The move to IFRS and XBRL

IFRS is an accounting standard dealing with global financial reporting. XBRL is an electronic language describing financial data according to global standards. This article describes why IFRS will displace GAAP in the US and the link between IFRS and XBRL.

The move to IFRS and XBRL

Why are governments moving to International Financial Reporting System (IFRS) and extensible business reporting language (XBRL)?

The advent of the Internet (circa 1980) resulted in global communication times shrinking to minutes from days or hours. The consequences of inexpensive, real-time, Internet-based access to information systems were that companies became global players, and then, that governments, international business partners, and subsidiaries needed a rapid and consistent way of exchanging data and analyzing financial statements.

The problems these organizations faced with globalization were the requirements for multiple financial statements by country, contending with the delays in producing them, with deductions allowed in one country and not another. These needs gave rise to the IFRS, a global accounting rule book. Hand in hand with the maturation of IFRS was the creation of XBRL, based solely on IFRS, the adoption of which can provide very significant cost reduction benefits for both governments and business. It is safe to say that IFRS gave birth to XBRL, and XBRL caused IFRS to be adopted. Together, these two deployments are coercing all remaining governments to adopt international financial reporting standards.

Beginning in 1970, a consortium of international financiers formed the International Accounting Standards Committee (IASC, the predecessor to today’s International Accounting Standards Board, or IASB). The purpose was to establish a global accounting rulebook, now known as the IFRS.

Today, IFRS is a fiscal reporting standard that is the government reporting rulebook in over 120 countries. Where IFRS is standardized, a financial statement or financial document prepared in any one of the 120 countries can be fully understood and accepted by any one of the other countries. As the number of membership countries using IFRS grew, it was recognized that a financial computer language would offer significant benefits to:

  • Governments, as companies could submit tax returns and communicate with the government in a standardized manner

  • Corporations could send invoices, sales orders, and other financial documents in this standard language, eventually displacing electronic data interchange (EDI)

  • Individuals would be able to do direct electronic submission of their tax claims with the government

  • Auditors would be able to benefit by having a single interpretation of IFRS-based information

Enter XBRL

Though extensible markup language (XML) was not an official language when XBRL was started, nevertheless XBRL definitions were established to meet the challenges of a global financial language. Its grammar would be based on the yet-unreleased XML.

Prior to and parallel with the definition and approval process of using IFRS as the basis, an XBRL grammar was defined using XML characteristics as the representation medium. From the late 1990s, much effort was spent creating the tags for thousands upon thousands of different financial fields. XBRL language tag names are unique in that each tag name has a very specific meaning and cannot be used for two definitions. The tag name exercise has not yet been completed, as procedures had to be created to allow companies to develop customized tags for data that they feel do not correspond to any existing standardized XBRL tag.

In April 2008, representing 157 countries, the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC) together approved the markup language (XML) as a standard. Thus, formally, XBRL was standardized.

Why XBRL?  

Once there is a global standard reporting grammar (such as XBRL), it makes sense that every line in a financial document bears a well-defined standard name. In XBRL, that name is called a tag name, or tag. That tag name is identical in name and use for every financial statement produced by an adherent of the IFRS. The XBRL standard goes beyond financial statements to include common types of financial documents, such as remittances, invoices, EDI documents, payroll, and more.

The major benefactors:

  • governments, for which annual personal and corporate income taxes can be filed electronically, saving thousands of hours of manual transcription work

  • corporations, that can use their enterprise resource planning (ERP) or accounting systems to deliver IFRS documents

  • auditors, whose efforts at certifying the accuracy of information is facilitated

  • private individuals, who will be able to file income taxes directly with government-supplied software

Using XBRL electronic records easily allows several years of IFRS documents to be merged to create year-over-year financial statements. KPMG and other auditing firms state that audits based on standardizing on IFRS (using XBRL) will be done more quickly and at less cost.

Why XML as a basis for XBRL?

From a computer system, a program that reads or writes XML would be able to read and write XBRL. XML, with its single syntax, can support multiple alphabets and their character sets, along with the compulsory unicode transformation format 8-bit (UTF8) in the American Standard Code for Information Interchange (ASCII) character set.

Prior to XBRL, in preparing an income tax form, we used to enter data by page number and line number. From year to year, income tax forms in the
US or other countries change such that when an insert or deletion occurs, the line number representing certain financial fields also changes. This means that for the same data, line numbers from one year may be different from another year. Electronic comparisons of different years are difficult to impossible to manage, year over year.

Suppose that line numbers are replaced internally by line identifications (tags). If these tags are universally standardized and all IFRS countries agree to their title and use, then understandings of meanings become global. Year-over-year comparisons become easily implemented in business software.

Good-bye GAAP

With the formal standardization of XML and XBRL in April 2008, the US’s Security and Exchange Commission (SEC) recognized that the US should not be the “odd man out.”  As the US could not “Americanize” the IFRS and because there were substantial benefits to adopting a world standard, the US joined as a team player (and this was mandated by the SEC in August 2008). Work in the US regarding IFRS had started prior to 2008, and it is to be noted that IFRS is in the process of replacing generally accepted accounting principles (GAAP, the current standard in the US), with a full implementation targeted to take place before 2014.

GAAP is a set of rules that has grown over the years, to the point that some of the entries are archaic and obsolete. For example, GAAP does not allow one to use well-defined, electronically generated financial documents in extensible business reporting language.

Why supplant the GAAP system? There is a reason to look at the benefits of doing so:

  • Companies should not have to create multiple financial statements by country (as an example, Procter & Gamble is a world-wide organization with businesses in every country. For the majority of their operations they now produce two financial statements to two standards: GAAP and IFRS. Prior to IFRS, they produced one for every country).

  • By standardizing with IFRS, contestations of allowable financial statements by foreign country and domestic review by the
    US government’s Internal Revenue Service (IRS) get reduced to one investigation.

  • Citizens of the IFRS world will be able to file their income taxes with government-approved software using XBRL tag names.

  • Citizens who have to produce multiple income tax filings will have one common electronic income tax form to complete and distribute.

  • Auditors who have to review company financial statements will have an easier role.

  • Time and effort to produce financial statements will be reduced.

  • ERP and financial software can be standardized for reading and writing electronically transmitted electronic documents produced by competing products.

A Little about XML

As mentioned above, XBRL uses XML as the grammar.

Every sentence in XML follows the format consisting of the sequence:

<tagname> data </tagname> (or “tag, data, end tag”).

A feature of XML is that tag nesting is permitted. No limit on nesting is stipulated and nesting is used in many places and supported. Thus, in the above XML sentence description, one could replace the data field by a string of text or an XML sentence or a combination of both.

XBRL uses a documented the set of tag names and nested tag names as a schema. Consider, for example: a sales order schema which contains at least a subschema for the order header and a second subschema for the order lines. The sales order header subschema may have a nested subschema for purchaser information, etc. The sales order line subschema may itself include a subschema for a note or reference to a sketch.

Those involved in supplying software to generate financial data, such as ERP and accounting system vendors or EDI developers, will program the use of XBRL schemas and the contained tags. (The handwriting is on the wall that EDI will be replaced by XBRL.) In individual income tax form software, generating electronic data will become XBRL compliant.

The SEC has stopped short of mandating XBRL for public filings, but to contain government and corporate costs, the use of IFRS standards and XBRL will be mandated. About 25 international trading companies have joined the SEC pilot program to file selected reports in XBRL; most of those companies (such as Procter & Gamble), will benefit from the widespread adoption of XBRL.

There is some resistance to change by some auditors. They feel that GAAP is sufficient and find no justification in replacing it for domestic use. GAAP rules related to energy resources and other sectors where depletions apply can be integrated into IFRS. The major noise is due to the costs of conversion. The SEC is looking at how it can meet corporations halfway in reducing conversion costs, estimated at in excess of $1 million (USD) per large corporation.


Conversion to IFRS is not without conversion costs. Oracle and Microsoft executives estimate that fewer than 10 percent of their customers currently use the XBRL features embedded in their products. General Motors has indicated that it will wait to the last minute before implementing IFRS and thus XBRL. With today’s economic climate, the 2014 deadline to be fully IFRS standardized may be delayed to 2016—but nevertheless, IFRS is coming.

Other US voices oppose conversion to IFRS and want the world to adapt GAAP standards. The world sees these voices as wanting globalization to be “Americanization.” When the
US decided not to convert to the metric system, the problem became one of having a standard that the rest of the world did not follow. Costs of US manufactures to sell to the world required two standards: US and metric. This time the SEC has wisely decided that the world-standard IFRS rules (with XBRL) is the way to go. Corporations will have to suffer short-term pain for long-term gain.

Reference Documents

Definitions of XBRL on the Web:
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