Understanding XBRL for regulatory filing
The global framework for effective exchange of business information – XBRL has revolutionized the space of e-communication. XBRL is the abbreviated form of eXtensible Business Reporting Language. It is freely available from the XBRL International consortium. It is also not the property of any software vendor, nor is it restricted to any one particular computer system or language.
For a better understanding of XBRL, it is important to understand why it was introduced to businesses in the first place. When the need for a standardized system that enabled seamless processing of business information surfaced, XBRL was introduced. XBRL is designed to cut down on manual processing, analyzing, and entry of data by automating the entire process. After the introduction of XBRL, one was able to easily comprehend, compare and analyze the data in financial statements.
An Instance document created according to the rules of XBRL, which contains all the above information, can be validated and created into readable renderings of XBRL data that can then be viewed on the EDGAR website. When validated, if there are simple errors with respect to business rules or even syntactic errors, the software can identify and flag them. This allows the preparers to rectify their mistakes before filing their final reports. This had proven to be efficient when in comparison to the manual methods of reporting, which had their own drawbacks like problems with validation, labor, and time-intensive.
When companies are obliged to file regulatory returns in XBRL or iXBRL format, Regulatory filing software comes to their rescue. Companies are aware of how XBRL has changed the face of regulatory financial reporting and led to a dramatic increase in the number of users who adapted to this effortless style of financial reporting. XBRL also aids the regulatory reporting process by allowing financial preparers to tag all financial items in their business reports in line with the taxonomy. Taxonomy is the grouping of key financial concepts and defining them with specific tags for individual data items, their attributes, and interrelationships.
The Role of XBRL in Regulatory Filing in the United States
Why U.S. Regulatory Bodies, Such as the SEC, Mandate XBRL
The U.S. Securities and Exchange Commission (SEC) mandates the use of XBRL (eXtensible Business Reporting Language) for several compelling reasons:
Enhanced Transparency and Accessibility
XBRL allows financial information to be easily accessible and understandable to all investors, including both institutional and retail investors. By mandating XBRL, the SEC ensures that financial data is presented in a standardized format, facilitating better comparison and analysis.
Improved Accuracy and Consistency
XBRL helps reduce errors in financial reporting by standardizing the way data is tagged and reported. This consistency ensures that financial statements are accurate and comparable across different companies and reporting periods.
Increased Efficiency in Regulatory Review
The use of XBRL automates the extraction and analysis of financial data, enabling regulatory bodies to efficiently review and monitor compliance. This automation reduces the manual effort required for data analysis, allowing regulators to focus on higher-level oversight and enforcement.
Enhanced Investor Protection
By providing transparent and accurate financial information, XBRL helps protect investors from potential fraud and misrepresentation. It ensures that all market participants have access to the same high-quality financial data.
XBRL Benefits for U.S. Regulatory Agencies
Streamlined Data Collection and Analysis
XBRL simplifies the data collection process for regulatory agencies by providing a standardized format for financial reporting. This streamlining allows for quicker and more efficient analysis of large volumes of data.
Better Monitoring and Enforcement
Regulatory agencies can use XBRL data to monitor compliance with financial reporting standards more effectively. Automated tools can flag discrepancies and potential issues, enabling timely intervention and enforcement actions.
Enhanced Data Quality and Reliability
XBRL improves the quality and reliability of financial data by ensuring consistency in how information is reported. This reliability is crucial for regulatory agencies that rely on accurate data to make informed decisions.
Facilitated Data Sharing and Collaboration
The standardized format of XBRL makes it easier for regulatory agencies to share data with other governmental and international bodies. This collaboration enhances the overall regulatory environment and helps maintain market integrity.
Quick XBRL Case Study: Microsoft (Source)
How XBRL Benefits Microsoft
Providing Timely and Transparent Financial Information
In the case of Microsoft, implementing an XBRL reporting system allows the company to deliver timely and transparent financial information to all investors. This includes both large and small investors, helping them gain a comprehensive understanding of Microsoft’s business and financial results.
Reducing the Likelihood of Error
By using XBRL, Microsoft reduces the likelihood of errors in the delivery of financial information. This ensures that the data provided is accurate and reliable, enhancing the overall integrity of the financial reporting process.
Flexibility in Selecting Taxonomy Elements
XBRL provides Microsoft with the flexibility to select the taxonomy elements (line items within the US GAAP collection of financial terms) that best represent their investment outlook. This is advantageous compared to relying on terms created by third-party data aggregators, which may not accurately describe the company’s financials.
How XBRL Benefits Investors
Quick Access to Financial Data
Investors benefit from quick access to financial data on Microsoft’s site. XBRL links this data directly to the full context of the financial statements, making it easier for investors to understand and analyze.
Visual Representation and Downloadable Data
XBRL allows investors to view a visual representation of financial data, which can be downloaded for further analysis. This capability enhances financial information analysis and makes it more accessible to investors.
Enhanced Insights through Footnotes and MD&A Content
Investors can gain better insights into Microsoft’s financials through footnotes and MD&A content provided by XBRL. This information is drawn directly from financial statement line items, allowing investors to drill down into the details without needing an in-depth understanding of technical financial analysis.
Future Trends in XBRL and Financial Reporting
The landscape of financial reporting is evolving rapidly, driven by technological advancements and the increasing demand for transparency and accuracy. XBRL (eXtensible Business Reporting Language) stands at the forefront of these changes, promising to transform how financial data is reported, analyzed, and utilized.
Here’s a closer look at the future trends in XBRL and financial reporting
Advances in Financial Reporting Applications
Financial reporting applications are becoming more sophisticated, leveraging advanced technologies to streamline and enhance the reporting process.
- Automation and AI Integration: Automation is revolutionizing financial reporting by reducing manual tasks and minimizing errors. AI and machine learning algorithms are being integrated into financial reporting applications, enabling predictive analytics and anomaly detection. For instance, AI can identify unusual transactions or discrepancies in financial statements, providing an additional layer of scrutiny.
- Enhanced Data Visualization: Modern financial reporting tools offer advanced data visualization capabilities, making it easier for stakeholders to interpret complex financial data. Interactive dashboards and real-time analytics are becoming standard features, allowing for more dynamic and insightful presentations of financial information.
- Real-Time Reporting: With the advent of real-time data processing, financial reporting is moving towards real-time reporting capabilities. This shift allows companies to provide up-to-date financial information, enhancing transparency and enabling quicker decision-making.
Emerging Technologies and Their Impact on XBRL
Several emerging technologies are poised to have a significant impact on XBRL and financial reporting
- Blockchain Technology: Blockchain offers a decentralized and immutable ledger, which can enhance the integrity and security of financial data. By integrating blockchain with XBRL, companies can ensure that their financial reports are tamper-proof and verifiable. This technology can also facilitate more transparent and efficient audits.
- Big Data Analytics: The ability to analyze vast amounts of financial data is becoming increasingly important. Big data analytics, combined with XBRL, allows for deeper insights into financial trends and performance. Companies can leverage these insights to improve their financial strategies and regulatory compliance.
- Cloud Computing: Cloud-based financial reporting solutions provide scalability, flexibility, and cost-efficiency. They enable seamless collaboration across different locations and departments, ensuring that all stakeholders have access to the latest financial data. According to Gartner, by 2025, over 85% of organizations will be using cloud-based financial applications.
Predictions for the Future of XBRL in U.S. Regulatory Filing
Increased Adoption and Standardization
As more regulatory bodies recognize the benefits of XBRL, its adoption is expected to increase. The SEC’s mandate for XBRL filings has already set a precedent, and other regulatory agencies are likely to follow suit. This trend will lead to greater standardization in financial reporting.
Enhanced Compliance and Oversight
With the integration of advanced technologies, regulatory agencies will be better equipped to monitor compliance and enforce regulations. Automated tools will enable more efficient analysis of financial data, helping regulators identify potential issues more quickly. The SEC is expected to continue enhancing its analytical capabilities, leveraging XBRL data to improve market oversight.
Improved Investor Access and Engagement
The future of financial reporting will see increased accessibility for investors. XBRL’s standardized format allows for easier access to financial data, enabling investors to make more informed decisions. Interactive and user-friendly reporting platforms will engage investors and provide them with deeper insights into company performance.
Greater Emphasis on ESG Reporting
Environmental, Social, and Governance (ESG) reporting is gaining importance among investors and regulators. XBRL can play a crucial role in standardizing ESG disclosures, ensuring that companies report their sustainability practices transparently and consistently. According to a report by the CFA Institute, 76% of investors consider ESG factors in their investment decisions, highlighting the growing significance of this trend.
Advantages of using a Regulatory Filing Software for XBRL Preparation
Significant improvement in the efficiency of business processes
With the Automation of regulatory filings, a company can aim to streamline activities that are highly labor-intensive and time-consuming. This could result in redirecting the company’s resources to more important business functions instead of manual regulatory reporting work.
The application of cognitive intelligence technology and Automation in the regulatory filing process can help execute manual tasks with minimal supervision. This would allow companies to redirect their resources to tasks that add more value. The software framework helps identify errors that could have easily missed a human eye, ensuring that you make Error-free Filings. This could save the company time and penalties in the worst-case scenario.
End-to-end Automation is the future
End-to-end Automation of the entire regulatory reporting process can cut down so many laborious man-hours and map data from the source systems to report generation. Starting to leverage the technology that automates these processes, one can help prime the consumers for an end-to-end regulatory filing system.
Return on Investment
With the right focus on areas such as-
● Standardization of data aggregation and development of reporting templates
● Enhancing the capabilities of reporting templates for reconciliation, analysis, and review at a later date
● Improvement of the quality of the data being reported for overall accuracy of the reports
A firm can aim to maximize its savings and gain the biggest return on its investment. DataTracks provide hassle-free and accurate compliance reports with the help of their software solutions.
Depending on the type of report required for filing with the regulatory body, a company can create an XRBL document using 5 main approaches.
1. Forms based approach offered by the regulator or third party
Every regulatory body has specific expectations when it comes to filing compliance reports. Some regulators provide the companies with their standard template or form to file the regulatory reports. A third party can also be approached to assist with the filing of that one form. The forms are highly simplified and available on the web. To access the forms, one can log in to the system with appropriate authentication and cut and paste the required information onto the form.
The process of cutting and pasting can be considered manual, time-consuming work. The margin for error is also high as it is manually done. What happens after the process of coy paste is that the system runs a range of validation rules to identify any errors in the filings. Once identified, the system rejects the areas that are incorrect. The company can rewrite the filing with correct information and submit it.
2. In-house embedded production from existing software
In an environment where a regulator already uses legacy paper, PDF, or proprietary filing arrangements and has shifted to XBRL, one can get their software vendors to simply update their systems to incorporate XBRL tagging.
This process could be fully automated or semi-automated. In this approach, the XBRL can happen as usual with only minimal changes to the existing process. And because this approach requires minimal changes, the costs incurred by the companies are very low. Thus, a company that previously relied on manual processes for filing regulatory reports can now comply with XBRL-based filing requirements in a simple and budgeted manner.
One major drawback of this method is that this approach is not capable of handling an extensive process that involves gathering data for the regulatory report manually or via multiple systems that do not have an automated consolidation system.
3. Outsourcing
Outsourcing is a highly collaborative approach that is known to significantly reduce the work of individuals involved in the process of preparing XBRL versions of a report along with their other day-to-day responsibilities. To further this collaborative approach, companies use Cloud-based tools that allow the regulated companies to review and oversee the work of the service provider. Certain environments that are highly sensitive to such huge process changes can benefit from outsourcing thor XBRL filing responsibilities. XBRL experts are fully equipped to handle the nature of the work they’re responsible for.
4. In-house production with “bolt-on” tools and processes
This approach allows a company to continue with its existing method for filing. With the help of a ‘bolt-on,’ they’re able to create an XBRL document from a set of documents prepared from other means. This approach is opted for by companies with sophisticated reporting needs and processes. They turn towards bolt on’s for their requirements when they feel that their processes are difficult, impractical, or expensive to change. These tools can range from desktop to SaaS offerings that can be used for the creation of XBRL documents.
5. In-house embedded production with Disclosure Management or Regulatory Filing software and changed processes
The Disclosure Management and Regulatory Filing tools are designed to take a different approach. They embed the process of tagging into the creation of XBRL documents. The process of managing the report preparation, review, amendment, audit, and approvals are carried out via collaborative tools. Some tools are embedded systems that act as a Linking Source system which is responsible for linking all your source files and consolidating them into the XBRL language of reporting, thereby automating the process and ensuring consistency.
These tools are tailored for specific markets and filling frameworks, while some are a hybrid offering that includes outsourced assistance with tagging and XBRL knowledge.
No data can be published without checking for errors. Reports that contain errors can lead to penalties by the regulatory body. Validations are a fundamental part of producing and reviewing the data before filing or publishing it. Validations relate to business logic and rules. Low-level validations are syntactic and are used to ensure that any information prepared using a software can be reconciled. An XBRL validation is part of its taxonomy and is generally published by the regulators themselves. Anyone who intends to report in XBRL will need to familiarize themselves with the validation rules that are imposed by the regulator and make sure that they are compliant with the validation rules before filing their data.
XBRL adoption is expected to accelerate, and countries including the US, Netherlands, and Japan have developed a curriculum around the education, training, and certification programs that are in line with the regulatory frameworks of those countries. This training will prepare companies to improve their efficiency and ensure that they are XBRL Certified.
Connect with an iXBRL Expert from DataTracks to understand how we can simplify compliance reporting for you.
FAQs on XBRL
What is XBRL and why is it important for financial reporting?
XBRL (eXtensible Business Reporting Language) is a standardized format for the electronic exchange of business and financial information. It is important for financial reporting because it enhances transparency, accuracy, and efficiency, making financial data more accessible and understandable for investors, regulators, and other stakeholders.
Why do U.S. regulatory bodies, such as the SEC, mandate the use of XBRL?
The SEC (Securities and Exchange Commission) mandates XBRL to improve transparency and accessibility of financial data, reduce errors, streamline regulatory review processes, and protect investors by ensuring consistent and reliable financial information.
What benefits do U.S. regulatory agencies gain from using XBRL?
U.S. regulatory agencies benefit from XBRL through streamlined data collection and analysis, improved monitoring and enforcement capabilities, enhanced data quality and reliability, and facilitated data sharing and collaboration with other governmental and international bodies.
How does XBRL improve financial reporting for companies?
XBRL improves financial reporting for companies by automating the reporting process, reducing errors, enhancing data extraction and analysis capabilities, and ensuring compliance with regulatory requirements. This leads to more efficient and accurate financial reporting.
Can you provide examples of U.S. regulatory bodies successfully using XBRL?
- SEC’s Interactive Data Program: Requires public companies to submit financial statements in XBRL format, improving data transparency and accessibility.
- FDIC’s Call Report Modernization: Uses XBRL to streamline bank reporting, reduce manual data entry, and enhance report accuracy.
- FERC XBRL Mandate: Federal Energy Regulatory Commission uses XBRL for financial and operational data submission, improving data quality and regulatory oversight.
What are the emerging technologies impacting XBRL and financial reporting?
Emerging technologies impacting XBRL include:
- Blockchain: Enhances data integrity and security.
- Big Data Analytics: Provides deeper insights into financial trends.
- Cloud Computing: Offers scalable and flexible financial reporting solutions.
- AI and Machine Learning: Automates anomaly detection and predictive analytics.
How will XBRL evolve in U.S. regulatory filing in the future?
Future trends for XBRL in U.S. regulatory filing include increased adoption and standardization, enhanced compliance and oversight capabilities, improved investor access and engagement, and a greater emphasis on ESG (Environmental, Social, and Governance) reporting.
What are the challenges of implementing XBRL for companies?
Challenges of implementing XBRL include technical complexities, training and knowledge requirements, and the costs associated with adopting new systems and processes. However, these challenges are outweighed by the long-term benefits of improved financial reporting and compliance.
By leveraging DataTracks Rainbow, companies can overcome the challenges of XBRL implementation and reap the long-term benefits of this standardized reporting format.
How does XBRL enhance investor access to financial information?
XBRL enhances investor access to financial information by providing standardized, easily accessible, and comparable financial data. This allows investors to make more informed decisions and gain deeper insights into company performance through interactive and user-friendly reporting platforms.
Why is there a growing emphasis on ESG reporting with XBRL?
There is a growing emphasis on ESG (Environmental, Social, and Governance) reporting due to increasing investor interest in sustainability and ethical business practices. XBRL standardizes ESG disclosures, ensuring transparent and consistent reporting, which is crucial for investors considering ESG factors in their investment decisions.