XBRL Way Forward - Taxonomy Extension

The financial reporting world has faced a number of changes in recent years. We have seen that with XML standards and especially XBRL there is an impact on the financial reporting supply chain. The most important aspect for XBRL market acceptance is the development of XBRL taxonomies, in order to standardize various business reporting domains. The XBRL framework is based on taxonomies as metadata and instance documents as data of the reports.

The taxonomy development has the following phases – pre-development, development and post development. MCA has provided the taxonomies by completing the pre-development and development phases of the taxonomies (currently they have released taxonomy for C&I, more industry specific taxonomies will be developed and released as we move forward with XBRL). The final phase is taxonomy usage and maintenance. The taxonomy usage and maintenance starts directly after the publication when feedback from the user community and companies filing using XBRL compliant format starts coming in. The feedback would include any bug, element level issues or any common "extension taxonomy" that has been used across various companies. These feedbacks have to be incorporated in the next version of the taxonomy release.

In India, for all the companies filing their financial statements using XBRL to comply with the MCA mandate, the phrase “taxonomy extension” is yet to be an understood term, as MCA has not allowed any taxonomy extension this year. But it is a only a matter of time when extension will be a requirement. The more companies start filing using XBRL and deal/drill/scrutinize the current taxonomies, the more they will need to use elements specific to the company and not present in the base taxonomy.

There is a narrow view that extension is only about adding brand new company specific elements which do not exist in the base taxonomy. While adding new elements is definitely one of the purposes for creating extensions, there are many other drivers for creating extension taxonomy. It can be a national or industry extension to these standards as well as company specific taxonomies. The base taxonomy compromises knowledge included in a single and stand-alone accounting or reporting standard or regulation. The jurisdictional taxonomy extension is a taxonomy using the knowledge base included in the base taxonomy and usually extends it for a certain geographical region. The industry taxonomy extension is enhancing taxonomy with industry specific aspects. Finally, the reporting company itself can build extension taxonomy for company specific elements.

You can tackle creating extension taxonomy by thinking about it as an upside-down pyramid. Beginning with the most general set of extension tactics and seeing if that suits the purpose. If not, we should move to a lower level, where more specific information is required. Once the taxonomy is approved by MCA, the extension taxonomy documents are as important as the Instance documents you submit to MCA. Special attention must be paid to the contents of the extension taxonomy. Extension taxonomies are much more than just about adding new elements; they include changes to Relationships, Labels, Linkbases, Calculations and more. Even if you have completely outsourced your XBRL preparation, it is important to work with your outsourced provider to understand what goes into your extension taxonomy since it is one of the documents that you will be filing with MCA.

MAGNE@XBRL

Guidelines for organizations preparing for XBRL implementation

As India gets ready to build a foundation for digitalization of financial reporting there are many things that need to be considered. There is bound to be a lot of inhibition and uncertainty with any new innovation. XBRL might be perceived as a regulator driven phenomenon right now but once the companies adopt and embrace it, the advantages will be manifold.

Based on what we have seen in the countries which have already implemented XBRL, there are certain challenges right from raising awareness and initiating an XBRL project to its implementation and realization. We believe that every organization needs to follow these guidelines to gear up for XBRL implementation.

1.       XBRL Knowledge - Everyone concerned should know what XBRL is, how it works and what problems it solves.

2.       Proactive dry run – A voluntary filing by companies will provide a good exercise in experiencing the new filing format even before the MCA mandate.

3.       Tool selection and implementation – XBRL filers should spend time on education, awareness, preparation and planning about the available implementation options.

4.       Choosing the right people – XBRL filings require a cross functional team from the accounting, finance and technology departments of a firm.

5.       Plan and support ongoing maintenance – The initial obligation of most companies will be to make themshelves compliant with the MCA mandate but they should also be ready for taxonomy changes and prepare for maintenance of source data, instance documents and all other related XBRL data and documents for future years.

6.       Tagging – Selecting the appropriate taxonomy applicable to the specific industry is the most important task because it is the basis of tagging data in an XBRL document. Organizations should take the time to review and understand the taxonomies to avoid errors in tagging and reporting data. The effort associated with tagging involves detailed accounting knowledge and the exercise of careful judgment by financial reporting specialists.

7.       Taxonomy extension – Extension of taxonomy documents are as important as instance documents. If the XBRL preparation has been outsourced it is important to work with the provider to understand the process of taxonomy extension. For this year MCA would not accept any taxonomy extension, all XBRL filing should adhere to the base taxonomies released by MCA. In future, companies filing with MCA will need to create extension taxonomy for their own unique disclosures and this will need a cross functional team.

8.       Report generation – XBRL is designed to define the content of a document separately from its formatting.  Hence, there is a need for a presentation format to operate in conjunction with the unformatted XBRL to enable human readability of the filings. Presentation layer plays an important role in XBRL based reporting.

9.       Ensuring quality

-          The tagging process should be validated by a CA to ensure the proper mapping of data elements

-          Making sure that the MCA defined taxonomy is used for generating the instance document

-          Rendered XBRL documents should be checked for accuracy and consistency

-          Filers should involve their auditors for assurance regarding the XBRL filing

10.   Leveraging XBRL for internal reporting – Organizations adopt XBRL as a strategic decision or as a requirement of a regulator like MCA. It would be wise for organizations to decide to leverage the mandate and use XBRL for their internal reporting as well.

Companies in India will be better prepared for their migration from the traditional paper based financial reporting and filing to the more interactive and technology enabled XBRL if these guidelines are adhered to from the onset itself.