I don’t think of myself as a Luddite. In fact, for someone with as much grey hair as I have, I think of myself as pretty tech savvy. After all, I have a blog, I also have my own web site, I carry around a Blackberry and I spend much of my day in front of a computer. But, I have to confess, when it comes to XBRL as it relates to investor relations, I’m lost. I’ve been to presentations at NIRI conferences where I hear speakers expound upon their theory that XBRL will revolutionize the way we look at and use financial data. I hear them extol the virtues of how the information will be tagged and prepared for automatic comparisons and I wind up more confused at the end of the speech then when I started listening to them. I find that when people start talking about XBRL, it’s similar to when I listen to computer programmers – I’m pretty sure they’re talking English, but not in a way that I can comprehend.
Finally, I couldn’t stand it anymore and I decided to try and figure out how all of this will affect me. So I went out and did a Google search on XBRL (I told you I was half-way tech savvy, didn’t I?) Here’s what I found:
“XBRL, like XML, applies identifying tags to items of data, which allows them to be processed and analyzed. Like XML, XBRL is a language intended to be read by computers, not humans. The use of XBRL tags enables the automated processing of financial data by specialized computer software, which eliminates the need for the tedious and costly process of manual re-entry and comparison. Once data has been tagged, computer software, rather than human labor, is used to select, analyze, store and exchange information. Moreover, since it is a standardized language, XBRL enables an apples-to-apples comparison across multiple companies and multiple industries.”
So as I understand it, we’re going to be able to grab all sorts of data and the computer will tell us if the information is comparable. If it is, then we can drop it into spreadsheets and unlock all that hidden information. Leaving aside the issue of whether or not companies will code everything in the same manner (which is a pretty big issue by itself), as I see it, there are two potential problems here. First, the numbers that are being tagged by XBRL are being prepared by humans using accounting. As we all know, accounting involves a multitude of judgments. Things that seem straightforward on the surface, such as revenue, can actually be quite tricky when you start to adjust for accrual accounting with its accrued revenues, deferred revenues, advances, long-term contracts and exceptions. The tagging for XBRL will follow the accounting judgments, so unless all companies start to account for things exactly the same, discrepancies will crop up in the numbers. In my experience, every company has certain accounting items that they handle differently from other companies. The reasons for this range from “We’ve always prepared it that way” to “The system can’t handle it that way” to a variety of other excuses, but I assure you these exceptions exist. Unless you get uniformity, comparisons are an illusion.
Second, and this goes back to something I learned when I was taught math (or as we used to call it in those days, arithmetic), you can’t just read the problem and say, “I understand it”. You have to get out your pencil and paper and work the problem to absorb what’s happening. Maybe I’m a dinosaur, but when I’m examining a company’s earnings report, I pull out a calculator and work out the relevant ratios and changes I care about. That way, as I work my way through the financial statement, I find I have a better understanding of where the variances are. Maybe the next generation will be better at letting machines point out these things, but having helped three children learn math, I don’t think so.
So as I understand it, XBRL will allow people to use software to manipulate numbers easier and faster (because they’re already tagged) for purposes of analysis and comparison. There is, of course, no guarantee that the analysis will be any better understood or that the comparisons will be meaningful, but hey, you’ve got to start somewhere.
Sounds to me as if the XBRL revolution is being oversold.
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One tool you might want to check out is at https://xbrlviewer.bowne.com/. (You'll need to supppy your e-mail address, but I've never been spammed by them.) If you check the "highlight extensions" box on any financial statement, you can see exactly which line items the company was able to report using standard accounting terms, and which ones they had to customize because they're reporting something that's unlike the 15,000 or so normal accounting facts that companies report. As an investor, that certainly helps me better understand the business. This is just one example -- there are already lots of other utilities and time savers and analysis tools out there. Just like computers never led to a "paperless" office, XBRL probably won't do some of what it's predicted to do. But like other computer technology, it will also do things that no one has yet predicted. To the extent those things allow companies to streamline reporting processes and markets to do better analysis, that can only mean more good things than bad things for capital formation, investor protection, and efficient markets.
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