Japan has long been known for embracing technological innovations, and now another one is coming to financial reporting in that country: XBRL.
Well ahead of the United States and many other countries, Japan plans to adopt the eXtensible Business Reporting Language for all publicly traded companies and investment firms listed there—some 8,000 registrants in total—starting in April. The companies must “tag” their financial statements in XBRL, and investors can then view and compare financial data with dramatically improved simplicity and control.
Japan launched its XBRL effort to attract foreign investors to the Japanese money market, according to Akira Yamagami, a partner at NTT Data Institute of Management Counseling and marketing and communication chairman of XBRL Japan, the consortium overseeing XBRL development in that country.
“The Japanese government was able to make XBRL mandatory for listed companies because all key organizations controlling the flow of money are using XBRL,” he says. “Japan was able to do it because former Prime Minister [Junichiro] Koizumi pushed to digitize businesses in Japan for practicality’s sake.”
Yamagami says no precise numerical figure exists to calculate the projected benefits XBRL should bring. But around the work, securities regulators consider it the way of the future for financial reporting, and nations are increasingly testing how much they can convince—or mandate—companies to adopt the technology. The U.S. Securities and Exchange Commission will consider later this year whether to mandate XBRL sometime in the near future, and Japan is emerging as a bellwether example of how such a transition might work.
Manabu Mizutani, chief operating officer of PCA Corp. and an early proponent of XBRL, sees it as a catalyst to improve Tokyo’s competitiveness as a world financial center. The Japanese securities market has an issue with disclosing information in English and converging accounting standards with other markets, he says. XBRL is “kind of a savior” because it will let Japanese companies identify which numbers are revenues, expense, gross profit, and so forth, and investors with XBRL-enabled software would then be able to find those numbers regardless of language.
Listed companies will file their XBRL-tagged financial statements to EDINET, the electronic filing network overseen by Japan’s Financial Services Agency and roughly equivalent to the EDGAR system in the United States.
Toshinori Kobayashi, director for enforcement of corporate disclosure at the FSA, says the agency ran an XBRL pilot program last summer that involved 1,233 companies—25 percent of all EDINET filers. Eighty percent of that test group filed successfully in XBRL. Of the 20 percent that failed, most were companies that did not use financial printers to help them draft their financial statements, Kobayashi says.
According to results from an FSA questionnaire, companies felt they failed because the work was beyond their expectations and the XBRL filing tool difficult to use. Respondents said they had difficulty identifying the cause of error and translating Japanese accounting terminology into English. The group also felt that the available guidance was complicated, as was the routine to submit XBRL-tagged statements.
A majority of participants in the pilot also said they anticipated at least a 50 percent increase in time spent to prepare their financial statements, especially in the first year of implementation. The FSA concluded that problems ran from filers using the wrong XBRL tags to repeating items multiple times to shortcomings in the XBRL guidance and tools. Preparers also needed more time and practice with XBRL.
“Companies are saying we need some preparation time to convert to XBRL,” Kobayashi says. “We decided [XBRL] should be mandatory for financial statements submitted in the calendar year of 2008.” In Japan, since the fiscal year starts on April 1, that means the first XBRL-tagged statements will be quarterly reports submitted in July. The first annual reports tagged in XBRL won’t appear until April 2009.
Several heavyweight Japanese companies helped bring XBRL to fruition. Hitachi’s Financial Information Systems Division developed the taxonomy of XBRL terms the Financial Services Agency uses. The company works with Takara Printing Co. and Pronexus Inc., the two dominant financial printers in Japan, to hawk its XBRL solutions. Fujitsu is also offering XBRL technology.
Still, Taiki Sakata, a senior system architect at Hitachi and an XBRL specialist, admits that the technology has its share of frustrations.
“There is a problem with present tools available for XBRL,” he says. “There are only tools that can be used by people already involved in using XBRL.” The learning curve for the ordinary person to study XBRL and master the filing tools, he says, remains high.
“XBRL is not rocket science ... The implementation just needs to be well thought out. XBRL is a technology everyone can use.”
— Yoshiaki Wada,
Director, Financial Systems Dept.,
The Bank of Japan
“The biggest complaint we hear through the FSA is people not knowing how to use XBRL,” Sakata says. He also notes that mastery of English will be a necessity, because XBRL’s underlying taxonomy is based in English.
Sakata says companies may try to avoid headaches with XBRL by leaning on financial printers. Going forward, he says printing companies may capture an even large piece of the pie (Takara Printing and Pronexus already control 95 percent of the market) to publish XBRL-tagged financial statements on behalf of corporations.
Other XBRL Endeavors
The Bank of Japan is also pushing aggressively to adopt XBRL. Starting in 2003, the bank began testing the usefulness of XBRL to help it manage the filings of roughly 570 banks, shinkin (credit unions), and securities firms. BOJ officials ran a three-phase test, followed by development of an easy-to-use tool and XBRL taxonomy. It began asking banks and financial firms in 2006 to release their monthly balance sheets on a volunteer basis in XBRL.
Yoshiaki Wada, a director in the BOJ’s financial systems and bank examination department, oversees the bank’s XBRL program (which was partly inspired by a similar XBRL filing program at the Federal Deposit Insurance Corp. in the United States). Wada says the BOJ supplies institutions with all necessary tools, taxonomy, and data communication infrastructure for free. Filers can then generate their own XBRL “instance document”—the file that contains the company’s financial data tagged in XBRL—without outside help. The bank also encourages filers to use Formula-Link, a program to check the accuracy of the filer’s numbers.
“It was difficult to get companies to understand the merits at first,” Wada says. “Error-checking functions such as Formula-Link have been a huge factor to get organizations to use XBRL.”
Thanks to XBRL-tagged data, the BOJ can now compile financial data more quickly for its in-house users. Along the way, the bank has revised its taxonomy several times due to revisions in Japan’s corporation law and other new requirements. It is now trying to improve the taxonomy design and to adapt it to more recent operating systems like Windows Vista.
“XBRL is not rocket science,” Wada says. “The implementation just needs to be well thought out. XBRL is a technology everyone can use.”
At the Tokyo Stock Exchange, TSE officials have been nudging listed companies since 2003 to file their announcements of fiscal results using XBRL. Today more than 60 percent of companies do. The TSE works with Fujitsu to develop its XBRL systems.
Koji Yoshida, head of the listing department at the Tokyo Stock Exchange, predicts the next few years will be “harvest time” for XBRL in Japan, as investors and organizations start reaping the rewards of what XBRL can offer.
“I think there will be a time where listed companies can generate XBRL files themselves as easily as HTML can be generated using Microsoft Word software,” Yoshida says.
Hirofumi Gomi, former head of Japan’s Financial Services Agency, touted the nation’s efforts at the recent XBRL conference in Vancouver as “a paradigm shift … from readable information to usable information.” But Gomi also conceded that corporate filers in Japan will use a taxonomy for Japanese accounting principles. So until Japan’s accounting converges with U.S. GAAP and IFRS—which hasn’t happened yet—users of the XBRL information will still need to perform extra calculations to compare Japanese filers with overseas companies.