(Editor’s note: FTF News is launching today a new area of coverage as we spotlight each month a key information technology (IT) trend that is proving to be crucial to the successful operation of middle and back office processes. For January, we focus on the eXtensible Business Reporting Language, also known as XBRL.)
The open and free eXtensible Business Reporting Language, or XBRL, has been permeating the financial services industry because of the efficiencies it offers to manual, error-prone and often expensive financial processes. In fact, XBRL has become a way of life for more than 8,000 companies that file XBRL-formatted financial statements. Many hope that XBRL can also serve as a catalyst for more automation of corporate actions processing.
The global, non-profit consortium says it has the support of more than 600 companies, organizations and government agencies. The appeal of the language extends beyond financial services and is global. In fact, the consortium is hosting this year’s international conference in the United Arab Emirates (UAE), March 20-22. With more than 500 participants expected to attend, the event will take place at the Yas Viceroy Hotel on Yas Island in Abu Dhabi.
The UAE also serves as a prime example of the language’s acceptance by the securities industry as a major XBRL project is underway for the sector via the region’s Securities and Commodities Authority, according to the consortium.
The participants in this project will be among the first to use the XBRL dictionary for the set of global accounting standards known as International Financial Reporting Standards (IFRS). The results of the project could have a major impact on international accounting standards. Accounting systems vary by nation and region, which causes confusion when comparing financial reporting methods. The combination of IFRS and XBRL holds the potential of paving the way for a new consensus for international accounting practices at banks, registries and stock exchanges.
XML at the Core
The consensus on accounting standards—or on any other financial processing—could come from the automation made easier by the eXtensible Markup Language (XML), which is the basis for XBRL.
XML facilitates the electronic exchange of data between end users and across the Internet. “Under XML, identifying tags are applied to items of data so that they can be processed efficiently by computer software,” according to the consortium’s website. This allows software to process the tags in a XBRL document and exchange them with software running on other computers. This also enables multiple methods for presenting data. By automating financial matters in this way, securities firms and their clients can speed up business reporting and analysis and make them more cost-effective, accurate and reliable.
Firms can use XBRL to replace error-prone, time-consuming and expensive manual processes with software that can analyze, validate and manipulate XBRL-based information. This benefits governments, regulators, economic agencies, stock exchanges, financial information companies as well as accountants, auditors, company managers, financial analysts, investors and creditors. Not surprisingly, XBRL has caught on among accountants, software providers, financial services firms, investor relations companies and, more generally, the IT industry, according to the consortium.
In addition, XBRL can handle data in many languages and accounting standards and can be adapted for multiple uses, according to the consortium. Mapping tools can transform data so that it can be used by XBRL and data can be generated within XBRL via software.
XBRL Dictionaries
XBRL’s dictionaries are called taxonomies and serve as the categorization schemes used to define the specific tags for individual data items, according to the consortium. The kinds of taxonomy can differ by national jurisdictions. For example, different countries have different accounting regulations and this is reflected in their respective taxonomies. XBRL also offers a special taxonomy for the collation of data and reporting within organizations.
Taxonomies also help spread the influence of XBRL.
For example, officials from the Depository Trust and Clearing Corp. (DTCC), the financial messaging services cooperative SWIFT and XBRL in the US have successfully developed and mapped XBRL taxonomy to the ISO 20022 standard for state-of-the-art automation of corporate actions.
The XBRL support allows issuers and agents of corporate actions to electronically tag key information on corporate actions in a standard format, enabling recipients to process the information. Firms can cut down on misinterpretation and the associated risks by tagging corporate action information at the source; the ISO 20022 standard also helps firms achieve straight-through processing.
At the SWIFT Sibos conference in Toronto this past September, the DTCC announced that its ISO 20022 messages for corporate actions announcements would be ready for implementation in November 2011. The news followed a pilot program that began April 25 of last year. Mellon, Brown Brothers Harriman, JPMorgan Chase and National Financial Services took part in the pilot test for all event types, including dividends, principal and interest, and redemption and reorganization events, such as rights, tender offers, and warrants.
“A number of companies and vendors have expressed interest in the ISO 20022 format, and we will help them transition to the new messages starting in 2012,” said Daniel Thieke, DTCC vice president, asset services, in September. Thieke said the onboarding and adoption of ISO 20022 announcement messages for DTCC clients will begin during the first quarter of 2012.
Also at Sibos, Citi has announced that its Securities and Fund Services group has delivered technology that will facilitate the standardized automation of corporate actions announcements for depositary receipts (DRs). The development effort is crucial for Citi’s XBRL pilot program participants.
Citi’s current project, which involves SWIFT and XBRL, is using the XBRL taxonomy for corporate actions reporting and is based on elements of the ISO 20022 corporate actions global standard. The initial Citi pilot has been focused on preliminary and final dividend announcements for Citi’s DR programs and got underway in late 2010, Citi officials say. Citi began work on phase two of the XBRL project in late 2011 and will focus on reporting non-dividend corporate actions. While based on ISO 20022, the Citi efforts are more streamlined than current reporting and announcement processes, officials say.
“Our industry has long been seeking a standardized solution to the challenge of corporate actions notification and automated processing,” says Alan Smith, managing director and head of issuer services at Citi, in a prepared statement. “Much work remains to be done, however, in engaging more participants and establishing an industry-wide governance model for these early efforts.”
A Slow Migration
To jolt the acceptance of ISO 20022 for corporate actions, some industry participants have suggested that global regulators and authorities step in and compel corporates to migrate to the emerging standard. Dennis E. Goodenough III, senior business manager, securities initiatives at SWIFT, counters that it’s not essential for corporates to migrate to ISO 20022.
But “it’s important for them to embrace the tagging methodology of XBRL [for corporate actions] if they already use it for their quarterly financial reports,” says Goodenough in a Q&A for FTF News that ran last year. “The folks at XBRL, ISO and SWIFT have already mapped those tags to the ISO 20022 standard and that can be systemically processed after the fact. So, it’s slightly different.”
While corporate actions come in many shapes and sizes, “the economic elements in the types of decisions that have to be made really come down to no more than 40 elements,” Goodenough says. Some of those elements are the number of shares, dividends, a stock split and a reverse split. “These things can all be tagged using XBRL and that tagging is embedded in the electronic document of the corporate action. And anyone who receives it can use any numerous tools to extract those economic elements and put them into a 20022 form so that my systems can process them.”
Embracing XBRL will also require corporates to resist a mentality that says, “ ‘Hey look, I’m issuing a legal document—how it’s interpreted is up to someone else,’ ” Goodenough says. The corporates have an ultimate responsibility to their shareholders and it would be in their best interests to tag their legal documents so they are interpreted correctly. In addition, corporates are the ones best positioned to tag their data. “But we know for a fact that many of them are not,” he says.
The misinterpretation causes financial losses as the shareholder ends up with “either no action because the corporate action was missed or misinterpreted, or they didn’t get proper accounting for shares,” Goodenough says.
As it stands today, some firms hire multiple data processors to interpret the same corporate actions and they use reconciliation processes to make certain they catch discrepancies that could cause a failure or an expense. “It’s a dirty secret in the industry: everybody has a provision for loss for misprocessing a corporate action. But nobody will tell you how much it is,” Goodenough says.
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