A Napster for Financial Data?

EXECUTIVE SUMMARY

IN THE NOT-TOO-DISTANT FUTURE, you may be able, with just a few mouse clicks, to access any public company’s financial reports in extraordinary detail and for any period. In addition, you may be able to perform an array of instant analyses of those data. THE UNDERLYING TECHNOLOGY is available now—XBRL (Extensible Business Reporting Language). All that’s missing is a standardized protocol to implement it—and the first steps for creating such a system have just been taken by Nasdaq, Microsoft and PricewaterhouseCoopers. THESE ORGANIZATION HAVE JUST LAUNCHED a test project designed to explore whether the concept is feasible, practical and sought by financial professionals, investors and regulators. THE OBVIOUS WINNERS from such a system will be financial planners and individual investors, who will have at their fingertips a huge amount of verifiable and easy-to-analyze financial information. COMPANIES ALSO WILL GAIN: They will appear more forthright in providing financial information to stakeholders and have an easier time conducting internal data analyses. XBRL-FORMATTED DATA WILL ENHANCE lender relations with companies seeking credit; banks no longer will be inundated with reams of paper financial reports. ACCOUNTANTS MAY BE ABLE TO MOVE XBRL forward by prodding their accounting software vendors to include it in their applications.

STANLEY ZAROWIN is a senior editor on the JofA . Mr. Zarowin is an employee of the AICPA, and his views, as expressed in this article, do not necessarily reflect the views of the Institute. Official positions are determined through certain specific committee procedures, due process and deliberation.

magine this: At any time of the day or night, and with just a few clicks of the mouse, a financial planner or an individual investor can access a company’s present and past financial reports in extraordinary detail. In addition, an array of instant analyses of those data can be performed, which displays them either graphically or as conventional financial statements. Within seconds a user can compare a company’s balance sheets with those of several competitors, examine an enterprise’s debt-to-equity ratio in any fiscal period, chart its stock price history and download an audit client’s major nonfinancial news. As if that’s not enough, the same range of analyses can be performed for any public company worldwide and the information even can be converted into any currency.

“No way,” you’re probably thinking. “At least not in my lifetime.”

Think again. All the underlying technology—XBRL (Extensible Business Reporting Language)—for it is available right now. All that’s missing is a standardized protocol to implement it—and the first steps for creating such a protocol to perform those feats have been taken. A team comprising the Nasdaq Stock Market, Microsoft and PricewaterhouseCoopers just launched a pilot project designed to demonstrate that the concept of making both the data and the analysis tools available on the Internet is not only feasible but both practical and sought by financial professionals, investors and regulators. If you want to see what the future looks like, just point your Web browser to www.nasdaq.com/xbrl (see exhibit 1 , at right) and download a free demonstration file called the Excel Investor’s Assistant. You’ll need Excel 2000 or later to run the demo.

Exhibit 1

Once you’re at the site, follow the instructions to install the pilot. When done, click on the file, Excel Investors Assistant.xls. You will be asked whether you want Excel to enable macros; you do, so click on the Enable Macros box (see exhibit 2 ,below left).

That will bring up the opening screen of Investor’s Assistant (see exhibit 3 , below right).

Exhibit 2

Exhibit 3

The Investor’s Assistant file contains two components: an Excel spreadsheet with built-in data analysis macros and formulas and a linked database that contains five years of financial information on 21 companies. The financial information, however, is not just raw data—that is, it’s not just a compilation of financial numbers. Instead, each item in the database has been labeled with an XBRL tag that identifies the item as, for example, revenue, profit or short-range debt. The XBRL tags are based on standardized accounting definitions customized for various industries. (For more on XBRL, see “ Finally, Business Talks the Same Language ,” JofA , Aug.00, page 24.)

A growing number of accounting software developers are incorporating XBRL into their products so a tag automatically gets attached to each item of financial information as it is entered and subsequently calculated by the accounting software. The tags eventually will be useful for anyone compiling both internal and external financial reports and tax returns.

Because many industries have unique categories of financial data, an international consortium of more than 170 companies is preparing customized XBRL dictionaries, called taxonomies, that optimize the XBRL definitions so the tags can handle any special reporting structure. The goal is to make XBRL a fully universal financial information language that is both automatically attached to the data and transparent to the viewer.

The XBRL International consortium was founded by the AICPA in 1999 and currently has active chapters in Australia, Canada, Germany, Japan, the United Kingdom, United States and Singapore. Chapters are being developed in Belgium, Hong Kong, India, Ireland, the Netherlands, New Zealand, South Africa, Spain, Sweden and Taiwan.

XBRL tagging eliminates subjectivity when users compare financial results from different businesses, thus making it easier to extract and analyze comparable information. However, XBRL doesn’t require companies to change what they disclose and the way they report financial results under current accounting standards.

This is not the first time XBRL has been used to publicly display financial data: Earlier in 2002 Reuters and Microsoft became the first to publish their corporate financial statements using XBRL.

PLAYING WITH NUMBERS
If you want to put the pilot to the test, open the Investor’s Assistant and select one of the 21 companies. Once you’ve made your selection, you have many options. For example, you can compare a company’s operating margin with its net margin. To do that click on the Financial Measures tag and then, under Ratios , check the boxes Operating Margin and Net Margin , and the following graphic analysis will appear (see exhibit 4 , below).

Exhibit 4

As you can see, the pilot project demonstrates that the fantasy outlined in the opening paragraph of this article is feasible using an off-the-shelf electronic spreadsheet; there is no need for a specially designed application. This demo uses Excel because Microsoft was one of the project’s sponsors, but it could just as well have been Lotus 1-2-3, the free Linux OpenOffice or any other spreadsheet application. The only requirement is that the system be linked to a Web service with access to comprehensive and up-to-the-minute financial data. Under the best of circumstances, a government regulatory source, such as the SEC, would provide the core information to ensure accuracy and authenticity. But media data, and even information input from the companies themselves, would broaden the database and make it far more valuable. In this pilot, Nasdaq provided the Internet-accessible data on the 21 companies from the SEC’s EDGAR (Electronic Data Gathering Analysis and Retrieval) filing system; they include Forms 10K and 10Q.

If all you want is a company’s financial statement, click on the Financial Statements tab and pick the time period you want to display (see exhibit 5 , below).

Exhibit 5

If you want to examine various ratio analyses, click on the Ratio Analysis tab and adjust the variables (period, variance materiality), and you can even compare a business with its competitor (see exhibit 6 , below).

Exhibit 6

The pilot also gives you access to nonstatistical information. For example, if you click on the Notes tab, it will bring up the revenue recognition policy for the company selected (see exhibit 7 , below).

Exhibit 7

If you’d like to see what a page of typical XBRL code looks like, click on the last tab, XBRL Instance Documents , and then on any of the blue names (see exhibit, 8 , below).

Exhibit 8

NEXT STEPS
Who will benefit from such a data-distribution system—in effect, a Napster of financial services? The obvious winners will be investors, who will have at their fingertips a huge amount of information that is both verifiable and easy to analyze. Companies also will gain mightily. Not only will they appear more forthright in getting financial data to stakeholders but they will also appear more transparent—thus addressing a high-priority public relations problem in this era of Enron. In addition, with all their financial information laced with XBRL tags, they will have an easier time conducting internal data analyses.

Consider, too, how XBRL-formatted data will enhance relations with lenders. Banks examining the books of credit-seeking clients will be able to click their way to a decision rather than be inundated with reams of paper reports to analyze manually, so to speak.

What will it take to transform the language of the financial world to XBRL? Accountants may help speed along that transition by prodding their accounting software vendors to include XBRL in their applications. CPAs also can encourage clients to incorporate XBRL in their financial statements so banks will become accustomed to using it.

So, if you’re not yet on the XBRL bandwagon, you had best get aboard quickly. The software tagging system will enhance your professional stance and, in the long run, boost your productivity.