Should you switch to XML?

YOU'VE seen terms like "revolutionary" being bandied about by the normally staid types at firms like PriceWaterhouseCoopers.

You've heard that XML offers the most significant development in accounting since the spreadsheet. You've seen the headlines in the likes of the Wall Street Journal giving prominence to the XML-fueled bun fight between US website aggregators CCBN and Shareholder.com.

And you're probably wondering what it's all about. Can you safely ignore the general polemic? Or is this really something you need to care about?

The answer is both yes and no. Yes, there's a lot of unnecessary hype surrounding XML. And no, you cannot afford to ignore it because XML is indeed an important development.

So what is XML?
First off, know that XML (Extensible Markup Language) is not all that new. It was adopted as a recommendation by the World Wide Web Consortium, the international standards body for the Internet, back in February 1998.

For a while, the Internet community and software developers were fairly slow in taking up the technology. However, we are now at the point where developers have begun to create some nifty tools with it.

To understand what XML is, know that HTML, the standard language of the web, defines how information on the Internet should be displayed in a user's browser. XML, on the other hand, defines what that data means.

Take your financial statements for example. Currently, if I want to format them for the web, I'm pretty much restricted to defining how the various line items should be displayed. I might define this year's EPS figure to appear in bold type, in which case I will insert <b>in front of the number and </b> after it. To the browser software, however, what appears between those tags is nothing but a jumble of letters, numbers and HTML.

But with XML I can now tell the browser, or some other program, that the characters between my HTML bold tags are in fact my EPS for a particular year. Sounds meaningless, but it is in fact a quantum leap for Internet technology.

It means that with the right XML-enabled tools, investors can easily extract, analyze and manipulate financial and other information from your website anytime they want. And not only from your site, but from those of your competitors, without ever leaving their desktop.

No more reading webpages manually. No more cutting and pasting from HTML or PDF. No more need to download Excel spreadsheets.

In a matter of seconds, investors can easily extract EPS figures (or any other data they desire) from your and other companies' websites and then manipulate the data in any way they want.

Cool, huh? But that's not where we're at just yet.

With XML there is no requirement to define data in a particular way. You can create your own set of XML tags specific to your company. That means that unless there are standard ways of defining financial data elements like EPS, the whole XML thing will be useless.

But that's where various industry consortia come in. These groups are working to develop common XML-based languages for particular industries and applications.

The most important industry consortium for investor relations is the one developing XBRL, extensible business reporting language.

What the XBRL financial reporting sub-language means to you
The basic objective of the XBRL consortium is to develop a set of standard tags that define the financial information reported in various jurisdictions around the world.

Hence, tag sets have or are being developed around most countries' accounting rules. The International Accounting Standards Board has also developed a taxonomy for international accounting standards.

The XBRL consortium has gained rapid momentum over the past year. We are now very close to having a usable XBRL language and some US and Australian companies are already reporting their financials in it. (You can keep abreast of XBRL developments by downloading the consortium's regular updates at their website, www.xbrl.org)

It is also expected that regulators will eventually require companies to use the XML filing format. A prototype Edgar filing for Form 10K in XBRL is currently under construction.

One project just completed at the University of Kansas provides an interesting glimpse into what XBRL will mean for how analysts and investors access and analyze financial statements.

It has developed a repository of 10K statements for 80 companies in XBRL which can be accessed and analyzed using an Excel spreadsheet that you download from the site. Try it yourself.

At the same time, accounting software vendors are putting XBRL-type tags into their systems while others are developing applications for analysts and investors to extract and manipulate XBRL-coded financial data. In new releases, major desk top applications such as Excel are also providing improved support for XML.

What all of this means is that changes are coming to the format in which public companies report their financial results on the Internet, internally and between each other. And they are coming sooner rather than later.

NEXT: How XML impacts your IR website >