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XBRL: a technology standard to reduce time, cut costs, and enable better analysis for tax preparers

XBRL: a technology standard to reduce time, cut costs, and enable better analysis for tax preparers – eXtensible Business Reporting Language

Louis Matherne

Introduction

One of the unrealized benefits of the Internet is the ability to automate business reporting functions. “Straight-through processing” and aggregation of data for business reports will increase market efficiency and lower costs and risks for companies. As is the case with transactional electronic commerce, “e-reporting” requires a set of technology standards with which participants can exchange data electronically, both internally and externally. XBRL, or “eXtensible Business Reporting Language,” is such a standard for the reporting and exchange of business information, including tax filings.

In 1999, the American Institute of Certified Public Accountants (AICPA) initiated a project that has grown into XBRL.org, a nonprofit international consortium of tax, accounting, consulting, technology, and financial services companies from around the world. Members include all of the “Big Five” tax and accounting firms, the accounting institutes in ten countries, such leading companies as Fidelity, General Electric, IBM, Microsoft, SAP, PeopleSoft, and more than 80 others totaling $2.5 trillion dollars in market capitalization. All these organizations have come together to form a standard to publish, retrieve, and analyze business information across any technology, quickly, cost-effectively, and virtually error-free. (Detailed information about XBRL can be found at the organization’s Internet site, www.xbrl.org.)

In the case of tax reporting, combinations of manual and partially automated systems are necessary today to consolidate data, and organizations face renewed challenges whenever they need to report in a new jurisdiction or implement new tax reporting requirements. They spend a long time creating tax exhibits, which then have to be recreated whenever someone changes the tiniest detail. Major corporations spend extraordinary amounts of time creating tax reports with desktop publishing tools, word processors, spreadsheets, and templates that are supposed to ensure compliance with myriad requirements affecting tax filings and reports. As is the case with other business functions, there are strong pressures to determine and report one’s taxes more efficiently. Corporations using XBRL can work with their tax data more quickly, less expensively, and more effectively.

The Case for Standards

Increasingly, companies are filing taxes using electronic networks both to reconcile and settle tax transactions with internal tax reporting systems and to select, execute, and process reports for external recipients. The benefits of such automation are considerable — lower transaction costs, lower potential for failed filings and human error, and less reliance on manual data input. More recently, companies have begun to automate their internal tax reporting and filing processes, using electronic networks.

By and large, however, the use of automated systems is isolated. Communication between companies and government agencies is still often effected via fax or electronic communication between incompatible systems. It is sent by the company using one technology to another company that uses another; it therefore requires the recipient to manually re-key the data for its system. The full benefits of automation will be seen only where there is straight-through processing of tax reports or filings within and between company operations, with little or no manual intervention between execution and filing. XBRL can make straight-through processing a reality for all parties involved in the tax filing process. XBRL for tax filings can help corporate tax departments obtain data and process information for reports across olden-incompatible legacy systems. This could save companies significant time and money in preparing tax reports.

Straight-through processing requires the automated and error-free electronic transmission of tax report details between technologies (hardware and software). This can be achieved only if parties “speak the same language.” In other words, it requires common message standards for tax transactions within a company and the aggregation of this information into tax filings and reports.

Paper-based standards in the tax profession have existed for decades and still are widely used. But with these standards, most corporate tax filings and reports are still printed and sent by mail or fax, and they are based on manually inputting data into different internal and external information systems — often many times. And, of course, each point of data input engenders transaction costs and increases the potential for input errors, failed filings, and inaccurate reports.

Streamlined automation made possible by XBRL is likely to have a greater effect on tax filings and reports than on most other business reporting (e.g., financial statements). First, in principle, virtually all tax documents can be delivered entirely in digital form; and second, development of an electronic standard format for tax documents is a relatively simple process because standards already exist in the world of paper tax forms.

Behind the Scene: The Connection Between XML and XBRL

A “message standard” is any standardized means of communicating between participants the data relevant to the processing of, and aggregation of, tax filings and reports. A message standard has two components: syntax — the technical basis of the standard; and business content — the data necessary to process the transaction.

“Syntax” is roughly analogous to the grammar of a spoken language. An example in the language of technology would be XML (eXtensible Markup Language), the new syntax that underpins the World Wide Web and enhances and extends HTML (HyperText; Markup Language).

“Business content” roughly corresponds to the vocabulary of a spoken language. An example might be the XBRL standard — a template or “dictionary” of data tags assigned to the information contained in the tax report line items.

XML represents a profound technological development with potentially groundbreaking implications for the standardization of electronic messages. XML is the syntax or grammar necessary to streamline the automated tax filing process. Every major software developer has embraced XML, and it is rapidly gaining acceptance as a tool for integrating disparate systems. Businesses are embracing XML, as they did electronic data interchange (EDI) in the 1980s, to facilitate trading with their partners. XML technology is turning the Internet into a powerful medium of exchange, for business-to-business (B2B) and business-to-consumer (B2C) e-commerce, for education, for e-government, and much more.

But standardized grammar (XML) in itself is not enough. Just as necessary is an agreement on standardized terms for a function or, more broadly, within an industry.

XBRL, which is built around the XML technology and is freely-licensed, represents the vocabulary or business standard to facilitate the syntax. Companies will be able to use the XBRL standard to develop all types of business reporting, including:

* XBRL for Financial Statements

* XBRL for General Ledger

* XBRL for Journal Entry Reporting

* XBRL for Regulatory Filings

* XBRL for Credit Line Reporting

* XBRL for Economic Indicators

* XBRL for Risk Reporting

* XBRL for Mutual Fund Performance

* XBRL for Performance-related News Releases

* XBRL for Assurance Schedules

* XBRL for Authoritative Literature

* XBRL for “Business” Reporting (Balanced Scorecard, Benchmarking, and other performance reporting)

And, of course —

* XBRL for Tax Filings

XBRL surpasses HTML in utility because it describes data in such a way that a computer can understand its significance, not merely the presentation of the data. XBRL distinguishes the definition of content from the style of presentation of that content (presentation style is determined by a separate style sheet written in the XSL (eXtensible Style Language) standard. Through XBRL-based tools, once incompatible technologies now will be able, in effect, to “talk” to one another easily and effectively, without misinterpretation.

As an added benefit, XBRL is extensible: It allows for the creation of new “tags” to describe new and unforeseen message fields. This means that new, customized XBRL data tags can be created, as long as they adhere to the XBRL specification and the standard core of tags defined by the World Wide Web Consortium (which oversees the development of XML standards). XBRL’s strength may be its ubiquity. Because XML is embedded in WWW technology, it should reach widespread use, even unknowingly by its users, very quickly as more and more businesses take advantage of the efficiencies of the Internet for business reporting purposes. Already, 95 percent of the Fortune 500 are using XML technology for e-commerce, and XBRL will work seamlessly with these initiatives to enable e-reporting.

Benefits

In short, XBRL has four main benefits to the tax preparer community for use within their companies:

* Enhances electronic tax filing and provides

* Streamlines electronic tax filings

* Enables better analysis for greater tax minimization

* Enables real-time, customized reporting

Gartner Group has estimated that the cost reduction to companies that publish using XML is 30 to 50 percent simply in the area of reducing manual intervention. With XBRL, not only can one reduce the cost of producing ally single report, but the ability to file all reports simply is an enormous cost savings.

Because XBRL is vendor-neutral, it will save organizations money by integrating with existing systems and technologies. This also means that tax professionals will be empowered to sort through the information of their companies more quickly and effortlessly, to determine the best methods of preparation and reporting for tax minimization.

There are also economies of scale that arise in situations where participants can band together to share the fixed costs of technical standards development. Software suppliers are likely to develop a wider range of complementary products using common standards like XML and XBRL. The cost of repairs and updates is typically lower since the pool of technical expertise from which they call draw is larger. And the “learning-by-using” mechanism works across as wide a group of users as possible. This is the process by which users’ specific experience and knowledge of the standard contribute to the development by the supplier of the standard’s technical capabilities.

The cost savings from such straight-through processing are substantial. For example, in the securities industry in the United States, IBM estimates that two-thirds of all securities trades need to be amended, repaired, or cancelled. Microsoft estimates that 90 percent of all Internet transactions need to be re-keyed on the backend of e-commerce operations. XML standards help companies reduce re-keying information for e-commerce, and XBRL will do so for e-reporting.

Are There Any Drawbacks?

Like many technical advances, this new method of sharing financial data raises both opportunities and challenges. Some have questioned whether information that is so readily available might not give a false sense of comparability. For example, the sales figures for Ford and GM are not created in the same way, which means you cannot make apples-to-apples comparisons between them. Nevertheless, being able to gather the information quickly might lead some people to make such comparisons. The position of XBRL.org, the nonprofit consortium that is developing the standard, is that technology in itself will not make such issues go away. Instead, financial reporting professionals should understand the new capabilities of the Internet and take a role in shaping what XBRL becomes.

It is also important to make clear that XBRL will not require disclosure of any new information. XBRL simply makes providing information far more efficient and effective.

Overall, the effect of XBRL on business reporting processes will be significant. It will reduce or do away with switching costs because it facilitates backward compatibility, meaning that companies will not have to “rip and replace” existing systems.

How Can a Tax Department Implement XBRL?

Development of XBRL for tax filings requires a voluntary user coalition. No standard will actually be used in a market unless it fits the needs of most or all users. The users themselves are in the best position to determine this. To make use of XBRL in your own organization, you can begin by getting involved with XBRL.org.

In addition, the consortium will periodically sponsoring educational forums to provide interested parties a very good opportunity to learn more about XBRL and its future direction. Please visit the XBRL Web site (www.xbrl.org) for details.

The development of common message standards is central to the move toward automated processing of tax filings and reports and the wider adoption of electronic commerce in wholesale corporate marketplaces. Initiatives led by market participants to establish common standards have made considerable progress. But it remains the case that too many tax reports from companies today are still processed via fax or incompatible electronic networks. Overall, the applications and the uses of XBRL in the tax area are now beginning to emerge, and the opportunities for its use are limited only by the imagination.

LOUIS MATHERNE is co-chair of the XBRL Strategy Working Group and has shared responsibility for the strategic development of XBRL. Mr. Matherne serves as Director of Information Technology of the American Institute of Certified Public Accountants, overseeing the identification, development, and deployment of IT-based initiatives within the accounting profession. He can be reached at lmatherne@aicpa.org.

ZACHARY COFFIN is chair of the XBRL Liaison Committee. He is also KPMG LLP’s Global XBRL Leader, and is responsible for introducing XBRL to KPMG’s services in consulting, tax, assurance, and corporate finance for clients of every industry worldwide. He can be reached at ZacharyCoffin@email.com

COPYRIGHT 2001 Tax Executives Institute, Inc.

COPYRIGHT 2002 Gale Group