XBRL translates long-form financial data, both from the tables and the footnotes in financial reports, into a format that computers can read and understand. To best understand how XBRL works, think of it as another language that public companies and the CPAs assisting these companies must learn—at least enough to understand and vet it. That’s no small task, given the complexity of the XBRL taxonomy—the set of definitions for the “tags,” or descriptions, attached to each piece of data. The tags translate the raw information in financial reports into a computer-readable format.
Then there’s just the sheer amount of data. Each filing can contain tens of thousands of data elements, each of which must be XBRL-tagged. The tags establish the type of data and its relationship to other pieces of data. For example, XBRL tagging would allow computers to recognize net income and understand that it is produced by subtracting expenses from revenue.
The technology’s promised benefits—greater company control of data definitions, exponentially improved efficiency for analysts and investors—are just beginning to be realized. Improvements in XBRL creation and validation software are making it possible to develop tools that allow analysts, investors, and others to extract key information from public company data far faster than they could before. For example, say that an analyst wants to compare intellectual property (IP) spending for the first quarter in the technology sector. Today, the analyst, or an assistant, would have to dig into each of the technology companies’ 10-Q financial filings for the first quarter, track down the IP spending number, and record it in an Excel file. It’s a process that could take hours. With XBRL and the SEC’s common XBRL taxonomy for GAAP, public companies would use the same tag for IP spending. An analyst could then run an XBRL search for that tag among technology sector companies and have the results compiled in a matter of seconds.
Mike Schlanger, head of the XBRL division for Merrill Corp., compares the current XBRL cycle with the one public companies went through when they were ordered to convert to filing financial and other statements through the EDGAR system.
“This was the paper-to-electronic conversion,” Schlanger said. “When that occurred, everyone was up in arms because someone moved the cheese. … Three to four years in, everyone (was) still grumbling, and the SEC opened up sec.gov, and this was (1996), when the web was really emerging, and all of the sudden everyone said, ‘Wow, this is great stuff. I can get every single public filer’s information at my fingertips.’
“XBRL is the same way … 18 months to two years from now, when the tools are there and the data’s better and the quality’s better, everyone is going to look back and say, ‘How could we have lived without this?’”