XBRL — the digital future of business reporting

Regulators world over felt the need for a language to electronically communicate financial and operational information between businesses and other users such as analysts, investors and regulators. To address this need, a common electronic format — eXtensible Business Reporting Language, or XBRL, was considered, and is now advocated by regulators in countries such as the US, the UK, China, and Japan. XBRL does not change what is being reported — it only changes how it is reported.

In India, XBRL is at a nascent stage, but developing rapidly. The Ministry of Corporate Affairs mandated XBRL for a certain class of companies from 2010-11 onwards. The companies should file their financial statements, along with the auditors’ and directors’ reports, using XBRL taxonomy.

No change is without pain, and the transition to XBRL was no exception. Last year being the first, companies faced several challenges due to a lack of clarity and awareness, as well as ignorance about the benefits from XBRL. Many considered it a mere compliance exercise. The taxonomies were issued late and there were frequent revisions, which added to the confusion. Companies were required to integrate XBRL within their environment, which required extensive coordination amongst the technology, finance and accounting functions, tagging, data and metadata maintenance sections and so on.

The most important challenge was to ensure submission of quality. Errors such as incorrect element selection, incorrect tagging of debits as credits (or vice-versa) were common.

The XBRL review process extends beyond the need to identify the most appropriate tags — it also calls for accuracy and completeness. Mapping of data to the taxonomies is as much an art as it is a science.

Different approaches were adopted to deal with the challenges and achieve smooth and accurate filing. Some entities chose in-house implementation, with their finance teams coordinating with the IT team to prepare the statements.

The other preferred alternative is an outsourced implementation, with a third-party expert appointed to generate the XBRL financial statements. This saves time and effort for the finance team and relieves it of the additional pressure of handling the XBRL exercise. However, when outsourcing there should be due emphasis on quality review. Experience showed that some companies that did not follow quality control faced several hurdles, and the filings took an inordinate amount of time and effort.

XBRL filing for 2011-12 is expected to start shortly. The MCA has revamped the business rules and taxonomy to align them with the revised Schedule VI requirements, and iron out certain glitches based on filing experiences in the previous year.

As the taxonomy and business rules have undergone significant changes, companies should not underestimate the time and effort needed for XBRL conversion. Finance teams should acquaint themselves with the complexities and challenges of the revised taxonomy and business rules. If a company prefers doing the XBRL conversion in-house, it should build a robust internal review mechanism to avoid errors. If outsourced, it should ensure that quality review procedures are followed by the vendor.

XBRL is set to become the benchmark for recording, storing and transmitting business financial information. However, the key question is whether it is worth the investment? The answer is a resounding ‘Yes’.

The benefits are innumerable, and will be seen in areas such as automation, cost saving, faster, more reliable and accurate handling of data, improved analysis, and improved quality of information and decision-making by all stakeholders, especially analysts, investors and Government authorities. By embracing XBRL confidently and building the required capabilities, companies can be better equipped for the future of digital reporting.

Jigar Parikh is a senior professional in a member firm of Ernst & Young Global

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