Liv A. Watson

XBRL Taxonomies: The New Word in Accounting and Financial Dictionaries

Find out how XBRL interactive data is reinventing the accounting profession.

May 6, 2006
by Liv A. Watson, VP of Global Strategy

Last month’s column introduced the concept of Interactive Data and quoted some of its champions including the Securities Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), Federal Depository Insurance Company (FDIC), as well as members of the commercial sector, EDGAR Online Inc. This month we’ll discuss why you need to add “XBRL Taxonomies” to your professional vocabulary.

As most CPAs are aware, data quality is becoming increasingly important for every public and private sector organization, particularly as organizations are more accountable for disclosure and transparency of their financial data.

To that end, XBRL International, Inc. (XII) has developed and manages the XBRL framework. XII is an international consortium consisting of more than 450 organizations comprised of the leading accounting firms, software vendors, information intermediaries, regulators, financial services firms and academics from over 26 countries. The consortium is organized into national jurisdictions and operates via electronic collaboration tools, conferences and meetings.

XBRL Taxonomies — The Foundation of Intelligent Interactive Data
The word “Taxonomy” is derived from the Greek words taxis meaning arrangement or division and nomos meaning law. XBRL Taxonomies are dictionaries of business terms and their corresponding tags, e.g., US GAAP taxonomy. By separating structure (or content) from presentation, you get Interactive Data: smarter, better quality data. Once data is made interactive, the numbers in financial reports are easier to locate. They will not only be instantly searchable and retrievable, but you will also be able to immediately download them into spreadsheets and an unlimited number of software applications.

Think of taxonomies as information about the structure of a document in terms of its content. Figure 1 shows a sample of an original data item with explanatory labels that enhance the user’s understanding of the data element. Labels (“tags”) enrich the basic data point, <500>, by fully explaining its context; <500> is net income from the year 2005, reported in euro dollars. The labels form a relevant context or structure (for example, a particular chart of accounts), and stay with the data point through its life cycle. These lists of specific labels -- as developed by the consortium -- are the “XBRL Taxonomy Framework” and can be extended or modified by individual companies to reflect their unique reporting needs and personalize the “business dictionary of definitions” (labels) called taxonomy.

Figure 1:

(Source: EDGAR Online, Inc)

XBRL Taxonomies Are the Foundation of Interactive Data

In his speech before the Securities Industry Association, SEC Chairman Christopher Cox pointed out that the SEC had taken the lead in encouraging the adoption of XBRL to keep U.S. markets, exchanges, companies and investors ahead of the curve. “The interactive data that XBRL data tagging makes possible can help everyone in this room achieve many of your different goals: keeping investors informed; minimizing your costs and improving your productivity as analysts; and managing your own companies better with real-time management control information,” he said. “Interactive data can make the SEC a far more effective regulator, by helping us focus on preventing fraud, not just reacting to it,” he further added

Data quality is becoming increasingly important for every public and private sector organization, particularly as organizations are more accountable for disclosure and transparency of their financial data. This data, generally, sits in different proprietary data formats with a document-centric view of the information, which means that the data is only valid and transparent in its original proprietary format. No labels or “tags” define its origin, context or content, i.e., it is not interactive. Therefore, in order to properly analyze or utilize the data in various financial reports, someone has to reformat it. While re-keying the data to new formats, is both necessary and critical, this process is time-consuming, expensive and replete with human error. Chairman Cox understands these issues and knows that in order to be globally “ahead of the curve”, the U.S. must not only understand XBRL taxonomies and interactive data, but must also implement them in financial reporting. Under his leadership, the SEC has already started a pilot project for voluntary filing of financial reports using the interactive data made possible through XBRL Taxonomies. In fact, the world is developing XBRL taxonomies as a global open standard and is about to revolutionize financial reporting and corporate disclosure worldwide.

Still not convinced that you need to add XBRL to your professional vocabulary?

Don’t underestimate the fact that over 450 worldwide members from the financial and business reporting supply chain have bet on a positive outcome for open source developed taxonomies. When successful, their efforts will mean that a broad spectrum of the accounting profession will be “reinvented” according to open-source principles and XBRL interactive data. Consequently, there is a demand for accountants with XBRL Taxonomy included in their professional skill sets or at the very least, in their “professional vocabulary”.

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Liv Watson is an accountant and Vice President of Global Strategy for Norwalk, Connecticut-based EDGAR Online Inc. (NASDAQ: EDGR )— a provider of global business and financial information. Questions? Contact Liv.