Learning Objectives

By the end of this section, readers will be able to:

  • Understand the taxonomy selection process and recognise common challenges in XBRL implementation
  • Identify criteria for selecting existing taxonomy
  • Understand how to adjust an existing taxonomy to local needs
  • Recognise when it may be necessary to develop a new taxonomy

Introduction

An XBRL taxonomy forms the foundation of every project that uses XBRL as a digital standard for exchanging business information. As a core artefact of the XBRL standard, a taxonomy precisely defines how entities disclose data to regulators in a way that is meaningful to both machines and humans. The usage and characteristics of taxonomies can vary significantly, influenced by factors such as the scope of information covered, the chosen technical architecture, and filing rules. Therefore, it is essential for regulators to understand the options available in order to select the approach that best supports their intended implementation.

In today’s reporting landscape, many existing taxonomies can be reused or adapted to meet the specific needs of different regulatory contexts. This section provides regulators with practical guidance to support an informed taxonomy selection.

Challenges When Starting an XBRL Project

Starting an XBRL implementation project often presents significant challenges, particularly due to initial misconceptions about scope and objectives. A vague starting point, such as a general desire to use XBRL because it is adopted in other jurisdictions, can lead to ineffective implementation, poorly defined outcomes, and inefficient resource allocation. This, in turn, may result in limited stakeholder adoption.

Some organisations sometimes mistakenly believe that adopting XBRL will automatically solve all data reporting and comparability issues. In reality, successful XBRL adoption requires clear, well-defined objectives that are aligned with regulatory frameworks and stakeholder expectations.

Common pitfalls when implementing XBRL without a clear strategy include:

  • Misalignment of expectations: Stakeholders may develop differing views on the taxonomy’s purpose and functionality.
  • Resource misallocation: Lack of specificity can result resources being spent on taxonomy features that are unnecessary or misaligned with user needs.
  • Regulatory non-compliance: An unfocused strategy may result in a taxonomy that fails to meet legal or regulatory reporting obligations or introduces unnecessary complexity that burdens reporting entities.
  • Scope creep and timeline overruns: Without clear boundaries, projects may expand beyond original requirements, leading to delayed implementation and increased costs.

To avoid these pitfalls, successful implementations typically involve thorough stakeholder consultation, detailed requirement analysis, and clear alignment between taxonomy development and regulatory objectives. A best-practice example is the European Financial Reporting Advisory Group (EFRAG) European Sustainability Reporting Standards (ESRS) digital taxonomy project, which incorporated extensive stakeholder engagement and precise alignment with written standards, resulting in broad stakeholder acceptance (EFRAG ESRS workstream summary).

Defining Specific Reporting Objectives

Clearly defining reporting objectives is essential to the development of an effective XBRL taxonomy. Specific objectives guide taxonomy selection or development, inform stakeholders accurately, and ensure alignment with regulatory and business needs. Objectives should explicitly state the desired outcomes, such as improved transparency, regulatory compliance, or greater data comparability.

For example, the European Securities and Markets Authority (ESMA) conducted a detailed analysis of implementation approaches before beginning work on the ESEF taxonomy design, which ultimately led the authority to use existing accounting taxonomies from IFRS with targeted modifications, to ensure compliance with the requirements of the EU’s Transparency Directive (see ESMA’s Final Report on ESEF).

Creating a Wishlist of Requirements

The successful development or selection of an XBRL taxonomy depends on a clear understanding of reporting obligations defined by legal acts, regulations, and stakeholder expectations. Creating a well-defined “wishlist” of requirements lays a strong foundation for ensuring regulatory compliance, consistency, and meaningful data reporting.

Identifying Reporting Obligations

The first step is to clearly identify the reporting obligations the XBRL taxonomy must support. This means reviewing relevant laws, regulations, and guidelines to determine exactly what entities are required to report. Clearly reporting requirements help reduce ambiguity, support compliance, and improve the usefulness of the reported data.

Compiling a detailed list of relevant legal acts and regulatory documents is essential for building a complete and accurate taxonomy. Regulators and taxonomy developers should also engage closely with stakeholders, including reporting entities, auditors, industry experts, and software providers, to gather input and confirm that all key requirements are addressed.

A best-practice approach is to create a checklist of each requirement, linked to its legal or regulatory source, to ensure traceability throughout taxonomy development process.

Ensuring Alignment with Regulatory Frameworks

Aligning taxonomy development with existing frameworks is essential for ensuring legal compliance, reducing stakeholder confusion, and improving overall reporting effectiveness. Regulatory alignment ensures the taxonomy accurately reflects regulatory intentions, standards, and expectations.

A notable example is the XBRL implementation by the South African Business Register (CIPC), which enabled digital reporting of annual returns and financial statements using the IFRS taxonomy. In this case, alignment of the underlying accounting standards with the local Companies Act allowed effective integration into existing regulatory frameworks, ensuring smooth market adoption and regulatory compliance (see Par. 29(5)(b) of Companies Act, 2008).

Investigating Existing Taxonomies

Before developing a new XBRL taxonomy, it is important to investigate and evaluate existing taxonomies. Reusing or adapting an existing taxonomy can save significant resources, promote consistency, and ensure alignment with international standards and practices.

Regulators and organisations should initially explore existing taxonomies through resources such as the XBRL Taxonomy Registry. This registry offers a valuable starting point for identifying taxonomies across sectors, reporting types, and jurisdictions. Each taxonomy entry includes links to its official source and supporting documentation, helping users assess its relevance to a particular reporting scenario. Taxonomies can be further evaluated in terms of their scope and structure, which can ease the selection process.

Investigating Existing Taxonomies

Evaluating Taxonomy Suitability Based on Project Requirements

Evaluating the suitability of an existing taxonomy requires a detailed comparison against specific legal and business requirements. Key criteria include coverage of mandated disclosures and how they are structured, the clarity and completeness of the information provided, usability for report preparers, and compatibility with existing reporting processes.

Another important consideration is the intended implementation approach, particularly the granularity of expected reporting obligations. While taxonomies may seem to be aligned with regulator’s needs in terms of scope, but may not address the required level of detail.

Considering Alignment with International Standards

Alignment with international standards such as IFRS or ISSB’s S1/S2 enhances taxonomy adoption by providing a recognisable and widely supported technical framework that facilitates consumption of reported information. Regulators are encouraged to re-use or adapt the existing digital presentations of these standards, rather than trying to redefine what has already been formalised. Alignment at the taxonomy level promotes cross-border comparability and reduces complexities for multinational entities preparing reports in various jurisdictions.

Understanding the Challenges of Adopting Existing Taxonomies

Adopting existing taxonomies presents certain challenges, including legal considerations, external dependencies, and versioning issues. Before deciding to use a specific taxonomy, regulators should assess whether its adoption may require policy changes or legal amendments to align with external governance practices.

In addition, relying on externally controlled taxonomies may affect update frequency, which can impact local regulatory timelines and reporting requirements. Continuous updates to external taxonomies may also create challenges in maintaining consistency and managing changes efficiently. Understanding these challenges in advance helps mitigate potential implementation risks.

Reuse of Micro Taxonomies and Registries

Micro taxonomies are specialised taxonomies focused on specific reporting aspects, universally accepted terms or definitions, measurement units, identifiers, codified enumerations, or commonly agreed technical constructs. By applying micro taxonomies, regulators can improve standardisation, leading to better consistency, accuracy, and quality of reported data. Multiple micro taxonomies can be used together within a single implementation, and they can be extended or adapted to meet specific local requirements whilst maintaining their standardised core elements.

Examples include the Legal Entity Identifier (LEI) taxonomy, developed jointly by GLEIF and XBRL International. This taxonomy standardises entity identification, incorporating advanced validation techniques such as LEI checksum validation and pattern matching to verify reported identifiers effectively. Another example is the Country/Currency taxonomy, defining ISO currency and country codes, which implementers can reference in their own taxonomies.

The XBRL standard alsooffers publicly available standardised technical constructs through registries such as the Link Role Registry (technical roles and arcroles) and the Data Type Registry. These registries provide modular, standardised extensions to the original XBRL specifications, supporting richer and more precise information within reports. Regulators are strongly encouraged to use these standardised registries to maintain consistency with modern XBRL reporting techniques.

Taxonomy Development Options

When deciding whether the best approach is to build a new taxonomy from scratch or reuse and, if needed, adapt an existing taxonomy, regulators must carefully weigh their options to balance efficiency, standardisation, and the specifics of local regulation.

Taxonomy Development Options

Option A: Reuse Existing Taxonomy Without Modifications

Adopting an existing taxonomy in its original form is optimal when the selected taxonomy fully covers all relevant legal and business requirements and aligns closely with local and international standards. This approach minimises the resources required, supports rapid implementation, and leverages established reporting practices and standards.

A key example is many countries’ direct adoption of the IFRS accounting taxonomy, which provides clear international comparability and reduces the complexity and costs associated with developing local taxonomies.

Option B: Reuse and Extend Existing Taxonomy

This approach is suitable when an existing taxonomy largely meets regulatory and reporting needs but requires adapting to fully comply with local legal obligations or reporting practices. Extensions can include adding new elements, adjusting definitions, or introducing local reporting requirements.

The European Single Electronic Format (ESEF) taxonomy extension is an effective use of this method, adapting the IFRS accounting taxonomy to incorporate specific EU regulatory requirements, thus balancing international comparability with local compliance.

Best practices include clearly documenting extensions, maintaining strong alignment with the base taxonomy, and regularly engaging stakeholders to validate changes and ensure continued relevance.

Option C: Build a New Taxonomy from Scratch

Building a completely new taxonomy is necessary where existing taxonomies do not adequately meet regulatory, legal, or reporting requirements. This approach can be resource-intensive, requiring significant technical expertise, wide stakeholder collaboration, and rigorous testing. However, it provides maximum customisation and flexibility to tailor the taxonomy precisely to local needs.

Best practices for this approach include setting clearly defined objectives, conducting thorough stakeholder consultation, ensuring rigorous validation processes, and providing ongoing updates to maintain relevance and compliance. Read more about building a taxonomy in XBRL International’s quick start guide.

Extending the Taxonomy

Extending an existing XBRL taxonomy to accommodate specific local requirements requires careful planning and alignment. Proper taxonomy extension maintains consistency with the original taxonomy, ensuring scalability and long-term effectiveness.

Maintaining Consistency With the Base Taxonomy

Maintaining consistency with the base taxonomy ensures comparability, coherence, and efficiency in data reporting. Extensions should adhere to the original taxonomy’s structures, definitions, naming conventions, and modelling practices. This approach ensures seamless integration and facilitates easier data exchange, comparison, and analysis.

Ensuring Scalability for Future Requirements

Taxonomy extensions must be designed with future regulatory and business needs in mind. Scalability ensures the taxonomy remains relevant and adaptable to new reporting obligations or changing market conditions. Extensions should be modular, flexible, and easily updatable.

Successful Taxonomy Extensions

Regulators are encouraged to adopt best practices when extending existing taxonomies. They should ensure that all taxonomy changes, justifications, and relationships to the base taxonomy are clearly documented. Active stakeholder engagement throughout the extension process is key to guarantee that the extensions meet actual reporting requirements and receive broad acceptance among reporting entities. Regulators should also conduct rigorous validation procedures to verify the accuracy, consistency, and effectiveness of taxonomy extensions. Finally, periodic reviews and stakeholder feedback sessions should be held regularly to ensure continuous alignment with evolving standards and to facilitate ongoing improvements.

Summary

At the beginning of their XBRL XBRL journey regulators should outline their objectives and engage with stakeholders to discover their needs. Recognising common challenges early helps lay a robust foundation for selecting or developing a taxonomy that meets regulatory, stakeholder, and operational needs.

Selecting or developing the right taxonomy involves:

  • Clearly defining reporting requirements and aligning them with legal frameworks.
  • Carefully evaluating existing taxonomies for potential reuse or modification.
  • Considering the balance between customisation and standardisation when extending or creating new taxonomies.
  • Prioritising taxonomy consistency and scalability.

An appropriate taxonomy supports regulatory compliance, high-quality reporting outcomes, and stakeholder satisfaction, significantly reducing the risk of compliance issues and reporting inefficiencies.

Selecting existing taxonomies can significantly streamline taxonomy development, promote international consistency, and improve overall reporting effectiveness. By carefully evaluating suitability, alignment, and potential challenges, organisations can understand if an existing taxonomy works for them.

Extending an existing taxonomy can provide a balance of standardisation and customisation to local needs.Extending a taxonomy requires maintaining consistency, ensuring future scalability, and rigorously applying best practices.

Building a new taxonomy provides maximum flexibility and customisation, however, is a resource intensive route and relies on significant technical expertise.

The choice between reusing, modifying, or building a new taxonomy must follow regulatory needs, stakeholder expectations, resource availability, and intended use. By carefully evaluating the options, regulators and institutions can select or develop taxonomies that best balance efficiency, regulatory compliance, standardisation, and customisation.