I mentioned a couple of weeks ago that I picked XBRL (eXtensible Business Reporting Language) as an essay topic. In order to get course credit for my internship, I have to write a 15-page “Issues and Solutions” essay about, well, and issue I encountered during my internship, and the solution to that issue.

I have completed most of the research I need to write the essay. Essentially, I’m addressing the issue of spending time re-formatting financial data to be able to analyze it for audit tests. My solution is XBRL, but honestly, the benefits XBRL will provide go far beyond solving the issue I saw. This post is intended to be an explanation of XBRL, and also an exercise for myself to make sure I feel confident about how to define the concept.

XBRL is a tagging system, that together makes up a language. Each little piece of data that goes into a financial statement is electronically “tagged” with a label that defines what type of data it is.

Think about how tags we already use online: tags on blog posts can help you instantly pull up all of the posts that mention an issue you’re interested in. Using a common hash tag on twitter (example #sxsw) can make it easy for interested people to find all of the tweets about a certain topic.

My first reaction to what I read about XBRL was confusion about why we haven’t been using this for years. The technology involved is not exactly cutting edge, and there are so many benefits that it seems silly not to be using it.

I think that the main roadblock was getting XBRL coordinated and accepted by enough people. Of course, Twitter tags are much more useful when everyone tweeting about a particular event or topic makes an effort to use one common tag. Similarly, everyone using XBRL has to use the same tags for the same data to make full use of XBRL’s capabilities.

That’s why an XBRL taxonomy has to be developed. It is like a dictionary of tags, and defines all the tags that should be used for each particular type of data. The now-released US GAAP taxonomy has over 13,000 tags in it! What a way to demonstrate the complexity of financial statements!

So, okay, I guess there are some reasons behind why XBRL took so long to make it this far. And how far is it? Well in December, the SEC passed a ruling requiring that public companies with a market cap of $5 billion or more must file XBRL financial reports for fiscal periods ending on or after June 15, 2009. These reports will not be audited, and will be issued in additional to traditional audited financial statements. Smaller public companies will have to begin filing with XBRL in the near future too.

My main conclusion though, after all my research, is that external reporting is just a small part of what XBRL can be used for. Rather than waiting for the SEC to require the switch, companies should be jumping to use XBRL as soon as possible, so that they can begin taking advantage of the internal uses of XBRL before their competitors do. Also, when they are required to begin using it, they will have more expertise than their peers, and may even find themselves in a position to consult with other companies about how to successfully manage the process!

I have been relaxing this week, but working on getting started on my internship essays. I have changed my mind about a hundred times about the topic for my paper. I think I have settled on writing about XBRL (eXtensible Business Reporting Language) because it just sounds so useful.

My paper is supposed to address a technical accounting issue I encountered during my internship and a solution. I’m not sure that I really encountered this issue, but it certainly seems that some of the large consolidated audits could benefit from XBRL.

I will have more opinions on this after I get further into my research, I’m sure. It seems like there must be a more efficient way to transfer financial data between companies than what we used during my internship, but at the same time, I think that a lot of the issues may not be remedied with XBRL alone.

I’m interested to read more and see what’s going on with this, as it has been in the works for a few years now, but I never heard anyone at my internship even mention it.

Photo by John Althouse Cohen @ Flickr

So, as part of getting course credit for my internship, I have to write a 5 page “evaluation” paper, a sort of summary of what I did, what I learned, etc. However, the main assignment is a 15 page paper where I have to address a current issue in accounting. Since the assignment title is “Issues and Solutions” I suppose I have to come up with a solution too.

A glaring issue right now is how accounting firms are dealing with the recession. However, I’m not sure that cutbacks in spending are really an “accounting” issue, and I don’t know if I can write 15 pages about it. Someone else suggested writing about the shortage of accountants, especially in regard to 2010. I need to investigate that a bit but a google search didn’t turn anything up at first glance.

I had a dream the other night that I came up with a great topic, but I couldn’t remember what it was when I woke up!