Pioneering XBRL

In addition to revising its corporate accounting and auditing systems to bring them more into line with international practices, Mainland China is also one of the first countries in the world to adopt a technology-based financial reporting system, reports Chris Davis

Known as XBRL, or eXtensible Business Reporting Language, the financial reporting system provides a computer readable structure where companies can tell their own financial story to the market without using standard reporting templates. The Chinese Securities Regulatory Commission (CSRC), which governs the Shanghai and Shenzhen Stock Exchanges, was the first capital market in the world to mandate XBRL reporting. The process, which began with a voluntary programme in 2006, became mandatory last year. The CSRC now receives XBRL filings from more than 1,400 public companies.

Professor Shiping Liu, chairman of Global Business Intelligence Consulting and chief scientist and associate director at the Chinese Academy of Science Financial Technology Center, says the plan to widely adopt XBRL could help more Mainland China companies to achieve cross-border listing objectives. 'The system has the ability to enhance the distribution of financial and business information to all users and their ability to analyse information,' says Liu, who has been one of the main proponents of XBRL use on the Mainland.

To date, the Shanghai Stock Exchange China Listed Company Taxonomy Framework has been acknowledged by XBRL International. The China Fund Company Taxonomy has also been recognised by XBRL International, a consortium of companies and agencies worldwide working together to build the XBRL language and promote and support its adoption.

According to Liu, the Chinese Government department, including the Ministry of Finance, State Owned Assets Supervision and Administration Commission, the China Insurance Regulatory Commission, China Banking Regulatory Commission and the China Accountant Society are paying special attention to the development of XBRL.

Similar to Christopher Cox, chairman of the US Securities and Exchange Commission (SEC), Liu is a strong advocate of investor education and the use of plain language to remove legalese from reporting documents.

He says the system provides easy-to-understand reporting principles familiar to investors worldwide that could boost investor confidence in the Mainland's capital market and financial reporting systems. Also, foreign investors' confidence in the A shares could increase as they will now be able to get a unified financial report for each public company.

By providing an identifying tag for each individual item of data, XBRL facilitates standardisation for the processing of accounting information. Each individual accounting class of asset is given a unique tag according to international accounting standard.

Gayle Donohue, assurance partner at PwC, says the development of XBRL in the Mainland is of particular relevance to Hong Kong's business and accounting community. 'If the Mainland continues to encourage and mandate the use of XBRL, it could become a key driver towards XBRL becoming widely used in Hong Kong and other parts of Asia,' says Donohue.

She says that if reporting companies and stock exchanges adopt XBRL, then the financial data emanating from them can be machine-read. Currently, global information providers like Reuters have been doing this job of translation and dissemination of basic financial data, often out of 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.

In 2005, the Hong Kong Securities Commission (SFC) established a Preparatory Working Group (PWG) to examine the development of XBRL as an evolving global standard for electronic communication of business and financial data. Currently, XBRL is being utilised in Australia, Japan, Singapore, the US and the UK. In September 2006, the SFC announced that it would consider transforming its public company disclosure system from a form-based electronic filing cabinet to a dynamic real-time search tool with interactive capabilities using XBRL.

Support

Meanwhile, in the most recent remarks on the topic, Martin Wheatley, chief executive of Hong Kong's SFC, asked investors if they would support development of the tools necessary to enable Hong Kong-listed companies to issue XBRL reports. If the necessary infrastructure was provided, he queried, would companies take the time and incur the costs needed to prepare financial reports in a machine-readable form?

David Phillips, a senior assurance partner at PwC based in London, says that like many other places, the Hong Kong regulatory authorities seem keen to implement XBRL, while companies adopt a wait-and-see approach until the benefits of XBRL are better understood. He says accounting, auditing and reporting reforms taking place on the Chinese Mainland could be a key driver for the increased use of XBRL in the Asia Pacific region. Furthermore, as taxonomies on the Mainland are developed that allow companies to better tell their story, its use and impact in the reporting process will organically develop over time.

'We know the use of XBRL will become more widespread, it is just a matter of when,' says Phillips, who has written extensively about XBRL. He says that by using XBRL, the transmission of data could also become quicker between stock exchanges' systems and the recipients, including fund houses or information aggregators like Bloomberg and Reuters, since financial information will come via Straight Through Processing (STP).

He says, to date, most preparers have not been persuaded by the value of XBRL. However, some early adopters have been willing to state publicly that its use has delivered some cost and time reductions in the reporting process. Furthermore, its use can reduce the impact of intermediaries in the reporting process and will over time, as taxonomies are developed, allow companies to better tell their story.

Phillips says obvious benefits include initial financial analysis, calculation of year-on-year growth in turnover and profits and calculation of certain ratios like profitability ratios (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.

'As an enabler, XBRL has the potential to transform the business information supply chain, but experience shows that transformational change does not occur unless all supply chain participants actively participate in determining the taxonomy,' says Phillips. Without users and preparers coming together to share their knowledge, insights and practical understanding of what information is important, how information is created and used internally, progress could be limited.

The view taken by Patrick Rozario, principal of Grant Thornton's Business Risk Services, is that while some companies understand the potential value of XBRL, it is the regulators who have made the first concerted move to introduce the concept. 'XBRL is capable of enabling a transformation of the world of business information and reporting, but it needs preparers to appreciate the value of cutting down the time and cost involved in this process,' says Rozario, adding that Grant Thornton was one of the firms that initially supported Hong Kong's SFC Preparatory Working Group.

Rozario says by presenting its statements in XBRL format, a company could benefit investors and raise its profile. He says understanding business performance requires an appreciation of the big picture and not single line items, such as turnover or profit. Here, XBRL has an important role to play in facilitating linked disclosures that can enhance user understanding. It could also help meet the requirements of regulators, lenders and other consumers of financial information, who are increasingly demanding greater reporting transparency. He says the benefits of implementing XBRL on the Chinese Mainland have a major impact on the use of XBRL in Asia, however; before future significant benefits could be evaluated, more taxonomies needed to be developed.

'When we compare Mainland China to many other jurisdictions, they are probably in a better position to embrace the use of XBRL because they are developing their accounting and reporting platforms from a different stage than places like Hong Kong,' says Rozario.

Chris Davis is a freelance journalist based in Hong Kong, where he covers regional business, finance and environmental topics.