In previous blog posts long ago (like here and here), I expressed the hope that XBRL will fundamentally transform financial reporting and financial statement analysis. For example, it's one thing to argue that mandating roll forwards of all balance sheet accounts would overload readers with information, but quite another to maintain the same thing about machine-readable data. In other words, XBRL will remove a key excuse for limiting financial disclosures.
On the other hand, despite my oft-recorded concerns with U.S. adoption of IFRS, I have not written anything about XBRL implementation differences. I recognize that XBRL is a significant issue when considering whether IFRS is ready for adoption by the SEC, yet it is beyond what I am comfortable evaluating on my own.
For these reasons, I am pleased to present this post from guest blogger Neal Hannon. Neal is an XBRL consultant and the former Director of Financial Reporting Technologies for the Financial Accounting Foundation. He can be reached at email@example.com.
Recently, Mike Starr, a deputy chief accountant at the U.S. Securities and Exchange Commission, spoke before a conference and said
"There is still concern about the adequacy of IFRS (XBRL) taxonomy… whether it has enough detail for industry, to ease the tagging process for companies and make resulting data useful for investors,"
Reuters reported that the SEC has refused to allow company filings under IFRS to use XBRL and Starr indicated there would be further delays. Unfortunately, the Reuters report was a tad inaccurate. The SEC is not refusing companies filing under IFRS to use XBRL; they are simply saying that they are not currently accepting the IFRS taxonomy. Additionally, they have signaled that the present IFRS taxonomy may not be robust enough to support the level of reporting they expect from foreign companies not using US GAAP.
On the EU side of the pond, reaction to the comment by Mr. Starr came quickly from the incoming chairman of the International Accounting Standards Board, Hans Hoogervorst. Hans replied,
"I am hopeful we can address the problems the SEC is seeing and hopefully the use of IFRS taxonomy can be allowed. A lot of these problems will be solved. We are working hard on a proper IFRS taxonomy. Without it, the spread of IFRS will be hampered.”
Tony Fragnito, CEO of XBRL International added the following comment:
XBRL is a format specification for “how” business information is structured; it does not define “what” gets reported. The SEC has accepted, in fact mandated, the use of XBRL as the format for US GAAP reporting. The SEC did not say IFRS does not fit with XBRL. They are not willing to accept the level of detail required by IFRS today. The XBRL representation of IFRS is not the issue.
In February 2010, the SEC (http://www.journalofaccountancy.com/Web/20102656.htm ) indicated that 2015 would be the earliest date that would be considered for US conversion to IFRS. The SEC vote directed the SEC staff to develop an IFRS adoption plan with the several issues in mind including
- Determining whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the U.S. reporting system.
Thanks to Mike Starr’s comments the adequacy of the IFRS XBRL taxonomy is back in the spotlight. Although not specifically mentioned in the February 2010 SEC vote, the adequacy of the IFRS taxonomy for use by US filers is certainly a criterion for determining if IFRS is sufficiently developed. A quick dig into the 2008 Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers confirms that the SEC should have been looking at this issue for a while. Milestone number three in that document read:
- Improvement in the ability to use Interactive Data for IFRS reporting
The Ankle-Deep IFRS taxonomy
What’s the real issue here? From the beginning, the IFRS taxonomy was designed to be a copy of the IASB regulations, and nothing more. If an accounting concept was covered in an IFRS standard, that concept got an IFRS XBRL tag. Only recently have tags been added to the IFRS taxonomy to reflect common reporting practices that do not appear in the regulations.
Below is an excerpt from the IFRS.org’s taxonomy feedback statement where they address the lack of depth in the taxonomy:
The IFRS Taxonomy 2011 is consistent with IFRSs as issued by the IASB at 1 January 2011. The IFRS Taxonomy contains tags for all disclosure requirements as set out in the IFRS authoritative literature, including application and implementation guidance and illustrative examples.
Many respondents suggested that we should undertake the development of additional IFRS Taxonomy items (ie extensions) to reflect disclosures that are not explicitly required when reporting in IFRS, but that are commonly reported by entities in their IFRS financial statements.
We understand the points raised however, we believe that additional IFRS Taxonomy items that reflect common-practice can only be made available following the comprehensive analysis of the financial statements of a global population of entities reporting in IFRSs across a broad range of industries and geographical areas.
We have initiated this analysis by conducting a detailed examination of the financial statements of over 200 entities reporting in IFRS, in order to try to identify commonality in reporting practice. We have also recently concluded a pilot initiative with foreign companies listed in the United States to produce US-SEC (United States Securities and Exchange Commission)-compliant IFRS financial reports in XBRL format, during which we were able to identify some commonality in reporting practice. We will maintain our efforts in this area, which we understand is of great importance to our stakeholders. [Bold added]
Here are two quick examples of the lack of depth in the IFRS taxonomy as compared to the US GAAP 2011 taxonomy. The 2011 IFRS taxonomy has one element to describe plant property and equipment; the US GAAP taxonomy has fourteen. The IFRS taxonomy has one element to cover intangible assets other than goodwill; the US GAAP taxonomy carries twenty nine.
According to Reuters, Hoogervorst said there will be proposals in April to extend the scope of the IFRS taxonomy. At least they are beginning to recognize the problem. Without considerable additional depth to cover common reporting practices in diverse industries, the promise of comparability through the use of standard taxonomies will become a distant memory if the US adopts IFRS. Lack of standard tags to tag common reporting practices leave companies on their own creating custom extensions. The SEC's Mike Starr is familiar with the problem and the International Accounting Standards Board has taken notice.
Additional work on the IFRS taxonomy is beginning this month, but studying the IFRS reporting habits of 200 companies is very little more than going through the motions; it will not lead to the IFRS team to discover the depth and intricacies of world-wide financial reporting. In a world where financial reporting varies widely by industry group, a narrow-scoped examination will yield yet another inadequate IFRS taxonomy.