Its official – XBRL is not a popular subject – just look at Google Trends for XBRL vs Blockchain.
At Daily Fintech, we like to dig below the hype to describe those things that are becoming important, even if the media are ignoring them today.
So, today’s post describes why we have chosen such a nerdy subject to focus on all week and why we think that XBRL may be ready to climb out of the slough of despond to the plateau of productivity, by describing:
1. What got originally got people excited about XBRL.
2. Why XBRL failed to meet those expectations initially.
3. Why the conditions are now set for XBRL to deliver a lot of value
▪ XBRL stands for eXtensible Business Reporting Language.
▪ It is an open data standard based on XML, created by an accountant named Charlie Hoffman.
▪ If you tag content consistently, software applications can more easily analyze the data and present more useful information. Think of XBRL like a barcode on financial statements. Yes, that sounds like the Semantic Web, and we all know that the Semantic Web has faced the chicken-and-egg problem (i.e. not enough content is semantically tagged yet and so developers don’t create tools to parse the semantic data). Imagine a Semantic Web standard where governments around the world tell companies that they must tag data that way. That is XBRL.
▪ XBRL gained attention in 2009 when the US SEC mandated that public companies report their financial results in XBRL. Many markets and regulators around world then also adopted XBRL and more have it under consideration. Although XBRL got famous because SEC mandated it for public equities, there are use cases and mandates in almost every asset class.
▪For more research, go to XBRL.org
What got originally got people excited about XBRL.
It was this superb article in Wired called Radical Transparency in the dark days of February 2009 in the thick of the Global Financial Crisis that first got me excited about XBRL. The usual analogy for the Global Financial Crisis was a heart attack. XBRL is like an MRI machine that lets you see inside to understand what is going on. You can do this at 3 levels:
1. An individual company. XBRL is good for fundamental analysis (credit or equity). One reason is that “the devil is in the footnotes” (or 10-K or proxy statements) where Investor Relations put the things that they have to report but which they would prefer investors gloss over. XBRL makes it easier for investors to surface this data into their Due Diligence process.
2. A portfolio of companies. XBRL is good for portfolio construction (e.g all companies meeting a thematic goal, global diversification rules and a number of financial filters) and Comparables Analysis (for Investment Banking). This will commodotize (or democratize, depending on your perspective) a lot of the work done on “Wall Street” (more likely today actually being done in Bangalore).
3. An entire market. XBRL is a great tool for regulators to spot both individual wrong-doing as well as systemic risk.
Why XBRL failed to meet those expectations.
There was a simple design error in the SEC Mandate. The SEC said, first big companies must comply and small companies can do it a bit later. That was logical. The assumption was that big companies would find the burden easier. However it was a mistake because:
- Investors had no problem researching a few big companies. What they wanted (and still want) are efficient tools to research a lot of small companies. That is where valuation inefficiency can be unlocked.
- Big companies had no problem with Investor Relations. They knew the Analysts and those Analysts took the time to cover them. By contrast, small companies need to be discovered by investors; it’s like a website that wants to be discovered by Google.
- Big companies had a long-established process for taking ERP data and turning it into HTML for investors and regulators. So they outsourced the work to meet the mandate to turn HTML into XBRL. It was all cost and no reward. If small companies had to comply from day one, they would have told their ERP vendors to output Inline XBRL (see below) i.e Straight Through Processing. That did not happen but – spoiler alert – it is starting to happen now.
While there are many other XBRL initiatives, the SEC Mandate is the bellwether. If this fails, investment in XBRL will decline and if it succeeds it will change the world as hoped for in 2009.
Why the conditions are now set for XBRL to deliver a lot of value
- InLine XBRL is mature and has recently been allowed by the SEC. The simple explanation of InLine XBRL:
- HTML = human readable
- XBRL = machine-readable
- InLine XBRL = machine-readable + human readable in the same document.
Note: some machines can read HTML (badly) and some humans can read XBRL (badly) but machines prefer XBRL and humans prefer HTML.
- Small companies are now reporting in XBRL and tools are appearing for investors. This Landscape Report is already out of date because this an area with a lot of innovation today.
- Inline XBRL enables ERP vendors to do Straight Through Processing (STP) from Accounting to Investor Relations and Compliance.
XBRL almost died in 2014, overturned by people worried about excess regulation, prompting this and other geeky rescue efforts. Fortunately good sense prevailed and XBRL is ready for the next phase.
During the rest of the week we look at the use cases, at the practical innovation appearing today that uses XBRL. Index to weeks posts:
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Bernard Lunn is a Fintech thought-leader.