XBRL stands for eXtensible Business Reporting Language. It is a set of standards for reporting financial and business information in a way that machines can read the reports, compare and analyze them easily. It presents a set of standardized vocabulary so that similar information can be presented using similar language by different companies. Recognizing that one standard set of concepts may not cover every possible situation, the system allows national regulators and even individual companies to create terms that are useful for their unique situations (this ability to eXtend the vocabulary is represented “X” of XBRL).
A short video introducing XBRL
The standardized format consists of a set of metadata, vocabulary to describe various concepts and a form of presenting them. The format also makes it easy to import the information into a software without doing data entry again. Without this, it would be very costly to assemble business information from multiple sources for comparison and analysis. This allows us to compare business information from different companies without worrying about the definition of the information behind them.
Relevance for transparency
XBRL makes it possible to obtain financial information from a large number of companies at relatively low cost. This can then be used to analyse the performance of the corporate sector on many dimensions. For example, if the regulators require disclosure of political contributions, XBRL can make it easy to collate the political contribution information of all companies covered by the regulator.
There is a law in India requiring companies that have a turnover of more than Rs. 500 crores to contribute 2% of their profits to “Corporate Social Responsibility”. We may be able to track which companies comply with this. If regulators mandate the companies to provide further details, we can even find out how companies spend this amount.
To take a different example, the Extractive Industries Transparency Initiative requires signatories to provide information on tax payments by the companies to different levels of government, and an equivalent disclosure by the government on the revenue they earned from the extractive industry sector. If all disclosures from companies are provided in XBRL format, it can be used to provide a quick analysis on the total revenues gained from this industry by different levels of government. It can also be used to analyse the tax contributions by individual companies in comparison to their turnover, profits and other financial information.
One can think of many other ways in which disclosures from the private sector could be used to improve accountability of the sector. But for that to happen, it is critical that the standard is widely adopted. More importantly, regulators should require companies to disclose a range of critical information such as political contributions, tax payments, use of CSR funds, etc. for this information to be available in the public domain. If regulation does not require it, it is not likely that the information will not be made available in the public domain in the first place – and having a technical standard of disclosure would be of little meaning in such a case.
Who uses XBRL
The good news is that the use of XBRL is increasing across the world (see http://XBRL.org for details). In India, the Ministry of Corporate Affairs has now requires XBRL compliant filings of the Balance Sheet and Profit and loss statement for a certain class of companies [those listed in stock exchange or having paid up capital of more than 5 crore rupees or a turnover of over 100 crores]. Similarly, the Reserve Bank of India has also started requiring XBRL filings and the Securities and Exchanges Body of India (SEBI) is also working on an XBRL taxonomy.
The current filings themselves provide a strong basis to analyse corporate performance. But if we lobby for information of broad public relevance to be mandatorily disclosed in these and other reports, we may be able to develop a low cost system of monitoring private corporations that can take us a long way.