Interactive data and the tax executive: why tax standards setters are paying attention to XBRL (and why you should, too!).

• Author: Cohen, Eric E.
• Position: Extensible Business Reporting Language

Introduction

What can lower the costs of finding and training tax staff, increase access to (and the reliability of) tax-related data globally, and improve communication between all members of the tax planning, compliance and audit supply chain? "Speaking and understanding a common digital language," in the virtual sense, sounds like a lofty and perhaps peril-filled concept, but could help contribute to these goals and more.

Developing and encouraging the adoption of a common digital business reporting language--not only for tax information but also for the broader class of business reporting information--is the goal of a global, collaborative effort, and it is an effort that tax administrations around the world are joining. This article discusses that collaborative effort, describes the benefits to the tax executive, and encourages readers to help make these benefits a reality.

It has been five years since The Tax Executive last covered the progress of a worldwide collaborative effort to create a standardized digital format for exchanging accounting, tax, and other business reporting information. In light of the growth of that effort, recent worldwide adoption of its recommendations, and extreme interest and support of key regulators--led by U.S. Securities and Exchange Commission (SEC) Chair Christopher Cox and leaders from the FDIC/FFIEC--it is time again to look at that effort. Chairman Cox and the SEC (1) use the term "Interactive Data" to describe how standardized, machine-coded business reports can more easily be created, published, discovered, and consumed by business applications for analytics and other purposes. More precisely, the effort is known as XBRL (2) (Extensible Business Reporting Language).

XBRL is more relevant to the tax executive than ever before. Tax departments are under increasing pressure to do more, with less help from their auditor, and in cooperation with other parties, both within the corporation and without. Owing to section 404 of the Sarbanes-Oxley Act of 2002 and some high-profile documentation failures, tax processes and documentation have greater visibility. Tax executives have increased responsibilities as part of the financial reporting supply chain and the enhanced internal controls environment, and they face new requirements from financial regulators and tax administrations to provide information in a format that increases the efficiency and effectiveness of the administrator. These pressures--and the benefits we will discuss--call for tax executives to actively take part in small and big steps to assure that XBRL become a reality, to everyone's benefit.

Relevance

XBRL is increasingly relevant to the tax executive, first because it is growing rapidly in many other areas of business reporting that will potentially effect tax planning, compliance, and audit; and second, because of recent interest by many of the world's tax administrations. Finally, tax executives are under pressures to perform--pressures that XBRL can help relieve.

XBRL is growing in many different ways. Many software products are now available to work with XBRL. Many regulatory environments, such as banking involving US (FDIC/FFIEC) and European banking regulators (CEBS), are using or implementing XBRL.

Significantly, tax administrations are starting to allow or mandate XBRL. But some of the greatest reasons and pressures come from within the organization. The "Tax Information Supply Chain"--the information flows and parties involved in creating, publishing, analyzing, approving, assuring, consuming, and otherwise "touching" tax-related information--has become increasingly visible within both the corporate environment and the capital markets. This has been driven by factors like financial reporting requirements related to accounting for income taxes, Sarbanes-Oxley and transparency requirements, and disclosure.

Financial Reporting Requirements

Tax is, of course, intricately connected with the financial reporting supply chain. Taxes begin as one of the largest, if not the largest, group of expenses on the income statement. Accounting for Income Taxes, driven by FAS (Financial Accounting Standard) 109 for U.S.-based filers or IAS (International Accounting Standard) 12 for many international filers, requires extensive tax department participation, focusing on foreign tax provisions, with the need to understand the U.S. GAAP requirements for accounting for deferred taxes for foreign jurisdictions, the interaction of the U.S. or international reporting standards and foreign tax systems, and data flows leading to corporate taxes and provisions.

The Sarbanes-Oxley Act of 2002

That same chain of information provision and exchange is also associated with the most common material weaknesses revealed in the first round of Sarbanes-Oxley Section 404 filings. (3) Those familiar with the systems and resources available to the tax department are seldom surprised that Sarbanes-Oxley, with its focus on internal controls, pointed a spotlight on the less integrated and human-intensive processes (nominally integrated at best, cut and pasted or manually reentered at worst) of the tax department, which are outside of the normal financial reporting processes. In addition, the deficiencies cited concentrated on staff shortages and competency.

Transparency Requirements and Disclosure

In addition, Commissioner Mark Everson of the U.S. Internal Revenue Service and SEC Chairman Cox have been talking about additional public disclosure of tax information, with the goal of making "side by side" comparisons of financial reporting and tax reporting information available. In light of Commissioner Cox's campaign for interactive data and an increased focus on much faster ("real time") disclosure, (4) tax departments may face additional pressure to report more information, more often, and more timely.

Where Will Help Come From?

All this happens at a time where there has already been a deluge of new and increased responsibilities. Although tax departments hope to be recognized as more than simply compliance shops, they are forced to concentrate on controls and risk management rather than on substantive tax issues; the mechanics of reporting and paying divert resources and focus from analysis and management of tax exposure.

* How can the tax executive better communicate with senior management on tax needs, and collaborate with financial reporting to develop systems that will meet everyone's needs and provide the support for transfer pricing and other tax specific needs?

* How can tax executives more easily take advantage of outsourcing and gain collaborative benefits both through improved internal integration, as well as working with tax software, advisor, external preparers, and tax administrations? How can they tame the spreadsheet sprawl that is so difficult to oversee and control?

* How can they work more closely, as appropriate, with their relevant tax administrations and encourage different countries' tax administrations to work together for more consistent approaches, which may lead to less effort needed to understand their disparate requirements?

Without question, what is not the complete answer is ERP--Enterprise Resource Planning. Few companies use a single instance of the product. Most companies use several different instances of one vendor's products and often intermix vendors' products. In addition, almost every company...