Academic

XBRL: 21st Century Financial Reporting

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

XBRL is a fascinating development in financial reporting, and the SEC has done a fine job coordinating its implementation. This is a concept that one of the Glom's former contributors, Commissioner Troy Paredes (the newest Commissioner on the SEC)(hopefully there's a link between Glom blogging and regulatory appointments) wrote about previously here. For a good introduction to XBRL, see this report.

It is a method for reporting information that tags data, presenting a more sophisticated data set than a simple adobe text document. Context is imbedded into specific financial numbers by the underlying programming language, minimizing the need for subjective assessment and occasions of human error when analyzing financial statements. Comparison across industries, or ratio analysis within financial reports, becomes almost automatic by linking directly to the tags rather than having to enter the information from the financial statements by hand. Among other things, this will allow the algorithmic programs crafted by total return investors to work almost instantaneously. It will also, after the growing pains of its initial implementation, reduce the costs and time pressure of the financial reporting process itself.

If nothing else, XBRL will make young associates lives easier. I can remember logging tons of hours looking through financial statements to develop reports, on issues that turned up during depositions, which could have been instantaneously generated with XBRL. It will also probably make the auditors and SEC enforcement staff's lives easier as well. The IRS uses complex algorithms of the interaction of information from tax returns to determine the taxpayers most likely to yield a penalty upon audit, I'm sure that financial auditors and SEC staff could also use XBRL to do the same thing.

The implementation of XBRL is an issue for the financial accountants, but since securities law is in part the law of financial accounting, I would imagine we'll see it worked into case law. For instance, plaintiffs might claim that a particular tag is defined by an issuer in a misleading way to hide some aspect of their firm?s performance. No matter how exact you think you've got the definitions for the categories in XBRL, there will always be some exception, some idiosyncrasy of a particular company or industry, that will requirement judgment. To the extent that different categories subject to such judgment have divergent effects on the company's financial statements, we are sure to see securities class actions and SEC Enforcement actions claiming that XBRL classifications and/or implementation decisions violated 10b-5 or other disclosure rules.

Full post as published by Conglomerate on August 30, 2008 (boomark / email).