XBRL can enhance transparency, ease of doing business

antitrust law, big tech, digital
The Competition Amendment Bill which will be taken up by Parliament in the ongoing Budget session will provide for steep fines on companies indulging in antitrust practices.

In 1998, Charles Hoffman, a certified public accountant from Tacoma, US investigated the use of XML for electronic reporting of financial information. He began developing prototypes of financial statements and audit schedules using XML. His experimentation went ahead and the American Institute of Certified Public Accountants (AICPA) got involved. They put together eXtensible Business Reporting Language, or XBRL as it is commonly known.

XBRL is an information standard, not a new accounting concept. It is a reporting format that works with existing accounting concepts. Adopting XBRL into an organisation’s core technology framework is easier and not expensive — probably the reason why not many IT firms offer this. The software to create XBRL documents is what is referred to as publishing software. To read XBRL documents, one would need a rendering tool.

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As a language for electronic communication of business and financial data, it has transformed business reporting and compliance tracking globally. It is open source and royalty free. It has evolved through collaboration between accountants and technologists. The XML properties of XBRL make the information machine-readable. That makes it 4th IR compatible, for the current era of AI & ML. The addition of business rules to XML creates XBRL, creating an information-set that is more easily deciphered. XBRL greatly increases the speed of handling financial data, reduces the chance of errors and permits automatic checking of information.

XBRL is being used in over 100 countries including China, Korea, Japan, and the US. In India, RBI uses XBRL (all banks file their reports using the format). The ministry of corporate affairs as well as SEBI adopted early on, and ensured that all compliance filings of companies are on XBRL.

Beyond this, most other public organisations, departments and regulators have been slow in picking up adoption and / or utilisation of XBRL. The benefits of XBRL could be far and beyond the conventional data reporting and associated regulatory-supervision. From tracking of government expenditure and land records, to health records, trade documents, granular loan information to tax / GST filing, XBRL has applications everywhere.

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How can XBRL help regulators ?

The regulators want to find something that others don’t see easily. And they want to see it first and to still have the time to act on such a discovery. XBRL could be that magnet that finds your needle-in-the-haystack. XBRL is designed for human augmentation, not human replacement. If the regulators can trust that the data has not been compromised with, in the journey from transactional system to reporting, they can focus on the data itself.

Globally regulators have increasingly been looking at big-data-sets (including structured financial data, payment transactions, unstructured granular data including from the internet) and analytics to provide new insights, enhance quality of their risk-assessments and forecasts. Regulators have always had to get used to the newer waves of technology shift and to finetune their regulations in sync with market mechanisms.

Also, the implementation of XBRL can help decision makers like regulators / boards of companies see the information tabled before it with greater clarity, knowing fully well that if there is a footprint anywhere that is “out of place”, it will be visible. A range of people, including analysts, credit risk agencies, investors and regulators use XBRL to analyse data within and across different companies. With the implementation of XBRL, one can’t hide as the trail will show up somewhere on the radar.

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Systemic stability that XBRL can offer India

A PAN (Permanent Account Number) is a unique identifier issued to all entities identifiable under the Indian Income Tax Act, 1961. All financial transactions and reporting are made with PAN as a critical identifier. If all financial regulators and governmental authorities use XBRL as unique and common data format, the ability to track monies & asset ownership becomes easier and it can also help in data granularity. With this, regulatory supervision can be preventive and not just about policing.

Since rules-based supervision is easy to handle with XBRL, it makes it simpler for real-time tracking of various aspects including financial markets, money movement and end-use fund monitoring. It could allow timely intervention to preserve financial system integrity at the first sign of a crisis. Improved effectiveness of policy making through targeted intervention can be done.

XBRL-based analysis can also improve credit access with improved decisioning capability. And with improved collections efficiency, cost of credit can come down over time. If structured well as an industry norm, it can help the insurance-sector track the solvency margins, risk management updates and any potential capital requirement in real time.

This would also lead to better transparency and governance standards in Indian markets. It also offers a glide path for an improved ease of doing business. There could be many more cases that each of the regulators / ministries might ideate to solve. The government could do well in adopting XBRL as the national data reporting standard.

(Srinath Sridharan is an independent markets commentator based in Mumbai.)

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Srinath Sridharan is a strategic counsel with 25 years experience with leading corporates across diverse sectors including automobiles, e-commerce, advertising and financial services. He understands and ideates on intersection of finance, digital, contextual-finance, consumer, mobility, Urban transformation, and ESG. Actively engaged across growth policy conversations and public policy issues.