What is XBRL, and Who does XBRL help?

Put it on your radar screens, the next big thing is going to be XBRL. It stands for extensible business reporting language, and it is meant to commensurate business reporting via standardization. So instead of entering text into an annual report, companies, governments, NGOs, anyone who would like to comply with governmental mandate will be using XBRL. You can think of XBRL as a set of metatags for financial and company data, so that instead of bracket-tags for header, title, links, etc. you would have bracket-tags for earnings, time periods, definitions of costs, etc.

From CoreFiling’s insight blog: “It won’t be very long before it is those documents – the bar-coded financial disclosures – that will be the primary materials consumed by financial market systems to help analysts and investors make decisions about the best way to invest. This is vastly more sophisticated than today’s processes that rely on slow and inaccurate re-keying of a subset of the financial information published by companies.”

This is commensuration more than just standardization, since the tags are designed to be specific to a particular business enough so that everyone is not required to give the same information, yet the tags are standardized enough that everyone is required to give information that can be made comparable. The pitch for companies (other than, because otherwise we’ll fine you and take away your business license) is that XBRL will make their financial reporting less costly, less prone to error, and ultimately more efficient.

Personally, I think this is a flat out misrepresentation of what’s going on here. XBRL helps one group of people orders of magnitude more than anyone else: investors. And the trade-off between increased government efficiency and business streamlining of compliance data on the one hand, and increased ability for data-gatherers for banks, hedge funds, and the investor class is totally totally off the charts. What this will end up doing is: 1) creating a standard way for companies to report financials; 2) creating some increased efficiency for government entities to keep tabs on the finances of these organizations; and 3) create a massive additional datastream for financial services and investment firms to work with. If you think it is a challenge for public firms to resist making short-term decisions based on financial analysts’ quarterly reports of earnings now, wait until this information is directly readable by quant trading models.

This would be an amazing dissertation topic. I would track: a) the creation of the standard; b) the adoption of the standard around the world; c) how XBRL is being incorporated into financial modeling; d) the before-and-after effects of XBRL on market prices for firms; and e) qualitatively, what gets excised from XBRL, or rather, what remains incommensurable about firms, governments, etc.

XBRL’s main site
US SEC’s ‘Interactive Data Viewers’
Microsoft uses XBRL
US GAAP XBRL Taxonomy (GAAP is the accounting standard in the US)

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