Feb, 2009

Lesson from 1139

Maybe the current market turmoil will force us to learn from a decision that was reached in 1139. During the Catholic Church’s second Council of Lateran, Pope Innocent II recommended not using crossbows or ballistas – a type of medieval catapult – because the arrows and darts they fire could be launched so far soldiers would be unaware of the consequences of their action.

Some investment bankers would do well to remember this basic principle of caution. The good news is that today, even if the likes of Bernard Madoff or Indian software company Satyam have thrown caution to the wind, stakeholders are getting closer to the information they need.

You might be wondering where XBRL fits into all this. Well, the period when XBRL was promoted for its potential benefits – remember the ‘better, faster, cheaper’ mantra? – is over. Promises are already being realized. Take the example of Belgium: since April 1, 2007, every one of Belgium’s 270,000 registered companies, if opting for the electronic way, has had to use XBRL to file its annual accounts to the National Bank of Belgium (NBB).

Multiple benefits
The benefits are manifold. It saves time for the regulator, as the data are already electronic, so there’s no need for any scanning or spot checking, as there is no room for error. Accounting packages have been upgraded to be XBRL-compatible, so accountants need only click on a button to produce the XBRL document.  Investors and banks can now benefit from electronic data available from the NBB website for free. And last, but not least, the issuer can enjoy filing fees reduced by a third, owing to savings made by NBB.

Today, the market is wondering whether the SEC’s recent decision to mandate the use of XBRL was appropriate. When reading the text of the rule, there is no doubt that, as we might expect from such a body, the SEC has heavily documented its decision, following an effective – and indeed impressive – due process. Let’s hope the transition to XBRL in the US markets will be as smooth as in Belgium.

As the team leader for the IASC Foundation, whose standard-setting body, the International Accounting Standards Board (IASB), is responsible for developing IFRS, I am closely involved in the use and development of XBRL for international financial reporting. While we are in no way connected with the SEC’s decision to make the use of XBRL mandatory, we are promoting XBRL because we believe in the benefits it offers all stakeholders, including regulators, preparers of financial statements and end-users such as investors and banks. Our commitment is to provide IFRS in XBRL – the so-called IFRS taxonomy – to the highest quality, at the same time as the IFRS principles are released, usually once a year, in the IFRS Bound Volume.

Early edition
Interestingly, the IFRS taxonomy has been released this year before the publication of the IFRS Bound Volume 2009, but the purpose of its launch – reflecting a similar due process to that of the IASB – is to get comments on it before its final version is released in April. Naturally, we expect extensive comments from the US since this IFRS taxonomy will be the first to be used by non-US companies listed in the US when filing their financial reports in the US electronically, should they choose early adoption.

Even if the number of companies already using XBRL for their IFRS filings is pretty limited, there are several projects around the world to allow or mandate IFRS and XBRL. Countries like Canada, South Africa, Europe and South America will soon follow the US’ recent rule or similar initiatives in China, Japan and India.

Another trend users might be interested in is the opportunity for companies to move to IFRS with the assistance of XBRL. Even if XBRL is not the deciding factor in changing accounting principles, some consider having a robust set of tags, which could ease the mapping between concepts, to be an attractive asset.

At present, more than 110 countries worldwide are either allowing or mandating IFRS and none is ignoring XBRL. It is no coincidence that the main expected benefit of Belgium switching to XBRL was to ease the transition to IFRS. The world’s financial markets are desperately seeking greater accuracy; in this respect, they have much in common with Pope Innocent II.

The opinions expressed are those of the author and do not necessarily reflect the views of the IASB or the IASC Foundation.