XBRL - Breaking Into the Equity Analysis Bastion

By Raghuvir Mukherji Senior Consultant, Financial Securities Domain Competency Group Infosys Technologies Ltd. [email protected]

After giving traders and order routers a bad scare in the form of algorithmic trading, technology is now in a position to threaten equity analysts, or make their job simpler, depending on where one is in the equity analysis 'value chain'. The advent of the internet and the use of XML (eXtensible Mark Up Language) enabled the quick transmission of information across the globe between people and machines using different software systems.XML allocates tags to different elements of data, so that systems can understand each other, even if they use different terminology internally. This has been a catalyst to the creation of a 'flat world', in the words of Thomas Friedman, in his eponymous book, since companies can now run operations in remote areas and integrate different systems quickly and efficiently with minimum re-programming. A similar kind of technology has the potential to revolutionise equity analysis and the dissemination of financial data: the use of XBRL (eXtensible Business Reporting Language), an XML like language that is suited to the needs of financial reporting.

If reporting companies and stock exchanges adopt XBRL, then the financial data emanating from them can be machine read. Reporting, whether to stock exchanges or to the government (which always follow a defined set of standards or a pre-set format) can be automatically processed. Transmission of data will also become quicker between the stock exchange's systems and the recipients (fund houses, or information aggregators like Bloomberg and Reuters) since financial information will come through STP (Straight Through Processing). Initial financial analysis--- calculation of year-on-year growth in turnover and profits, and calculation of certain ratios like profitability ratios (e.g. net profit on sales), liquidity ratios (debtors turnover, current ratio) and capital-related ratios (price to earnings, interest cover and debt to equity) can also be done by computers, which can then be quickly presented to human analysts in a structured manner, for their 'buy' 'sell' or 'hold' recommendations.

The quicker this happens, the better is the competitive edge of the firm, whether it is a fund manager doing proprietary trades or a broker advising its clients (the 'first mover advantage'). Of late, global information providers like Reuters have been doing this job of translation and dissemination of basic financial data out of India and other low cost centres. The use of XBRL and the consequent automation of initial analysis can further cut down the time and cost involved in this process.

It works very much like XML in principle: it allocates tags to different elements of financial data, like items of expenses like salaries, materials, general administration and interest. The tag also denotes the broad subset the element belongs to and would show inter-linkages between that item and other items. For example, 'Buildings' would belong to the sub-set 'Fixed Assets' and would be linked to 'Land' (if it was purchased separately) and 'Depreciation on Buildings'.

However, data coming in from various locations may follow different accounting standards---while the US has its own GAAP (Generally Accepted Accounting Principles) issued by the FASB, the EU has shifted to IFRS (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board, an international consortium of Accounting bodies). In Asia, India has its own standards, which are very close to the IFRS, but not completely identical. So too have China, Australia, Japan and Korea. To overcome the problem of different accounting terminologies and accounting standards, XBRL works through a series of 'Taxonomies' or dictionaries which allocate tags to different elements of financial data relevant to each taxonomy. For example, there are different taxonomies for IFRS, the US, UK, Australia, Canada, China and Korea, among a few others. As far as possible, terminologies are standardized, but there may be elements unique to a particular taxonomy. The recipient systems have to be programmed to receive data adhering to various taxonomies.

The need to programme recipient systems to receive data from various taxonomies and the ability to automate initial financial analysis creates a huge business opportunity for technology companies.

The push towards XBRL is being made by a not-for-profit consortium consisting of about 450 members across the world. These standards are open and hence, can be downloaded free from their website, www.xbrl.org. As per data given in the website, the consortium counts among its members industry leaders like the big 4 Accounting firms, software majors like Microsoft, IBM, SAP and Accenture, stock exchanges, banks, data accumulators (like Reuters, Dun and Bradstreet, Fitch, and S&P), settlement agencies like DTCC, financial firms, some multinational companies and Accounting bodies like the Institutes of Chartered Accountants of England & Wales, Canada, Australia and New Zealand, and the International Accounting Standards Board (IASB). Even HM Revenue and Customs (in the UK) is part of this consortium. In the 14th annual XBRL International conference held in Philadelphia in December 2006, the Securities and Exchange Commission (SEC) threw its weight behind XBRL, with Chairman Christopher Cox exhorting the FASB to complete the taxonomies relating to the US, so that XBRL can be integrated into the SEC's financial report filing system, EDGAR.

Even though XBRL makes financial data machine-readable and hence expedites their processing, it has been adopted only by a few multinational companies, even for internal financial reporting. Probably one reason for this is that it still does not completely resolve the problem of diverse accounting practices in different countries. The European Union has taken a huge step forward in this direction by adopting the IFRS and creating a uniform accounting environment. The FASB and Accounting bodies in other countries should follow suit to reap the full benefits of using XBRL. Till then, the cacophony in the Accounting world will continue to make adoption of this technology more difficult. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio