In FY2008, Japan will put into practical use the world's first infrastructure to be used in the financial sector. The infrastructure is eXtensible Business Reporting Language, or XBRL, which is a XML-based language to be used for financial reporting.

Many software makers are soon expected to develop tools that will allow users to easily analyze various financial data written in XBRL. Thus, it seems that even individual investors would benefit from XBRL without necessarily knowing it.

The Financial Services Agency (FSA) has recently launched a system called Electronic Disclosure for Investors' NETwork, or EDINET. This system allows users to browse on the Internet various documents, including financial statements and the documents which investors holding more than 5% of the issued shares of any single company are required to submit to the agency.

To facilitate the use of this system, the FSA has required companies and investment funds to submit to the agency XBRL-based financial statements starting this business year beginning in (or after) April.

The target of this mandate includes listed companies, more than 4,700 unlisted companies with a capital of more than 500 million yen and 500 investors each, and about 3,200 investment funds.

The Tokyo Stock Exchange (TSE) is offering a database service called TDnet. The service allows users to browse (via the Internet) timely disclosure data of the companies listed on the stock exchanges across the country. Starting this October, the TDnet users will be able to browse even the front page and summary of the companies’ statements of accounts written in XBRL.

XBRL is an information language designed to enable computers to recognize account titles, such as sales and sales cost, and others. Financial statements written in XBRL would make it possible for computers to process numerical information described in the financial statements as if they could understand each figure's meaning.

This means that a computer would be able to calculate automatically financial indicators, such as the turnover ratio of capital and labor's relative share, even if users do not input necessary figures and calculating formulas into the computer.

Traditionally, in order to perform such calculations, it was necessary for users to set up the formulas in the spreadsheet software and input the figures into those formulas.

By using XBRL, computers would be able to process any kind of financial statements automatically, once users define the calculating formulas in their computers.

XBRL makes it easy to translate financial statements written in Japanese into English

XBRL not only enables investors to process financial information easily according to their purposes, but also spares companies the trouble of recreating financial statements in the format required by the public offices to which those statements should be submitted.

Moreover, the language enables computers to translate financial statements written in Japanese into English almost instantly. XBRL, therefore, would play a significant role in the future in opening up Japanese stock markets to overseas investors, who have had difficulty in investing in Japanese companies because of the language barrier.

The American Institute of Certified Public Accountants (AICPA) was the first in the world to launch efforts to put XBRL into practical use. In 1999, the AICPA established a consortium comprising accounting firms and software companies. Currently, the consortium is developing the specification that complies with the U.S. accounting standards.

Encouraged by the AICPA, the Japanese Institute of Certified Public Accountants (JICPA) also established in 2001 a consortium comprising volunteers called “XBRL Japan” to develop the specification that complies with Japanese accounting standards.

As of October 2007, a total of 80 companies and organizations participated in the consortium. They include auditing firms, companies that print securities, financial information service companies, software companies and financial institutions.

The Tokyo Stock Exchange (TSE), in particular, is keen on the diffusion of XBRL in Japan. TSE has made available sample software for browsing XBRL-formatted data and financial statements of a fictitious listed company.

The U.S. Securities and Exchange Commission (SEC) has made publicly available an experimental Web site. The site allows users to interactively compare and analyze the financial information that companies voluntarily wrote in XBRL.

For example, users can easily compare the salaries that the top 500 U.S. companies are paying their executives. In addition, the SEC is making public the source codes that can be used to create browsers for XBRL-based information.

Thus, anyone who has an ability to write computer programs would be able to create tools for analyzing XBRL-based information on their own.

But the SEC is still in the process of concentrating its efforts on diffusion of XBRL in the country, and is now considering a plan to require companies to write in XBRL all the documents to be submitted to the SEC, such as financial statements, including annotations, the commission said.

The Japanese government has decided to require companies to write their financial statements in XBRL ahead of the U.S. SEC. The government was motivated to do so due to the early adoption of XBRL by the National Tax Agency and the TSE.

In 2003, the TSE began to receive XBRL-based financial statements. In 2004, the tax agency introduced the e-Tax system. XBRL was also adopted as a JIS standard. Taking these facts into consideration, we may be able to conclude that XBRL is the most suitable data format to be used for creation of financial statements.

Even unlisted small and medium-sized companies can benefit from XBRL

The introduction of XBRL by the tax agency has enabled even unlisted companies to utilize XBRL in various ways. For instance, when small and medium-sized companies take out a loan from a bank, they can reuse their XBRL-based financial statements which they used for filing a tax return online.

Companies that have paid taxes to the tax agency can obtain a cryptographic key on the tax agency's Web site. If a company gives this key to a bank, the bank would be able to download the company's financial data directly from the tax agency's Web site and check the amount of the tax the company has paid.

This process allows the bank to examine the company's financial condition accurately. Previously, even if a company brought an electronic recording medium containing its financial information to a bank, the bank was unable to receive it because of troubles involving security checks and other problems. However, the use of XBRL would make it possible to complete all the procedures via the Internet.

The specification of XBRL which the tax agency initially adopted was different from those used by the TSE and other organizations. Thus, the agency will introduce the same specification as those used by the TSE and FSA in September.

This means that the XBRL-based financial information a company created for timely disclosure can be used not only as financial statements to be submitted to the finance bureau but also as electronic tax return forms.

The objective of XBRL is to make it possible to compare all types of financial statements based on the same accounting standard. By utilizing XBRL, people can conduct a sophisticated analysis of financial conditions of a wide variety of companies, from listed companies to unlisted small and medium-sized companies.

XBRL supported by volunteers’ group comprising corporate officials and accountants

Those who took notice of the convenience of XBRL and started, from an early stage, their efforts to diffuse and promote the language were neither public servants nor private company officials, but a group of volunteers.

In May 2000, the XBRL consortium in the United States held a meeting in Washington. Eiichi Watanabe, technology advisor to Tokyo Shoko Research Ltd, was the only Japanese who attended the meeting.

Responding to his call, a number of volunteers, including Manabu Mizutani, certified public accountant and the president of PCA Corp, strove to establish XBRL Japan.

In addition, Koji Yoshida, head of the TSE's listing department who was on loan to FSA from 2004 through the end of FY2006, embarked on the development of a new version of XBRL that complied with Japanese accounting standards. The primary objective of his attempt was to unify the format of financial statements which companies submit to the TSE for disclosure on EDINET and TDnet.

“In this project, public servants, corporate officials and engineers, whose interests might have clashed under ordinary circumstances, could cooperate with each other for a common purpose,” said Watanabe.

In fact, it was not an easy task to develop a new version of XBRL that complied with the Japanese accounting standards.

Companies are allowed to enter their reserves for possible loan losses and accumulated depreciation on more than one type of financial statements. Therefore it was necessary for the development team to design the Japanese version of XBRL so that the language can deal with all patterns of the entry formats.

Moreover, the volunteers of XBRL Japan prepared the fundamental structure of XBRL based on the Japanese accounting standards, when the tax agency decided to introduce the language.

“At the beginning, we had to meet challenges by enhancing our potential power considerably,” said Yoshida. The members of the XBRL Japan who were working for a manufacturing company that eventually won a contract from the FSA for the development of the XBRL system allegedly designed XBRL by scanning through about 50,000 accounting titles and categorizing them into several groups.

The XBRL Japan group plans to create a system in which notes and other elements of financial statements can also be written in XBRL, the consortium said.

Stock markets are driven by investors’ enthusiasm to maximize their own profits. However, the people who created the necessary infrastructure for the markets were not major market players but a group of volunteers with the passion to make the markets more efficient, and we must never forget this fact.

(Takashi Oomamyuda, Staff Writer, Nikkei Business)