XBRL is coming: are you ready?

1. XBRL is coming: are you ready? Miklos A. Vasarhelyi KPMG Professor of AIS, Rutgers Business School Technology consultant, AT&T Labs CAIP Lecture – University of Melbourne October 14, 2010

2. Outline • Some background • Five axioms of change • Is XBRL Really electronic reporting? • What are the implications for continuous assurance? • A likely scenario of adoption / development • Unintended consequences

3. Some background

4. Knowledge and Structure Measuring Business Tabular numerical Information Tagged detailed Semantic Information Tagged Coarse Semantic Information Structured semantic format Free Semantic Format • Understandability • Automation understandable • Expressing complex concepts • Comparability • Structured storage • Globality • Expressing Nuances • Paucity Expressing Complex Concepts

5. Scope and role of XBRL XBRL “Financial Reporting” Business Operations Internal Business Reporting External Business Reporting Investment Lending, Regulation Economic Policymaking Processes Companies Financial Publishers and Data Aggregators Investors Central Banks Participants Trading Partners Auditors Regulators Management Accountants Software Vendors

6. XBRL: Cheaper, Smarter, Faster • Reduces the cost of preparing, publishing and analyzing information (CHEAPER) • Increases efficiency of business decisions, real-time reporting, deeper analysis capability, reduces margin for human error, more accessible and easier to use, enhances comparability (SMARTER) • Automates the migration of information from systems to financial statements, increases the speed of data use and related decisions, easier to transfer data (FASTER) Benefits of Supply Chain Standardization

9. Consolidated Profit and Loss Account for the year ended June 30, 2003

10. 4 core elements of XBRL The XBRL standard XBRL Taxonomies XBRL Instances e.g. IBM, Dell, Microsoft XBRL style sheets

11. Standardization Presentation Cash & Cash Equivalents References GAAP I.2.(a) Instructions Ad Hoc disclosures Label cashCashEquivalentsAndShortTermInvestments Calculation Cash = Currency + Deposits FormulasCash ≥ 0 Contexts US $ FY2004 Budgeted Validation XBRL – More Than Just Definitions Presentation Comptant et Comptant Equivalents Presentation 現金及び現金等価物 Presentation Гроші та їх еквіваленти Presentation Деньги и их эквиваленты Presentation Kas en Geldmiddelen Presentation 现金与现金等价物 Presentation Geld & Geld nahe Mittel XMLItem XBRL Item XBRL Item

12. XBRL Creation Company Financial Statement XBRL TaxonomyCreated by XBRL Consortium TAGGING XBRL DocumentCreated by Preparer Consumed Rendered 12

13. Scope and role of XBRL XBRL “Financial Reporting” XBRL GL, the Journal Taxonomy Business Operations Internal Business Reporting External Business Reporting Investment, Lending, Regulation Economic Policymaking Processes Companies Financial Publishers and Data Aggregators Investors Central Banks Participants Trading Partners Auditors Regulators Management Accountants Software Vendors

14. Standard Payload: XBRL GL Can Represent 1. Trigger: a source document is represented electronically 2. Source Journal The document is entered and posted, creating a source journal. 3. Journal entries: The accounting implications are gathered and prepared for the GL. 4. GL Entries: the journal entries are prepared for posting to the GL. 5. Journal History: The entries are posted to the Journal History. 6. Consolidation: The data at journal entry or trial balance level are brought together. 7. Reporting: Consolidated numbers combine for eventual reporting. Invoice Posting Journal Source Journal Distribution To GL Report General Journal Transaction Posting Journal History Report Consolidating/ Consolidated

15. Journal Entries Sub Ledgers General Ledger Financial Reporting xbrlInfo xbrlInclude summaryReportingElement Business Activity Transaction Detail Source Documents XBRL GL And XBRL FR Source Systems Internal Reporting Pipeline Reporting Annual(Quarterly) Reporting Financial Systems Journalize Accounts Payable Accounts Receivable Order Entries Purchasing Fixed Assets Human Resource Payroll Regulatory Reporting Aggregation Consolidation Tax Decision Support Manual Transaction Late Entries Adjustments Manual Entries Business Activity Management Extract & Transform Financial Data Mart/ Repository Business Events Benchmark & Analysis Budgeting & Forcasting Monitor, Audit & Control

16. Dutch Taxonomy Project • Major eGovernment initiative • The Ministry of Justice and the Ministry of Finance in a joint effort intend to reduce the administrative burden of businesses by using XBRL to make the composing of reports and exchange of financial data easier. • Focuses on three important reporting chains: • Reporting of taxes; for instance profits tax, wage taxes, value added taxes (VAT) and Income taxes • Reporting of annual accounts • Reporting of economic statistics Projected savings for Netherlands businesses? 350 million euro 16

17. Five axioms of change

18. Axiom 1 Tagging will force substantial standardization of reporting Extension taxonomies will be viewed negatively as presenting lack of transparency IFRS dialects will present the apples and oranges of measurement in the global context Foreign currency conversion will make these substantially more complex Prior to the 2nd wave there will be rationalization of mandatory reporting structures (expanded Dutch model)

19. Axiom 2 Tagging will create a language of its own There will be a move towards taxonomy recognized utterances limiting the types of information to be added to annual statements Focus of education will be on this dictionary Data elements within the ERP will dominate this dictionary Simple semantics will eventually prevail Predefined quantitative metrics will dominate over semantic utterances or ad-hoc measurements Computation of these metrics will be core to teaching but somewhat irrelevant as they will be provided by software and the formuli (calculations) in the structure of the taxonomies

20. Axiom 3 Tagging will lead to greater granularity of data The mapping of corporate statement data and ERP structures will substantially increase allowing time sequential disclosure without manual manipulation Traditional limitations to the quantity of data are rapidly disappearing in the free storage and cycle area The difficulties are more in the willingness of management to provide transparency under the guise of competitive impairment and on the existence of obsolete, incompetent, and misguided legislation E.g. aspects of reg FD and Sarbanes Oxley

21. Axiom 4 Universal tagging will follow tagging by sectors There are over 400 groups generating XML derivative standards to create system interoperability There has been little effort to create coherence in these standard to void obliquity of data structures There will be substantial societal costs to bring together these standards in the 2nd wave 1st wave: development of many sectorial interoperability standards 2nd wave: development of mapping and coherence of these standards 3rd wave: development of clustering standards for macrointeroperabily

22. Axiom 5 Tagging will accelerate the route to continuous reporting Tagging will allow low cost continuous repetition or “addition” to existing statements Statements will be very different in format / a new type of annual report with accounting principles focusing on atoms of data not reports Hyperlinks to “external” sources of data will be increasingly found in the corporate information portals Variable information update periods will be prevalent on the information portals

23. Is XBRL Really electronic reporting?

24. Is XBRL really electronic reporting • NO – it is too close to the old reporting model • Not particularly appropriate for balkanization of data • Not particularly appropriate for secure / selective / database disclosure • Not particularly appropriate for servicing disclosure agents • Not particularly appropriate for data level assruacne • BUT A STEP IN THE RIGHT DIRECTION • Will be a phase towards real electronic reporting which requires major paradigm change

25. What are the implications for continuous assurance?

26. Traditional data item • Explanatory labels (tags) • Identity, units, source, etc. • Control labels • E-signatures, sequence numbers, invisible markers, • Control signals XML derivative transactions

27. ERP Financial-related Web Services in the future (the universal data bus) Selective Layered Reporting Accounting bots and services Audit Service Fraud detection Service Other Assurance Services Financial Analytic Services

28. Management action Auditor alarm alarm Decision standards reports Inv. purchase Labor purchase Continuous reporting: balances XBRL Serv. purchase Continuous reporting: transactions The digital data life-cycle: reporting layer Xbrl/gl ERPS / databases

29. alarm Decision standards reports Continuous reporting Continuous Assurance The digital data life-cycle:the umbrellaof assurances Management action Data level assurance Xbrl/gl Inv. purchase ERPS / databases • Transaction assurance • Estimate assurance • Rule assurance • Judgment assurance Other tertiary assurance Labor purchase Serv. purchase

30. A likely scenario of adoption / development

31. Adoption Frames (2010) • Will be ubiquitous for listed companies within 10 years • Will be spottily adopted for special applications (like government forms, loan applications) within these 10 years • Will require XBRL 3.x over next 5 years in particular to make it more XML compatible • Object oriented tagging will follow • XBRL 4.x will follow for another 5 years moving towards more real electronic reporting / assurance tags / integration into ERPs

32. Unintended consequences

33. Financial Statement Presentation Purely electronic and a part of a wide corporate information portal The question is who controls this portal: the firm or value adders such as Bloomberg / Edgar Online Consequently students will have to have analytical skills that involve gathering and managing data from different sources In particular accountants will be more like the financial analysts of today as opposed to bookkeepers Standard setters will eventually focus on the content /comparability of data provisioning by companies as format will be irrelevant Consequently students will have to have skills of data integration and decision support

34. Information Theory Reapplied Valuation bases can be reinstated (fair value) Decision relevant bases must be created and kept updated – exit values, market values, competitive position valuation, price level valuation, etc Tradeoff of information provisioning must be changed and re-evaluated frequently For the students Improved expertise in archival search Substantial training in valuation / appraisal Understanding of information versus decision context Obsolescence of substantive part of the current curriculum

35. Better Data and Better Analytics Should accountants be the providers of data or analytics? Should accountants be involved in strategy setting? Should accountants be designing ERP systems? Should accountants be designing ERP information structures? Should accountants be designing the tens of thousands of ERP reports?

36. Will tagging prevail? Inevitably!!! XBRL is infrastructure therefore will eventually be forgotten Measurement structures will be affected by a feedforward effect Granularity Pressure to comply Standardization Who has dominance? Business prevailed in the last decade government will have an upper hand for a while Integration of reporting structures – a la Dutch Effort A conspiracy theory Democratic forces favor heterogeneous reporting structures and porous controls