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01/31/2012

Global Evaluation of a Company’s Nonfinancial Information: A Challenge for New XBRL Technology


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WHAT IS XBRL?

eXtensible Business Reporting Language (XBRL), an XML-based language for describing financial reports, is a freely available, market-driven, open, and global standard for exchanging business information. In an XBRL file, all of the line-items of the financial statement are tagged, depending on their accounting definition. Analysts can use these tags to capture line-item data (e.g., total revenue, net income, etc.). In general, analysts still have to read all of the items and then select what they need for the evaluation. They will also have to input the selected data into their spreadsheets. To minimize their work loads, there are some information service providers who offer the normalized financial data as part of their service. However, companies are now able to provide original data as XBRL directly to select tags themselves.

In the US, all public companies with a mandate to file on the Electronic Data-Gathering, Analysis, and Retrieval (EDGAR) system have been using XBRL to edit their statements since July 2011. Given the scarcity of available tools, few analysts have exploited the XBRL format until now.

XBRL has already revealed issues which were previously overlooked—for example, the fact that each company’s line-items are not perfectly comparable. When detailing specific items, each company names them without taking into account comparability from the users’ perspectives, despite stringent Generally Accepted Accounting Principles (GAAP) on the definition of individual items. The way in which these items are tagged depends on their “name.” As a result, some of them—such as special types of allowance, extraordinary loss, and details of inventory—have been tagged incorrectly. For more information, please click here.

MAKING NONFINANCIAL INFORMATION COMPARABLE AND MEASURABLE

These days, buy-side seeks a range of factors in corporate evaluations in order to differentiate their fund operation from their competitors, including looking for a potential growth area or avoiding specific risks. These data are usually used to estimate the company’s future performance. However, recently some quants analysts are seeking new approaches to use these data for screening by a company's characteristics or analyzing the data systematically. Since there is no de facto definition of comparable items in nonfinancial data, companies may select an inappropriate definition or even slightly different information. This fact makes it difficult to compare data between individual companies.

According to our research, the most popular nonfinancial information is corporate governance, which enables the analyst to determine the quality of management. This type of information is needed not only for a long-term investment but also for a proxy voting. In Japan, companies usually state their corporate governance in a security report. However, analysts may have to read an entire section or chapter just to find the relevant information, since it is written in story format. Besides, contents are not assured to contain the same factors for each company.

In order to change such situations, XBRL started being introduced. The Tokyo Stock Exchange requires companies to file their corporate governance reports in XBRL, which is automatically created on the TSE website by entering their information. Analysts can, therefore, capture exactly the same factors, such as the percentage of independent executives on a company’s board of management or its introducing/nonintroducing stock-option system. XBRL ensures that the document contains specific information on defined items and that this information is comparable across companies' reports. In Europe, the German XBRL group has been discussing XBRL for German Corporate Governance Codex (DCGK). Discussions about the adoption of XBRL are also taking place worldwide.


XBRL Conference


Potential growth information becomes comparable and measurable by XBRL Recently, the number of Japanese public companies announcing their mid-term management plan for investors is increasing. As these plans involve the companies’ future development, the information’s definition must be clearer and better structured for sector-comparison in the same industry, or market. To facilitate global access, the documents should also be available in multiple languages. The same applies to ESG or sustainability reports. These types of IR documents tend to be edited in a long, free format. Analysts and fund managers do not have time to read them all.

We conducted an experiment aimed for describing those factors using tags such as, “line-item of financial statement,” to save time interpreting IR documents. The problem was that it is difficult to design "items" with regards to "future plans" or "strength of company”, without specific disclosure regulations. To resolve this issue, we have interviewed over 40 analysts about factors that they were focusing on presently, for example, the type of management indicators, such as ROA or net sales, or the existence of systems that the company put in place for bonuses linked to its performance, etc. We then listed these factors as “items.” Although it is assumed that analysts are typically unwilling to provide this type of information, we can say more than 50% were happy to provide relevant data. Many quant analysts were quite open to disclosing their focusing factors. Some asset management companies have to report their reasoning for electing specific companies and the results to their clients (usually pension or foreign investors), since a fund manager of an asset management company is operating the sponsor's money. If the reason for selecting the company is strange or secret, all other investors will never think the company is worthwhile. Your performance does not depend on the time lag of information; it is dependent upon the company’s performance in terms of long-term investments. In the next stage of our research, we will verify the performance of companies that have similar value for those factors. Our experiment was presented at the latest XBRL international conference.

HOW CAN XBRL BE USED TO EVALUATE THE PERFORMANCE OF A COMPANY?

The key is the analyst’s point of view.

Through our experience, we recognized that tags have the ability to indicate companies’ contents on their IR documents properly—but good communication with analysts is crucial. Many companies expressed interest in these tags as factors which analysts want to know.

XBRL files can also be converted into English if the company edits them correctly. As a result, the information can be disclosed to all investors without any time lag. The files are also in a machine-readable format. We believe that this experiment needs to be continuous to discover more valuable data for company evaluation. However, in order to further develop new XBRL technology, we need more input from the analysts’ points of view. Because they can be individual tags, it helps to understand the important factors for evaluation. For example, we would like answers to the following questions:

“What types of factors are required as comparable items in a company’s disclosure material?”
“What do you think about XBRL or about our experiment?”

To further improve the evaluation of companies, we would like to discuss it with many more parties.

Chie Mitsui

Chie Mitsui is a data analyst in the Investment Information Business Department, Asset Management Service Division of Nomura Research Institute. Nomura provides corporate financial data for both buy-side and sell-side analysts, and fund managers. Mitsui is responsible for the quality and the accuracy of data collected for the evaluation of the company, and is currently involved in researching how XBRL can be utilized to develop new types of analyses.

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