How to Prepare XBRL Financial Statements

Preparing XBRL financial statements transforms your standard, human-readable reports into structured, machine-readable data for regulatory filings. This process, often called "tagging," requires precision and a clear understanding of the steps involved. This guide walks you through the entire XBRL preparation process, from gathering your documents to final validation, ensuring your filings are accurate and compliant.

What Exactly is XBRL?

Think of XBRL (eXtensible Business Reporting Language) as a special language for financial information. While a standard financial statement on a PDF is easy for a person to read, a computer sees it as just a collection of text and numbers with no inherent meaning. XBRL solves this by letting you "tag" each piece of financial data with a unique identifier that explains what it is.

For example, instead of just seeing the number "$1,000,000," an XBRL-tagged document would tell a computer: “This value is Total Revenue, it's for the period from January 1, 2023, to December 31, 2023, the currency is US Dollars, and it’s reported on a consolidated basis.” This structured data allows regulators, investors, and analysts to pull and compare financial information from thousands of companies automatically.

This process relies on a taxonomy, which is essentially a dictionary of all possible financial concepts. For US public companies, the primary dictionary is the U.S. GAAP Financial Reporting Taxonomy, maintained by the Financial Accounting Standards Board (FASB).

The XBRL Preparation Process: A Step-by-Step Guide

Creating an XBRL filing is a systematic process. Rushing through the steps often leads to validation errors and time-consuming corrections. By following a structured approach, you can produce accurate and compliant statements efficiently.

Step 1: Finalize Your Core Financial Statements

Before any tagging begins, your primary financial statements must be 100% complete and approved. This includes the Balance Sheet, Income Statement, Statement of Cash Flows, Statement of Stockholders' Equity, and all accompanying footnotes.

XBRL is a presentation layer applied after the accounting and review process is finished. Attempting to tag draft numbers or incomplete notes will only create rework. Lock down the final, audited version of your financials in a standard format like Microsoft Word or Excel.

Step 2: Choose Your XBRL Software or Service Provider

You have several options for handling the technical side of XBRL creation, each with different levels of control and cost.

• Disclosure Management Software: Platforms like Workiva, Certent, or IRIS Carbon are built for this purpose. They allow you to import your financial statements, manage the tagging process in a controlled environment, and validate the output before filing. This is the most common approach for public companies as it integrates the entire reporting workflow.
• Bolt-On XBRL Tools: These are specialized applications that focus solely on the tagging part. You would typically do your report creation in another program (like Word and Excel) and then import it into the bolt-on tool for the XBRL mapping.
• Full-Service Providers: Many financial printers and accounting advisory firms offer XBRL as a service. You provide them with your finalized financials, and their team handles the entire tagging and validation process. This can be a good option for companies with limited internal resources but offers less direct control.

When selecting a software, look for one that uses the latest version of the U.S. GAAP taxonomy, has strong built-in validation features, and provides a clear audit trail of who tagged what and when.

Step 3: Map Your Financial Data to the XBRL Taxonomy (Tagging)

This is the heart of the XBRL preparation process. Mapping involves going through your financial statements, line by line, and matching each item to the most appropriate tag in the U.S. GAAP Taxonomy.

Here’s how it works in practice:

1. Your software will display your financial statement on one side of the screen and the taxonomy on the other.
2. You select a line item on your report, such as “Revenue.”
3. You search the taxonomy for the corresponding element. A search for "Revenue" will likely bring up several tags, such as us-gaap:Revenues, us-gaap:RevenueFromContractWithCustomer, and more specific tags for different revenue types (like interest or premiums).
4. Your job is to select the most specific tag that accurately describes your line item. If your company doesn't break down revenue further, us-gaap:Revenues might be sufficient. If all your revenue falls under ASC 606, us-gaap:RevenueFromContractWithCustomer is a better choice.

As you tag each number, you must also define its context. The context tells the machine three critical things:

• The Reporting Entity: Is this data for the consolidated entity or a specific subsidiary?
• The Period of Time: Is it an "instant" in time (like a balance sheet date, e.g., 2023-12-31) or a "duration" (like an income statement period, e.g., 2023-01-01 to 2023-12-31)?
• Dimensions or Scenarios (if applicable): Any other unique identifiers, such as reporting by business segment.

Step 4: Create Extension Elements (Only When Necessary)

What happens if your company has a highly specific line item that doesn’t exist in the standard U.S. GAAP Taxonomy? For example, your income statement might have a line for "Revenue from Recurring Software Subscriptions." Let’s say there is no tag in the taxonomy that perfectly captures this concept.

In this case, you are allowed to create an "extension element." This is a custom tag that exists only within your company’s filing. However, creating extensions should be a last resort. Regulators, including the SEC, strongly encourage filers to use a standard U.S. GAAP tag whenever possible, even if it’s a slightly broader concept.

Overusing extensions reduces the comparability of your data, which defeats one of the main purposes of XBRL. Always document the reason why an extension was deemed necessary over an existing standard tag.

Step 5: Define Relationships and Calculations

XBRL isn't just about tagging individual numbers; it's also about defining the relationships between them. For instance, the income statement has a natural calculation hierarchy: Revenues - Cost of Goods Sold = Gross Profit. Your XBRL software allows you to build these mathematical relationships using the tags you’ve selected.

Defining these "calculation linkbases" is vital for two reasons:

1. It helps ensure accuracy. Most software can automatically run validation checks to confirm that your tagged numbers add up correctly based on the relationships you defined. If Revenues ($1,000) minus Cost of Goods Sold ($600) does not equal your tagged Gross Profit ($300), the system will flag an error.
2. It adds intelligence to the data, allowing analytics software to understand how your company calculates key totals and subtotals.

Step 6: Validate Your XBRL Instance Document

Before you even think about filing, you must rigorously validate your work. A completed XBRL filing, known as an "instance document," must pass a series of automated checks. A good software platform will have built-in validation tools that check against the rules in the EDGAR Filer Manual.

Common validation errors include:

• Calculation Inconsistencies: A total does not equal the sum of its tagged components.
• Tagging Inconsistencies: For example, using a negative value for a concept like "Revenue" that is defined in the taxonomy as a credit (and thus should be positive).
• Missing Context: A piece of data is tagged without a date or a reporting period.
• Improper Use of Tags: Using a tag on the balance sheet that is meant for the cash flow statement.

Work through and resolve every validation error. Do not ignore them, as they will almost certainly lead to your filing being rejected by the regulator.

Step 7: Conduct a Final Human Review

Validation tools are excellent but they cannot catch everything. They do not know if you picked the right tag, only if the tag you picked is used correctly. The final step before submission is a thorough human review.

Most XBRL software can generate a human-readable version of your tagged document. Compare this version side-by-side with your original, finalized financial statements. Does the numbering hierarchy match? Is every line item represented? Do the totals and subtotals look exactly the same? This is your last chance to catch an error like selecting us-gaap:NetIncomeLoss when you should have selected us-gaap:ProfitLoss.

Final Thoughts

Creating XBRL statements is a detailed procedure that blends accounting knowledge with technical precision. By following a structured process—finalizing your source documents, methodically mapping each line item, defining the proper relationships, and validating thoroughly—you can generate accurate, compliant filings that regulators and investors can depend on.

Interpreting complex disclosure guidance or specific SEC rules during the tagging process can take time. When you find a unique transaction and have to be sure you're applying the correct accounting treatment before you tag, a dedicated research assistant simplifies matters. Tools like Feather AI deliver answers straight from authoritative sources, letting you make consistent and defensible tagging decisions with greater confidence.