XFRML Working Group

January 4, 2000 By

Liv A. Watson Lwatson@GaitherCPA.com

XML; The Missing Key to Financial Reporting

The XML-based Financial Reporting Markup Language (code named XFRML)

standards train is boarding and about to pull out of the station, but some aren’t quite

sure where it is going or how it can benefit their organization. According to the

XFRML working group XFRML would make it easier for companies to share financial

information and its data from incompatible spreadsheets and other applications

across disparate operating systems. Since most significant financial reporting and

data involves the communication of some form of structured data, having a standard

syntax for creating and exchanging data structures is obviously an important first

step to reducing the cost of distributing financial information. The goal of the XFRML

Working Group is to have an initial set of XML document types defined by March

2000.

The XFRML working group was begun by the AICPA (American Institute of Certified

Public Accountants). The following organizations have already joined this important effort.

• American Institute of Certified Public Accountants (AICPA)

• Arthur Andersen LLP

• Best Software

• Caseware International

• Canadian Institute of Chartered Accountants

• Cohen Computer Consulting

• Crowe Chizek

• Deloitte & Touche LLP

• Document Technologies

• e-content, a division of Interleaf, Inc.

• EDGAR Online, Inc.

• Epicor Software Co.

• Ernst & Young LLP

• Financial Executives Institute (FEI)

• FreeEDGAR.com, Inc.

• FRx Software Corporation

• Great Plains

• Hyperion

• Institute of Management Accountants

• KPMG LLP

• Lawson Software

• Microsoft Corporation

• Morgan Stanley Dean Witter

• PricewaterhouseCoopers LLP

• Sage

• SAP

• The Woodburn Group • XML Solutions

Creators and users of financial information are motivated to use XFRML because it

provides a means of describing documents, independent of medium; XFRML

documents can be used for print, the web or any other document medium. This

flexibility allows information system designers to use XFRML, as they can adopt one

set of standards, tools and methods for processing documents, regardless of their various distribution targets.

What is XML?

XML describes documents by explicitly identifying each significant structure. These

descriptions are referred to as markup and can be used to describe financial data and

other documents in various ways. Every XML document uses some form of markup

to describe document parts, although some documents also conform to predefined

structural outlines called document type definitions (DTD). Various processes use

markup as a guide to modify, manipulate, format, display and transform documents. The concept and use of markup are exactly the same in XML as in SGML and HTML.

Where HTML is concerned with presentation of information, XML is focused on the

nature of the information in the file. XML's main benefit is the interchange of

hierarchical data between different companies, different departments within the

same company, different applications, or even different portions of the same

program to communicate in a well-ordered, yet flexible way. For example, let's say

that you'd like to send you’re financial analyst a financial report. Ideally, you'd like to

send it electronically from your accounting software so that they can easily import it

into theirs. How would you go about doing this? You could send the information as

an Adobe Acrobat document, a Microsoft Word file, or a plain text file. While this is

convenient for humans, it isn't as easy for a computer to extract information from

any of these formats. You could also work with the financial analyst’s accounting

department to come up with a custom format, such as a comma-delimited file. Of

course, should they later decide to change the file format to accommodate another

client, you'll have to make changes to your financial generator program as well.

XFRML offers a solution to this problem. Your accounting program could e-mail the

financial analyst a copy of the financial report in XFRML that he could then read into

his system. Because XFRML will be flexible, minor changes to the format won't make

the systems unable to exchange information.

By using XML, organizations will be able to leverage their IT investments over a

variety of applications. Also, because XFRML will be an open standard, its users can

be confident that they will not be locked into a legacy of opaque binary data.

XFRML's simplicity and flexibility have made it an ideal foundation on which to build

XML-based Financial Reporting Markup Language initiatives.

XML was developed by the SGML Editorial Board formed under the auspices of the

World Wide Web Consortium (W3C) beginning in 1996. The design goals for XML

according to W3C are:

• XML shall be straightforwardly usable over the Internet.

• XML shall support a wide variety of applications.

• XML shall be compatible with SGML.

• It shall be easy to write programs, which process XML documents.

• The number of optional features in XML is to be kept to the absolute

minimum, ideally zero.

• XML documents should be human-legible and reasonably clear.

• The XML design should be prepared quickly.

• The design of XML shall be formal and concise. • XML documents shall be easy to create.

There is a clear demand for the prompt delivery of accurate and reliable financial

information as an input to stakeholder decision models. The ability to retrieve

financial information and its data from the Web could provide higher levels of

accuracy, and considerable opportunities for innovative and cost-effective analysis

and use of accounting information. Today, accounting information on the Web is

inconsistently presented from corporation to corporation. The reality of the Web is

that it falls far short of being a reliable communications medium for accounting

information. This is mainly because there is no standard for metadata representation

of accounting information on the Web

Standards are beneficial because of the interoperability and integration aspects. In

the long run standards Improved access and lower distribution costs because fewer

technologies are involved. The data and the application will be useful for a much

longer time period and the data will not be tied to particular platforms.

.

At this early stage in the XFRML development, the working group is trying to figure

out what XFRML will do best. Some of the perceptions and objections from financial

departments that I have spoken to are addressed below and we as the XFML working

group are working on answering these and other questions.

1. Requires disclosing more financial data than the financial department

want.

XFRML is a tool that does not add or subtract to the amount of information

companies choose to make available, it enriches its context.

2. Regulatory Agencies like the IRS & SEC would be the primary

beneficiaries of XFRML – not Corporate Finance teams – in effect –

XFRML will give more power to groups that corporate finance teams

think of negatively

XFRML is a tool to create a neutral interface. This is as useful to the

consolidation process as it is to the external reporting process. The

acceptance an implementation of XFRML should ultimately lessen the

regulatory burden by making it easier to create necessary filings.

3. The benefit of XFRML is external of the company and not internally

and they feel like XFRML would take control away from the Finance

team.

The benefit of XFRML accrues to whomever uses it, internal or external. See

comments on consolidation above. Migrating data out of one

application/storage format to another is costly and error-prone. XFRML is

designed to address that pain, which occurs many times more often during

operational transfers of information within the company than during reporting

transfers to external entities.

4. They are already doing this – what more does XFRML give them?

The neutrality of XFRML leads to interoperability. As more tools and packages

are upgraded to import/export XFRML (tools already in place and under

maintenance agreements), less custom 'glue' is necessary to move data

around. Lower software maintenance costs on the glue code, shifting burden

(risk) of correctness from company to vendor.

5. Finance Teams do not want other groups/companies/constituencies

to be able to compare their financial data. Finance teams like to have

uniqueness in their reporting they do not see the benefit of

consistency.

If anything, XFRML’s extensible taxonomy makes it even easier to highlight

the uniqueness and incomparability of a company's reporting.

6. XFRML is too auditor/CPA focused.

XFRML is flexible enough to be used for internal reporting as well as external

reporting.

7. Finance teams would not trust XFRML tagged info ie. in the case of

mergers & acquisitions Finance teams would still want to go out and

do due diligence

Due diligence will be easier with applications that understand XFRML than

previously. Trust will grow with experience. Digital signing will help.

8. The finance department did not see the cost benefit.

XFRML eliminates the 'sand in the gears' effect of reformatting and re-keying

data. That is a direct benefit to the Finance Dept. The cost of implementation

of XFRML will be part of the maintenance cost of each package used be the

Finance Dept., which is a sunk cost.

9. This functionality already exists in Excel – we have a large investment

in Excel and pivot tables specifically – we don’t want to lose this.

XFRML can/will be implemented by vendors that base their products on the

Excel platform. A shop that depends completely on custom

software/templates will take the hit that any vendor would take, it is in effect

self vending.

10. The scope of what is being communicated is too broad.

We need to tighten our message to speak directly to the pain of this

audience.

11. We are not adding to the value chain of trading partners.

To the extent that trading partners exchange financial data, XFRML is an

appropriate solution to the creation of flexible, extensible data interchange.

Adding a new trading partner presents a challenge, unless all partners agree

on a neutral interchange format. This is what consortia-led standards are all

about, see RosettaNet. Which XML vocabulary will be the enabler and

enhancer of data interchange is a question of what the data is about. Are you

exchanging data about derivatives? Use FpML. Are you exchanging data about

the financial position of a company? Use XFRML.

According to industry leaders XFRML appears to offer its biggest benefits where an

organization needs to move financial data between systems without having to map

the record formats to each individual system. Just as Java means portable programs,

XFRML means portable financial data. To find out more about XFRML, you should

visit the XFRML site at www.xfrml.org, which includes an overview and

demonstrations of the working group’s efforts, and a FAQ at

http://www.xfrml.org/Library/xfrml_FAQ.htm.