At present, enterprises use a variety of software tools and formats for financial reporting. This makes aggregation and interpretation of data a tedious, time-consuming, and costly exercise for users, such as investors and analysts.

On top to that, the advent of business-to-business (B2B) commerce has accentuated the need for companies to automate their business reporting supply chain by aggregating data from partners and suppliers, a strategy that can help lower costs and reduce risks. A new programming language—Extensible Business Reporting Language (XBRL)—is expected to benefit organizations, particularly financial institutions, by providing a common vocabulary and format.

If you advise or perform application development work for financial institutions, you’ll want to know how XBRL works and how it will benefit various segments of the industry.

Just what is it?
XBRL is an XML-based language for financial reporting. It is a standards-based framework that enables the financial community to publish, compare, exchange, and analyze financial statements of public held companies. XBRL is still in its infancy but has the potential to have wide-ranging impact on the way financial information is reported and processed.

XBRL, a derivative of XML, uses tags similar to those used in XML to describe the data contained. It tags financial data in a company’s software or applications so that private and public organizations can exchange information across the Web.

The four elements that make up XBRL include the following:

  1. Specification: This is the technical specification of XBRL.
  2. Schema: This is the core of XBRL. The document type definition (DTD) and XML schema definition (XSD) define how an XBRL taxonomy or instance document is to be built.
  3. Taxonomy: The taxonomy is usually prepared as indicated by the XBRL specifications. It defines the terms to be used in an XBRL instance document and their meaning. For example, a taxonomy for the federal government will define the terms that can be used in an instance document by federal agencies.
  4. Instance document: This is a financial report or statement prepared by an entity such as a company. The instance document is tied to a particular taxonomy and is used in conjunction with it. You can imagine it as a Name=value pairs where Name is a tag defined in the taxonomy and value is the current value of financial data defined by the taxonomy.

What will it do for my clients in the financial industry?
XBRL will be a strategic advantage for banks and financial institutions in today’s competitive market. By standardizing the taxonomy, XBRL will help the organizations:

  • Exploit the benefits of interoperability and integration.
  • Cut costs involved in extraction and processing of financial data across a variety of applications and technology.
  • Provide executives with a clear and consistent view in real time of the financial information supply chain.

The investment community will be one of the biggest beneficiaries of this standardization. Analysts will be able to search for and automatically download data into their spreadsheets from a myriad of sources. They can then evaluate a company in an industry segment by comparing it to its peers since all companies will use the industry standards reporting format. Even individual investors will be able to leverage this technology by extracting information from a variety of Web sites.

Banks will also find a myriad of uses for XBRL, including use in data processing for customers for loans, credit cards, and checking accounts. By eliminating the need to re-key the same data, XBRL would help end users avoid rekeying errors. It will also help banks cut down on the cost of processing loan and other applications.

Despite all these benefits and the hype surrounding XBRL, several hurdles remain. So far, the buy-in from the industry has been lukewarm. No major banks are using XBRL yet. The major ERP vendors have yet to incorporate it into their products.

But, the organization behind this movement, has been able to attract a lot of technology companies to its fold. Most major systems integrators and large software vendors are part of the organization. The consortium has started to focus on U.S. federal government and some financial institutions.

Visahl Srivastava is a senior consultant with KPMG Consulting, specializing in financial management applications such as procurement and supply chain. He holds a bachelor’s degree in electrical engineering from the University of Roorkee in India.

What do you think?

How long will it take for XBRL to catch on in the financial industry? How will you advise your clients about this new language? Post a comment below or send us a note.