ROI on XBRL

EXECUTIVE SUMMARY

The reality of XBRL has grown exponentially over the past two years, in large part due to the SEC’s focus and encouragement. With the time, money and effort that Chairman Cox and the SEC have dedicated to this initiative, it appears highly likely that XBRL will be either an optional or mandated form of filing in the near future. For this reason alone, companies need to become involved and get up to speed. However, many are reluctant because they do not understand what XBRL is, what it will cost, what they have to know, and what the benefits are. United Technologies Corp. found that XBRL can be implemented for a reasonable price and without significant knowledge of the underlying technology. Beyond the potential for an SEC mandate, XBRL can provide many other tangible benefits for companies. An example of one such tangible benefit —labor saved preparing an SEC filing—is illustrated. XBRL is the future. As more government agencies implement XBRL technology, the benefits to issuers will continue to grow. John Stantial , CPA, is director of financial reporting for United Technologies Corporation. His e-mail address is john.stantial@utc.com.

To SEC Chairman Christopher Cox, XBRL is the next revolution in financial reporting. The technology’s proponents assert that it will significantly reduce manual effort, strengthen internal controls, enhance financial statement comparability and level the playing field for all investors. Data that is trapped and lacking context, such as those in PDF or HTML files, can now be electronically accessed and manipulated in seconds from your desktop. Sold? Apparently not. Despite its benefits, fewer than 100 of the 10,000 public registrants have submitted an XBRL filing under the SEC’s voluntary filing (VFP) or test pilot programs. Why the apparent disconnect?

Our experiences at United Technologies Corporation (UTC) over the past two years as an early adopter of XBRL have led us to conclude that companies have been slow to embrace the technology for three principal reasons:

A lack of knowledge or understanding of XBRL.

Misconceptions regarding resources required, including cost and technical proficiency.

The perception that there is little benefit to participating in the process.

In early 2005, we faced these same issues as we sought to determine the implications of XBRL on our financial reporting processes. Through the effort of tagging and furnishing our first document (an 8-K earnings release), we were able to gain a practical understanding of XBRL that we hadn’t been able to achieve previously and to dispel the misconception that the process is expensive and time consuming. But more importantly, we began to fully appreciate the capabilities and potential of XBRL as well as the benefits of early adoption.

In the two years since that original XBRL filing, we have tagged and furnished all subsequent earnings releases, a complete form 10-Q and all of Part II of our form 10-K. More importantly, we have built our internal processes and controls to support the ongoing tagging and filing as part of our standard financial reporting process. It is with these experiences and from this perspective that we address the three issues above.

WHAT IS XBRL?
XBRL has been likened to a bar code for financial statements. An electronically readable tag (bar code) is put on each financial statement element, which provides additional context. Staying with the analogy, if you looked at the bar code on an item in the grocery store, the code would contain a series of bars with little relevance to you. However, with the proper tool to read the code, it would tell you the product, the size, the cost, the vendor and the expiration date. XBRL operates in a similar fashion. The electronic tag assigned to each financial statement element contains further information or context regarding that element.

If, for example, you apply the tag for gross margin to the gross margin line on your income statement, a tool that can read XBRL would tell you the line item is gross margin, how it is defined, what the balance is, what currency it is in, how accurate it is, what period it covers, and for what company. The electronic tags that are applied are standardized and are contained in taxonomies (essentially the dictionaries used by XBRL that define the specific tags for individual items of data) that have been developed and are maintained on the XBRL Web site. The tags are applied using a tagging tool that retrieves the tags from the standard taxonomies and applies them to whatever format your financial statements are created in, such as Microsoft Word or Excel.

The benefit to users of financial statement information is that they can now electronically retrieve data in a matter of seconds with the additional context that is provided by the tags and with greater assurance of accuracy given the standardized context of the tags. Although standardized, the expandability of the taxonomies allows company-specific and unique information to be captured and reported accurately. Because XBRL uses standardized XML technology, it can be read by multiple, diverse software systems.

COMMON MISCONCEPTIONS ON COST
Not surprisingly, resistance to the adoption of XBRL often takes the form of cost or resource concerns; however, neither need be a valid obstacle. The only required out-of-pocket cost is for the tagging software, of which there are several options available and which cost as little as $1,000 (see the XBRL Web site at www.xbrl.org/us for a listing and links to the various tools available). Each of these tools is designed with the layperson in mind, takes very little time to learn and does not require a technical knowledge of XBRL (or XML—the language of which XBRL is a dialect).

Our initial effort at tagging and furnishing an XBRL document to the SEC consumed approximately 80 hours of an employee’s time. But to adequately evaluate this commitment, it is necessary to understand the scope and context of the effort. The hours included not only the time to tag the underlying document, but also the time to learn how to use the tagging tool, understand the requirements for filing under the SEC’s VFP, create tags that did not exist in the standard taxonomy, and to build a process that would allow the ongoing tagging and filing of documents. Our current effort to tag and file an 8-K earnings release is down to approximately four hours now that the learning curve has been eliminated.

Also important to evaluating the initial time commitment is the ongoing development of the tagging tools, the skills of the individuals involved and the extent of any custom tag development that may be required (known as “extensions” as they extend the existing standard taxonomy). Since our initial efforts almost two years ago, the tagging tools have become significantly more robust and comprehensive. This facilitates the tagging effort and allows for the efficient creation of new tags and the editing or correcting of previously tagged data.

Knowledge of XML would help the tagging effort, but it is not required. We have tagged and furnished our nine filings to date using internal staff, none of whom had, or have, a working knowledge of XML. Lastly, the current voluntary filing regulations only require the basic financials to be furnished; therefore, depending on how complex, simple or unique these basic financials are, you may be able to use only the standard taxonomies and not develop any extensions. For example, at UTC we report revenues and operating profit by business segment, so we needed to provide extensions for each of these segments.

WHY PARTICIPATE NOW?
With the never-ending demand placed upon finance organizations, the need to prioritize and focus resources invariably arises. While individual circumstances will dictate how this is done at each company, there are several strong reasons to consider XBRL among these priorities.

Although the SEC has deferred responding to inquiries on whether XBRL will be mandated as a filing requirement, the agency has nonetheless taken significant actions that would suggest it is a strong likelihood, including the recent $48 million upgrade of EDGAR to accept interactive filings, and the $5.5 million project with XBRL US to fund the development of U.S. GAAP taxonomies. Given this potential, it would seem advantageous to set up processes and work through the learning curves now, in the open and relatively unconstrained environment provided by the VFP, rather than at some future point when the filings are subject to the content and timing requirements of current documents.

In a similar vein, the SEC has structured the VFP with an avenue for companies to provide feedback on the XBRL process. Therefore, by participating now, preparers, analysts, auditors or any other constituents in the financial reporting supply chain can help develop an efficient, effective and workable process that takes into account their particular needs and circumstances. As with the SEC, the tagging software vendors are eager to receive feedback on the ease of use, features and effectiveness of their tools.

REAL BENEFITS TODAY
Exhibit 1 provides an overview of the current financial reporting process UTC uses to file its quarterly form 10-Q. There are hundreds of locations worldwide that capture their underlying financial data in a multitude of ERP systems. This information is then fed into Hyperion Financial Manager (HFM), where it is consolidated at the segment level. The segments then upload consolidated HFM information to the corporate office, where the overall consolidation of UTC’s results is done. Needed information is then manually extracted from HFM using reports or retrieves and entered into a Word document that will become the form 10-Q.

Current 10-Q Process Flow

Other information needed for the 10-Q that is not contained in HFM is received through various supplemental files that are e-mailed to corporate headquarters where the information is again manually extracted and entered into the Word document. As data is manually manipulated, there is an ongoing validation required that is constantly checking that the information conforms with certain rules and reconciles with its source.

As the 10-Q approaches completion in Word, it is disseminated to all the involved parties such as legal counsel, CFOs and business segments for review, commentary and approval. Changes from this review group are manually entered into the Word document and again proofed back to the source documents. When complete, the Word document is provided to the filing agent for conversion to HTML, after which a full proof to the underlying Word document is made before the 10-Q is filed in EDGAR.

The entire quarterly reporting process takes an average of 845 hours. As data is extracted from the financial reporting system and is managed between multiple documents, nearly 20% of those hours are spent on the non-value activities of proofing, reading, checking and footnoting. Additionally, it is this manual aspect of the process that has the most potential for errors.

Exhibit 2 portrays the future financial reporting process that incorporates XBRL. In this process, the entire 10-Q is created as a report in HFM, where it is then tagged in XBRL. At no point will the information be taken out of HFM and placed into Word or another document format. For management’s review and approval, an HFM report will be run and disseminated. Any changes will be made directly in HFM and will automatically update the report.

Future 10-Q Process Flow

When the review is complete, the financial statement files will be generated from HFM in XBRL and transmitted to EDGAR. By not manually extracting the data and working in multiple documents, the effort to proofread, review, check and add footnotes is not required. This eliminates 150–200 hours of labor from the quarterly reporting process, while concurrently strengthening the overall process controls.

FUTURE BENEFITS
So, there isn’t a cost barrier, the tools are available, technical knowledge of XML is not required, the resource commitment need not be extensive, and there are a number of reasons to begin participating now. But this is all reactive information. The benefits to XBRL come in the future when tagged information is readily available from all companies and can be accessed electronically for analysis, benchmarking, reporting uses and financial modeling. Not only can XBRL enhance external financial reporting, but it can also be applied internally for cost accounting, performance measurement, analysis and decision-making purposes.

Analysts and investors will be able to dramatically increase their breadth of knowledge with data readily available that does not require hours of manual manipulation. The data will be much more accurate and comparable; and context to the numbers will be accessible, ensuring they are used correctly. While these attributes will benefit preparers, the integration of the technology into companies’ accounting and reporting systems will produce the real benefits, especially through significant reduction in current manual efforts.

LOOKING EVEN FURTHER AHEAD
But the benefit needn’t stop there. If other users of financial information, such as the IRS, the Bureau of Economic Affairs and the Department of Labor, were to accept XBRL files, comparable benefits could be realized as the necessary filing documents could be generated and transmitted from the same tagged database—in our case HFM.

XBRL is not a fad; it is here to stay. It is already mandated by the FDIC for the filing of all U.S. bank call reports and is in use in other countries around the world. The tools are available, the resources are there to assist, and the potential benefits are tremendous. With the flexibility and generally open-ended nature of the SEC’s VFP, now is the ideal time to begin.