As we come to the end of another financial year end reporting season and await the deluge of impenetrable financial reports, we can only lament that another year has passed and an important reporting mechanism widely used in many international exchanges, is still not with us.
In Australia financial statement information continues to be provided to users in detailed and complex reports, that are not user friendly. These may now be provided electronically in pdf format, but the problem is that the data can’t be extracted electronically; accurately and efficiently. There is a solution which is passing us by.
I am talking about XBRL - which stands for eXtensible Business Reporting Language - and it represents a standardised form of electronic reporting by companies which facilitates the preparation and exchange of financial statement information.
The formats for the preparation of data are now well established and the International Accounting Standards Board publishes a taxonomy that reflects the requirements of International Accounting Standards which are in use in most countries around the world.
It is required in many countries and if Australia wants to be a financial centre it needs to catch up. In the US the Securities Exchange Commission has since 2011 required all public registrants to file XBRL information. This is no longer new or untried technology and there many companies providing services for the preparation and use of XBRL information.
What are the benefits of XBRL? At a very practical level XBRL is a relatively straight-forward format for sharing financial information. As it uses standardised formats, which financial reports already follow, it allows for software to be developed which extracts relevant information and presents it in formats that makes it more relevant, understandable and facilitates it use.
Importantly, XBRL can make annual reports more transparent and reduces the risk of important information being lost in the notes. Not surprisingly XBRL usage has been found to improve analyst forecast accuracy. Software using XBRL may be proprietary or publicly available for sale, and it may allow sophisticated analysis to be undertaken.
This is simply not possible at the moment as financial data is provided by various data aggregators who manually key data. This naturally limits the amount of data provided and there are potentially issues of accuracy. Requiring firms to provide XBRL information will reduce the cost of data collection and increase the ability for international investors who might otherwise overlook Australian firms.
Australia operates in a global economy and this is part of the membership price. There is evidence that the provision of XBRL information reduces the cost of capital, and this is most pronounced for small, high growth firms that likely have low analyst coverage. So, while the relative costs might be higher for small firms, the benefits might be relatively higher too.
Has there been progress with implementing XBRL? There have been a number of initiatives to bring XBRL to Australia and these envision widespread application, encompassing all companies rather than just listed companies and the provision of information to multiple government agencies, including the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority and the Australian Taxation Office.
This level of ambition while on the face it desirable, has committed us to a long and tortuous negotiations about format rather than achieving outcomes in a timely manner.
Our immediate focus should probably just be on firms listed on the Australian Stock Exchange and including this requirement in their Listing Rules.