In This Chapter
Looking at transformational technologies
Predicting impact from clues offered by other transformations
Gaining insight from regulatory reporting and financial reporting changes
Creating your own transformation
This chapter is about peering into the future as best we can, based the past. The purpose is to help you plan your future. Predictions are never perfect, but they can be useful in understanding what something is, what it isn't, and how it may impact you. Looking at changes that have occurred in other industries can also provide clues to changes in your own industry. This process reveals clues as to what the future might hold and help you plan for that future by helping you see opportunities and fend off potential threats.
This chapter is also a visionary look into the future of business reporting and XBRL. We look at changes that are already occurring in regulatory reporting and financial reporting and extrapolate from those clues to help you see the broader changes that are likely to occur in business information exchange in general.
The global consultancy firm Gartner classified XBRL as a transformational technology. Gartner defines transformational as something that "enables new ways of doing business across industries that will result in major shifts in industry dynamics." Major shifts mean lots of change and some winners and some losers.
Accounting Today, in its September 4–24, 2000, issue, said, "XBRL is perhaps the most revolutionary change in financial reporting since the first general ledger." Many other similar types of statements have been made, but these types of statements don't really help you understand why some sort of transformation will occur, what the transformation might look like and mean to you, or what you should be doing. For that, you need details. So how do you get details about something that hasn't yet occurred?
Well, getting details is actually not quite as hard as it may seem. One way to predict something is to look at similar types of things to learn from them. Then, you do your best to project what you have learned from the other things on to what you're trying to predict.
Two specific areas can help you understand the transformation that XBRL is being hailed for bringing:
Transformations from other industries
Transformations from areas of business reporting that adopted XBRL early
Various industries have experienced transformations, and their experiences can give you a sense of the magnitude of the changes that are likely to be in store for business information exchange, which includes business reporting. In this section, we discuss big changes that relatively small-looking ideas caused.
The UPC is a simple enough idea. In 1974, UPC codes began appearing on products you buy to relieve the congestion occurring in supermarket checkout lines. Consider these facts:
PricewaterhouseCoopers projects that the UPC saves $17 billion annually in the domestic retail industry alone.
Businesses such as Home Depot have more than 75,000 inventory items in their mammoth stores. These big-box stores, which displaced many smaller stores, couldn't have existed if the UPC wasn't around to help these stores keep track of their large inventories.
The people who created the UPC code are now going through the process of expanding the code to collect additional information. For example, they want to be able to identify which batch a product came from to help with things such as product recalls, merchandizing, and so on. This UPC code expansions means not only do they find the UPC useful, but that its creators and users realize its potential.
The standard shipping container perhaps doesn't seem that ingenious. The first idea it represents is to put items into batches or containers rather than shipping them in bulk — kind of like using a shopping bag when you go to the store. The second innovation behind the shipping container is that you take some steel and, rather than creating boxes of whatever size you want, use standard-size boxes that fit nicely onto ships, trucks, trains, and so on.
A simple enough invention, a 40-by-20-by-20 steel box. And yet, the standardized shipping container caused changes to how ships are loaded and unloaded. It also impacted ship, train, and truck construction and port and manufacturing facilities locations.
Busy ports in New York City and San Francisco ignored the shipping container and shrank as a consequence; new ports that adapted to containers, such as New Jersey and Oakland, built container cranes and grabbed the business. Today, the ports of New York City and San Francisco are tourist attractions. Rotterdam anticipated the impact of the standard shipping container and was the biggest harbor in the world for years, although now Asian harbors are the biggest in the world. Why are the Asian harbors the biggest? Well, because that location is where a great deal of the manufacturing moved because the efficiencies of the logistics made it irrelevant as to where the manufacturing facilities needed to be.
With the advent of the shipping container, the number of longshoremen performing manual loading and unloading in New York City plunged by 90 percent, and the time to unload and unload a ship went from 14 days to 14 hours. Achieving the levels of trade we have today without the shipping container and the efficiencies it enabled would be inconceivable.
The MP3 is turning the music industry on its ear! Think about your music collection. Depending on when you were born, how did you store your collection of music? Before LPs became standard, you may have stored songs on a pre-LP (long-playing) format. You may have stored them on LP records, 45s, 76s, or even 8-track tapes. Then maybe you went to cassette tapes, reel-to-reel tapes, CDs, or maybe DVDs.
Then suddenly, the MP3 comes along. MP3 changes the format from physical to something digital that is portable on small, cool gadgets. Now you can use the format to create and store your own media, and what you're storing doesn't even have to be songs: It can be podcasts or audio books. You can play this media on your computer, in your car, on your phone, or on your iPod. Consider these facts:
iTunes has a catalog of approximately 6 million songs. It costs iTunes virtually nothing to add songs to its catalog, and, once added, a song can be distributed globally via the Web for pennies. A music store would be lucky to have space for 10,000 CDs and, to sell the CDs, you have to get them to the store.
Apple, a computer company, going into the music business? That thought is as absurd as someone trying to get into the book-selling business on the Web, errrr . . . like Amazon.com. Anyone can produce and distribute a song or other audio for pennies on his personal computer to anyone else in the world.
Podcasts made it so that you can listen to your favorite radio shows anytime you want, not when the radio network airs the broadcast. Video podcasting is having a similar impact on the television shows we watch.
Photographs came in many different standard physical mediums, one of the most popular being 35mm film. Remember the little drive-up photo booths where you could drop off your pictures for processing? No? Well, at least in its day, it was a great idea, but you don't see many of these booths around these days. Consider this:
Today, you can take a picture, get it onto your computer, and distribute it globally via the Web in less time that it takes to develop a Polaroid photo.
Taking pictures no longer has a cost associated with it. (Well, maybe a little cost for memory to store the photos.)
Processing photos requires only your personal computer.
Some areas of business information exchange are already seeing a significant amount of adoption of XBRL. Early adopters of XBRL fell in two primary categories: regulatory compliance reporting and financial reporting.
Some of the earliest adopters of XBRL were those who regulate you. All around the world, regulators are adopting XBRL. Around the world, each country has something of a common set of regulators. Here's a list of types of regulators that are already adopting XBRL in countries around the world:
Capital market regulators (that is, regulators of stock markets)
Tax offices
Banking regulators
National statistics offices
Corporate registrars
Two things are worth pointing out: First, these regulators aren't the only categories that use XBRL. They're simply the common types of categories that different regulators have already expressed interest in, are currently undergoing implementation and have moved, or are currently moving to XBRL to help them collect information from those they regulate.
The second point we want to make is that just one regulator using XBRL can mean that XBRL will impact hundreds of thousands, or even millions, of users. Add up the number of users, and this number is quite big. Businesses required to use XBRL eventually realize that they can use XBRL for purposes other than simply providing information to those that regulate them. Further, each of these businesses, because of the regulatory use of XBRL, already have in place at least some of the infrastructure for using XBRL, which they can now leverage for uses other than reporting to regulators.
Why are these regulators making these changes? Chapter 9 discusses the benefits from changing to XBRL. You can also read about the specific benefits that one regulator, the U.S. FDIC, realized from its XBRL conversion in Chapter 1.
One of the most pervasive and significant types of business reporting is external financial reporting. (For more on external financial reporting, see Chapter 6.) Financial reporting is another area that is making considerable use of XBRL, which isn't surprising because accountants started the XBRL snowball rolling in 1998. Since that time, the accounting profession has accumulated a lot of support for XBRL in the area of financial reporting. Much of this financial reporting is to regulators. The accountants realized early that XBRL had more applicability to reporting than just financial reporting. But financial reporting was what was used to drive XBRL's adoption globally, commonly by regulators collecting this financial information.
Even before XBRL existed and before the Web took off, those who worked with financial information were already getting into position to get the maximum benefit from XBRL, and they didn't even know it. They were standardizing their metadata, even though most accountants didn't understand what the term metadata meant. (For more on metadata, see Chapter 21.)
Rather than each country creating and maintaining its own set of financial reporting standards, which resulted in about 80 different sets of financial reporting standards around the world, the idea was to create one high-quality set of financial reporting standards that everyone could use. This goal gave birth in about 1973 to IFRS. This process went on for a number of years with a lot of work and limited adoption, but as the world became more and more of a global community — and particularly when the Web took off — it seemed to get a bit of a kick in the pants. IFRS really took off when the members of the European Union (EU) agreed to use IFRS as the financial reporting standard for public companies (called listed companies) that were regulated by some member of the EU. Another thing that helped IFRS get going was XBRL. And XBRL helped IFRS! It was a symbiotic match made in heaven. IFRS was the metadata, and XBRL was the format used to express the metadata and exchange IFRS-based financial reports.
Enabling technologies, changes in dynamics, and the mood caused by scandals and financial crisis are impacting one another and are creating a perfect storm for the initiation of transformation of the world of financial reporting.
XBRL is only part of these dynamics; it's simply an enabling technology that contributes to meeting the objectives of financial reporting in the 21st century. Sarbanes Oxley (SOX), IFRS, the Web, and increased transparency in general are other parts.
Chapter 9 is packed with examples on XBRL projects that are already changing financial reporting. Chapter 13 is dedicated to one major project, the U.S. SEC's mandate of XBRL for financial reporting by all U.S. public companies. All these financial reporting-related projects are just the beginning of a bigger trend.
Business information exchange is a broad category. The uses of XBRL for external financial reporting and statutory reporting by listed or public companies are substantial by any measure. Regulators require much of this reporting. But a lot of financial reporting has nothing to do with government regulators, and a lot of business information exchange has nothing to do with financial information.
The internal use of XBRL will likely dwarf external use and reporting to regulators and investors. Further, the use of XBRL for nonfinancial reporting will likely dwarf its use for financial reporting.
Organizations will discover the benefits of XBRL from reporting to regulators, mandated by these regulators in many cases. Every organization will be able to realize the same benefits internally that regulators today are already realizing.
You may have heard the saying that there are three kinds of people: Those who make things happen, those who watch things happen, and those who wonder what happened. The question now is, "Which category will you put yourself in for this historical period of transformation of business information exchange?"
We mention financial reporting by publically listed companies, which are usually regulated by a stock exchange or some government agency, such as the SEC in the United States. Consider other types of external financial reporting: private companies; not-for-profit organizations; and federal, state, and local governmental agencies. Chapter 13 discusses how the SEC's mandate of XBRL will likely indirectly impact these types of financial reporting.
A plethora of nonfinancial information exchanges also exists: corporate-sustainability reporting, environmental or green reporting, carbon-footprint reporting, and triple bottom line. We could go on and on, but we think you can see our point: XBRL for regulatory reporting and external financial reporting is only a start.
Exposure to XBRL from a company's use in one area of business reporting gives them the infrastructure to use XBRL in-house for one specific use, which leads to the experimentation and use of XBRL in other areas. The internal use of XBRL will eventually dwarf the use of XBRL for reporting to external parties. Thousands of small (even tiny) information-supply chains (see Chapter 7) will be glued together because it's inexpensive to do so and the resulting benefits are so profound. The infrastructure offered by the Web and other technologies for things such as distribution of this information would have been cost prohibitive for smaller companies to implement — until now, that is.
We wish we could tell you about the XBRL killer app or apps that are changing the world, but at this stage of XBRL's evolution, we're not aware of such applications. Those killer applications haven't been built yet, as far as we know. XBRL is still maturing, so we have to wait for software vendors to make these applications available.
What we can do is describe to you the characteristics that such killer applications may possess and the types of things those applications might do:
Business-person-to-business-person information exchange: The application would allow one business person to exchange information with another business person with no assistance required from the IT department. For example, you could maintain information in something that would look like a spreadsheet, and that information would automatically flow into some process for which one of your coworkers is responsible. The two of you negotiate the information exchange: You don't need to get your IT department involved, and you don't have to rekey to exchange this information (you know, like you're doing today with those spreadsheets).
Dynamic information: The application would allow for dynamic information exchange, not just static forms: The business user can change the information set being exchanged. Again, no need to get the IT department involved to change your form.
Collaboration: The applications let you do your job, and others in the information-supply chain do theirs in a collaborative way, so well that you may think that you're using integrated applications (you're not!). The connecting link between the applications is XBRL. The XBRL standard helps enable this collaboration.
Operating environment: The application isn't just one application, but a collaboration of applications within a robust, business-user-friendly operating environment. An entire operating environment is built around the application, which is hopefully an open system. Think along the lines of how something like Apple's iPods integrate with iTunes, how users can order iTunes music, and how album covers are automatically downloaded for your music.
Agility: The application is agile. The application enables proactive assessments and real-time processing of transactions. For example, for cost, logistical, or tax optimization, the system communicates with other systems within the information-supply chain by using — you guessed it — XBRL as the means of communications. Other standards, such as RSS, are also involved and assist in this process.
Radically tailorable tool, but within a rigid environment: Preformatted templates may get you started, or you can build your own templates. All the templates are adjustable, configurable, and dynamic — not static forms. Highly skilled domain experts create these templates, lesser skilled experts adjust them within bounds, and even lesser skilled workers use the templates and the application infrastructure to do their job. You have flexibility where you need it, but not where you don't.
Building blocks: Business users won't interact with XBRL at all. Rather, they interact with a logical model that is made up of several building blocks. These building blocks are constructed to work together, hiding the complexity of the XBRL syntax. There is a fairly small number of building blocks, but users can add more, if necessary. These building blocks are similar to Microsoft Visio shapes. Incredibly smart programmers engineer these building blocks, while highly skilled programmers that are XBRL experts construct them. These experts can build new building blocks, but they may not break the logical model.
Business-rules driven: Business rules allow the user to interact with the business information and never make certain categories of mistakes. The application simply won't allow a business user to, say, create a balance sheet that doesn't balance or a movement analysis that doesn't properly foot. It's as though a little accountant lives in the application, in the form of rules, which always makes sure that all the i's are dotted and the t's are crossed.
Integrated internal audit process: Thanks to a built-in internal audit process, all information is there to see, and the internal audit process is part of the building blocks. Creating information without the ability to audit the information yourself to be sure that you're doing things correctly is impossible.
Smart transactions: Many business reporting transactions are more science than art. In an accounting system, for example, you can't post all transactions to any account. Ninety-nine percent of transactions are quite predictable and follow specific patterns.
This chapter looks at ways others are making use of XBRL. But what about a little closer to home? What about you and your company? What kind of transformation will occur there? Well, that's up to you.
If you're anxious to get the transformation process started in your organization, your department, or your group, but don't quite know where to start, flip to Chapter 7, which walks you through creating an information-supply chain. If that general guidance doesn't suit your needs, Chapter 9 walks you through how others are building information-supply chains and may provide inspiration for a way to create your own little (or big) transformation.
That is really all there is to it! Creating your own transformation may not cut your costs by millions of dollars or improve your efficiency or effectiveness on a large scale, but it will help you see what's involved with actually making use of XBRL. We encourage you to experiment. Remember that even Rome wasn't built in a day! Lots of small improvements can create quite an impact.
If you want more detailed guidance on how to get your project going, see Part III, which gets you started successfully pursuing and executing an XBRL project.