Written by Toshinori Kobayashi Posted on July 1, 2008
Toshinori Kobayashi is director for enforcement of corporate disclosure at JFSA, the Financial Services Agency of Japan. He was responsible for the XBRL renovation project of EDINET, the JFSA’s electronic disclosure system. In his previous articles, Toshinori offered a brief introduction to adopting XBRL for EDINET and described the JFSA's voluntary filing program. In this post, he discusses why he thinks the implementation of XBRL in Japan went smoothly.
Last November, when SEC Chairman Christopher Cox met in Japan with the Financial Service Agency’s (FSA) cabinet minister and managers, he asked about the EDINET renovation project. Specifically, the Chairman wanted to know how the implementation of mandatory XBRL filings had proceeded so well.
We discussed the details of our experience with him. The new EDINET system requires some 5,000 listed companies and 3,000 funds to submit their financial reports in the XBRL format. So far, we've heard few voices of protest or dissatisfaction. How was EDINET able to introduce the new reporting regime so smoothly?
First of all, when we originally began discussing incorporating XBRL into the EDINET system, the act of making XBRL statements mandatory beginning in fiscal 2008 was not a fait accompli. Starting in 2004, several reports were issued on the project through March 2006, but these reports didn't clearly touch upon the issue of making XBRL mandatory.
For me personally, since becoming the EDINET project leader in July 2006, I was uncertain about the mandate issue for six months or more. I thought that XBRL reports offered a useful tool for high-level analysis for investors. Whatever the timing, I didn't doubt that making XBRL mandatory was a necessity. But could implementing a mandate in one fell swoop beginning in 2008 be done smoothly? How do you go about starting with a successful voluntary program and run it for some time, and then switch over to making XBRL mandatory on all fronts?
This confusion was symbolized in what was being written about the project. During the time the renovation project was underway, there were two articles in major Japanese newspapers about introducing XBRL. The first was on November 15, 2006; the second on June 10, 2007. The 2006 article said that "Depending on the spread of the use of XBRL, the FSA is looking at making it mandatory for reporting companies.” An accompanying chart in the article said that XBRL would be implemented under "a voluntary system." In other words, the 2006 article implied that the new EDINET would be launched as a voluntary XBRL system at first, and then the FSA would consider the transition to a mandatory system. Clearly the mention of a "voluntary system" was misreported, but the fact was that in the interview I didn't say that beginning in 2008 the program would be mandatory. By contrast, in the June 2007 article, the headline said "mandatory."
In the second half of 2006, XBRL still wasn't well-known in Japan. Would filers' cognizance of XBRL and their preparations be sufficient by 2008 for an interactive data mandate? Would they be able to absorb the costs for moving to XBRL? Beginning in autumn 2006, there were several months to sweep away the confusion surrounding these questions and decide whether or not the go-ahead should be given for mandatory XBRL filings in 2008.
During this time, the FSA was explaining the issues regarding the transition to XBRL to those affected by a mandate and inviting them into discussions. At this point, we did not discuss macro policy issues such as whether XBRL should be mandated. Rather, our discussions were conducted on a practical level to come up with workable solutions for the various problems an XBRL mandate would create. Our talks were aimed at dispelling the psychological resistance and anxiety that users would feel upon introduction of the new system, and sharing practical information about the move to XBRL with users and other key stakeholders .
The primary vehicle for moving the discussion forward and accomplishing these goals was the Working Group (WG) of the EDINET Advancement Council. This WG was initiated when the decision to introduce XBRL was initially made, but had been inactive for about a year; it was reorganized again for the next level of discussions. Its members were key players in the business world: the Keidanren, which represents Japan’s major industry leaders; the Securities Analysts Association of Japan; the Japan Securities Dealers Association; the Japanese Institute of Certified Public Accountants, or JICPA (which includes all CPAs and auditors); the Financial Accounting Standards Foundation (the accounting rules-making body); the various stock exchanges (the Tokyo Stock Exchange, the Osaka Stock Exchange, JASDAQ); the Bank of Japan (which had already introduced XBRL and whose cooperation was very important); and the National Tax Agency.
Besides all the key stakeholder representatives, XBRL Japan and the financial printing companies (mentioned in my previous post) also participated as observers. From October 2006 to February 2007, the WG debated important technical and technological issues, including the selection of accounts under the EDINET taxonomy and related user issues; the display method for XBRL data; and formats (with the introduction of XBRL filings, formats would be different from those existing under HTML). Concurrent with the general activities of the WG, there were active discussions of specific issues with members knowledgeable about those problems. The WG’s work and discussions were forwarded to individual members of the participating organizations, the representatives of which take part in the WG.
Of course, it was impossible to exchange views with all of the 5,000 companies and 3,000 funds that would submit XBRL filings. But as a vehicle for airing and debating the issues, the WG functioned as a window through which its member organizations, companies, and other interested parties could efficiently exchange information and have their voices heard. (And to be frank, I also think it was a way to justify that the FSA could pursue debate with valid representatives of the various stakeholders involved.)
Also, individual discussions were held with the associations of 23 industry sectors for which separate taxonomies needed to be prepared, taking into consideration the particular accounting rules for the specific industry (banking, utilities, insurance, construction, etc.). Information was exchanged and opinion was solicited also from the relevant government agencies (such as METI; the Ministry of Land, Infrastructure, Transport and Tourism; and others).
We requested the members of the Working Group and the industry associations and government agencies of the 23 sector groups to review their respective taxonomies from a real-world perspective to ensure they were viable. At the same time, from January to February 2007, the first pilot program was conducted with about 50 of the filing companies testing the taxonomies. Based on the results, upgraded versions of the taxonomies were prepared.
Regarding user costs for XBRL implementation, our major concern was the expense of the software tools for the filing entities. In 2006, Japan’s software market did not offer XBRL tools with good cost performance, and for a period of time, the FSA looked at providing software with minimum functionality at no cost to users. But discussions with software vendors revealed that they were planning to develop and make available to users good XBRL software tools at low cost by 2008. In addition, we were informed by the printing companies (which more than 90% of reporting entities use) that they plan to offer XBRL filing services at a cost not significantly higher than that for HTML statements.
Through a concentrated six-month effort, we were able to take a fresh approach to the issues raised by an XBRL mandate and became confident with the solution we developed by the time the renovated EDINET system started up operations in 2008. Through improved relations with stakeholders, information was provided to them on the changes that would be introduced by XBRL filings and the essentials for preparation. These efforts served to heighten stakeholder recognition about the new system and was extremely effective in enlisting the cooperation of the business community.
With no indication of broad opposition to the goal of introducing XBRL by 2008, the FSA became confident that sweeping changes that incorporated XBRL into the new EDINET system could be put into place this year. In a speech I gave at a symposium in March 2007 sponsored by XBRL Japan, the JICPA, and the TSE, I said for the first time that "XBRL filings would be made mandatory from the time the renovated EDINET system was put into operation." That was the start of the FSA beginning to make an aggressive appeal through various media for a mandate, and, as I described in my previous post , that was the environment in which the second pilot program proceeded.
There was yet one more decision that had to be made regarding the mandate: the timeline for submission of financial reports in XBRL format.
The new XBRL-enabled EDINET system would be inaugurated on March 17, 2008; at the beginning of April it was possible to require that financial statements be filed in XBRL. Because the vast majority of Japanese companies have a March fiscal year-end, the most recent yearly financial reports were for March 2008 and would be filed in June. We had to consider whether the XBRL mandate would apply for March 2008 yearly reports. Within the FSA, there were those that championed "mandate XBRL from fiscal years ending in 2008"; with the systems now in place, requiring XBRL for the vast amount of yearly reports for March 2008 would well symbolize the renewal of the EDINET system.
However, as a result of our discussions with the business community, we understood that the June date for submission of March 2008 reports made for a tight schedule. Indeed, there was a lot of sentiment that it would lead to chaos (this was the only issue where companies had a truly negative reaction during the whole XBRL project). Because quarterly reports have relatively few disclosure items, the burden of kicking off the XBRL mandate with three-month statements was not heavy. This viewpoint prevailed, and the mandate for XBRL filings began with reports for companies' fiscal first quarter of 2008.
Looking back, I think there were two major “keys for success” in the smooth XBRL implementation in Japan: close cooperation with the stakeholders and the timing. Our method of gradually formulating consensus through a conversation with the business community may be uniquely Japanese. It also helps that Japan’s corporate culture is relatively accepting of unilateral regulations. In any event, I think creating an environment that focused on the stakeholders, and making sure key players recognized the significance of the interactive data mandate and were well prepared for the changes that it would impose, were both essential to the smooth introduction of Japan’s XBRL mandate.