by Lisa Miller      Posted February 7, 2008

Lisa Miller is President and CEO of Dynaxys, a technology and business service provider headquartered in Silver Spring, Maryland. She has extensive experience in the public sector, including managerial positions at the Department of Housing and Urban Development (HUD) and the Federal Savings & Loan Insurance Corporation. She has also been a Director in the Washington office of PricewaterhouseCoopers, where her client list included HUD, the Federal Deposit Insurance Corporation, and other government and nonprofit organizations.

In the 2006 Technology Issues for Financial Executives survey (sponsored by the Financial Executives Research Foundation and Computer Sciences Corporation), nearly 20% of respondents identified upgrading or replacing legacy systems as a critical technology concern. But only about 1% cited evaluating the adoption/use of XBRL. How ironic then that these two critical issues, holding down opposite ends of the concern spectrum, would be paired up in a highly successful endeavor that puts a federal government agency at the forefront of innovative applications of XBRL General Ledger (XBRL GL).

It’s true and it’s a real success story that other federal agencies as well as organizations still strapped with legacy systems could benefit from. In short, the Federal Housing Agency (FHA), an agency within HUD, used XBRL GL to create interoperability between disparate legacy financial feeder systems and the department’s ledgers and control systems.

A federal agency an early adopter. Here’s how the FHA used XBRL GL combined with best practices to standardize data flowing between multiple systems and move responsibility for data integrity and utility from the consumer to the producer.

The FHA has as many as 20 different financial feeder systems supporting its insurance operations. They were all built to support commercial, not federal, accounting standards. It was critical that FHA find a way to improve the interfaces, data management, business processes, and controls between these commercially based systems and the FHA general ledger. At the same time, the agency needed new interfaces to other federal systems to improve internal controls and ensure the agency had current, accurate, and complete financial and procurement information.

This project focused on two subsidiary ledgers that were commercial, transaction-based systems: one for loans and one for properties that report collection and disbursement results for more than $3 billion in assets held by the government. To transform the data from a commercial chart of accounts into the government’s standard, the FHA controller had been using a data warehouse (to receive and translate the financial information) and complex posting models before uploading the data into the FHA general ledger.

Translation errors and the effort required to resolve them produced an unending nightmare. The monthly closing typically took 7 to10 business days. Year-end close took between 30 and 45 days. Inefficiencies, rising expenses, and frustrations ran high.

Thanks to the freely available XBRL GL framework, FHA was able to turn this familiar situation around. With the XBRL GL taxonomy, one can represent any data found in charts of accounts, journal entries, or historical transactions (whether they are financial or nonfinancial) without requiring a standardized chart of accounts to gather information. With XBRL GL a business does not have to change the way it represents data. And better yet, XBRL GL facilitates data exchange among software applications.

XBRL GL presented an obvious solution to FHA’s data problems:
First, XBRL has emerged as an effective framework to reduce the cost and effort required in information exchange. It was designed to allow financial data to be part of an information supply chain.
The XBRL taxonomy (i.e., dictionary) defines a common language that specifies the tags (words) to be used, their semantics (meaning), how they are defined (types of data, structure, and relation to each other), and the rules and formulas they must adhere to.
Further, XBRL provides a metadata structure that can be used across an organization. (XBRL delivers on the best practice dictum: Provide the data once — use it many times.)
At each step in the supply chain, data need to be viewed, analyzed, and manipulated for a variety of purposes while its integrity is kept intact. XBRL achieves this and other fundamental benefits such as accuracy, consistency, efficiency, reuse, flexibility, traceability, and visibility as data move through the supply chain.

In the FHA project, a metadata structure for data exchange was established so that legacy data could be standardized once and reported to multiple systems. The metadata structure also provides enhanced data integrity. Data are validated before they are transmitted. XBRL was used to standardize collecting, obligating, and disbursing data coming from the various financial feeder systems. Data were filtered or summarized based on the system they were feeding, and then sent to other systems. Performing full audits is relatively easy now because the audit trail for the detail is linked to the data through tags.

With a more reliable, accurate, and consistent crosswalk, the FHA improved cash management by eliminating posting errors and the subsequent rework or complicated after-the-fact adjustments. Reconciliations are done on the spot. Month-end and year-end closing of the books takes days not weeks. And post-closing adjustments or other rework is a thing of the past.

Today, FHA transmits clean, sound data from its legacy systems. Data validity has been consistently measured at 100%. The data warehouse middle layer is gone, and data flow directly from the source system into the general ledger, improving data management practices.

This project represents not only the first use of XBRL GL in a federal agency, it represents the first use of XBRL GL for data interchange in any organization in the United States. One might assume: If it can be done at HUD, it can be done anywhere.

Written by Bob Schneider     Posted on February 1, 2008

Most of the news coverage of XBRL now focuses on when the SEC will require its use for financial statements of US companies. Given the huge impact of such a mandate, the media’s emphasis is certainly not misplaced. But there have been other interactive data developments that have garnered far less attention which, while not more significant, point to richer and more robust uses of XBRL than financial reporting alone.

A case in point is microfinance. Several years ago the economist Hernando de Soto published his landmark book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Essentially, de Soto attempted to answer (from a contemporary point of view) the same question that Jared Diamond tackled from a historical perspective in his Guns, Germs & Steel: Why do people in the West have so much cargo (as the New Guinean politician Diamond spoke to put it) and people in some other places so little?

De Soto’s great insight was that the problem for people in poor countries was not that they lack assets, or business prowess, or economic drive. It was that they didn’t have a system of property that identified legal ownership, making it impossible for them to borrow. Despite inadequate legal systems, the small entrepreneurs of poor countries are in fact excellent credit risks.

At the same time that de Soto’s ideas have been gaining currency, there has been growing disenchantment with large-scale development programs for poor nations. Recipient nations have often used the funds for ideologically driven projects that make little economic sense, or to line the pockets of the country’s current crop of kleptocrats.

These conditions have set the stage for the emergence of microfinance. Unlike traditional big-budget aid projects, microfinance offers very small amounts of financial support usually loans, but also other services, such as insurance to a country’s breadwinners. These are very often women, who are ordinarily excluded from financial services. Financial support can come from financial institutions, like credit unions and banks, as well as donor agencies and private investors. The interest in microfinance increased significantly after Muhammad Yunus shared the Nobel Peace Prize in 2006 with the Grameen Bank for their efforts to relieve poverty through microcredit.

Microfinance is not without its critics and controversies. Some question how well it works, as this recent Business Week article (subscription may be required) indicates. But as international institutions focus on ways to ensure that developing countries get more cargo, microfinance is bound to be part of the solution.

How can XBRL help? The Microfinance Information Exchange (MIX) is the leading business information provider dedicated to strengthening the microfinance sector MIX provides detailed financial and social performance information from leading microfinance institutions and market facilitators as well as from leading donor organizations and investors in microfinance. The MIX MARKET, the organization’s web-based information platform, provides both financial and nonfinancial data for over 1,100 microfinance institutions.

Robert Kugel of Ventana Research, who recently wrote a piece for this blog on XBRL and Accounting Standards, has looked at how MIX adopted XBRL for its reporting needs. I found two of his points particularly interesting:

(1) Microfinance institutions often have inconsistent and slow Web connectivity. Spreadsheets with XBRL tags turned out to be the best approach for them to communicate with MIX. Spreadsheets, for all their shortcomings, are universally used and an easy extension of the systems and methods these institutions are already using. XBRL makes it possible to maintain the accuracy of data pulled from spreadsheets into MIX’s systems.

(2) MIX required a “double bottom line approach”  i.e., organization objectives are measured both by traditional financial measures as well as social reporting metrics. Because XBRL is extensible, it can be tailored to the requirements of a specific entity (as in the social reporting requirements for MIX) yet still conform to broader standards (such as the modified IFRS standards MIX uses for accounting data). The MIX example demonstrates the power of XBRL to facilitate the collection of both financial and nonfinancial data used to track and assess organizational performance.

It’s exciting to see XBRL used in innovative ways to reach socially significant goals. It extends the reputation of interactive data beyond the single dimension of financial statements and demonstrates the versatility XBRL offers business information users.