Digital Financial Reporting

The utility of a high-level computer-readable fundamental accounting model is becoming more clear to me. In a prior post I discussed the notion of fundamental accounting relations. In another post I showed a screen shot of an application I am using to figure out these relations. This post builds on that other information and tunes the information for what I am actually finding in SEC financial filings.

This post also points out that this model can be used to be clear of the accounting choices made by reporting entities.

You can see my updated visual model by clicking on the image below:

I have summarized the relations on this wiki page. Definitions which would add additional clarity are forthcoming.

The model is based on my understanding of financial reporting, the US GAAP Taxonomy, and 7,160 SEC XBRL financial filings (10-Ks) that I am looking at.  What I am noticing is this:

• Detecting accounting choices: The balance sheet and cash flow statement models are extremely straight forward and there is very little inconsistency. For example, there are 1,377 SEC filers who report a noncontrolling interest.  Of that total, 1,262 (92%) include noncontrolling interest within equity and provide a subtotal for "Equity attributable to parent".  Approximately 50 filers either (a) don't include noncontrolling interest in equity or (b) they don't include the total "Equity" on their financial statement.  There are less than 10 SEC filers which clearly do NOT include the noncontrolling interest within equity, for example like this filer reports it as part of liabilities. Now, my accounting skills do not allow me to make any statement about whether this is someone making a mistake or if there is a reason for this, or otherwise determine the appropriateness of this (I don't have enough experience with accounting for noncontrolling interests).  However, I can tell you this.  If I were an accountant and I had to create a financial statement and I had to report a noncontrolling interest; this would be VERY good information to help me understand where to put the noncontrolling interest on my balance sheet. As long as all the facts are the same, doing what 92% of other financial statements do is WAY safer than doing what only 10 or 1% choose. While figuring out how to report a noncontrolling interest is not that hard really, these same techniques can be applied to EVERY part of a financial statement.  That is useful to accountants and auditors.
• Operating income (loss), Nonoperating income (loss), Interest and debt expense:  There is only one part of this representation which has real variability: the three pieces of "Income (loss) from continuing operations before taxes". You can see this section of a financial statement herein the US GAAP Taxonomy. The "line" between "Operating income (loss)" is vastly clearer than the line between "Nonoperating income (loss)" and "Interest and debt expense".  In fact, financial statements tend to "co-mingle" what goes into those two categories. Also, subtotals are many times not provided for these categories.  OK fine, to deal with this in my representation I simply created a subtotal "Nonoperating income (loss) + Interest and debt expense".  Problem solved. Again, it is certainly not wrong to organize your income statement line items in this area using the three categories provided by the US GAAP Taxonomy.  However, the variability which I see in SEC financial reports leads me to believe that you are not required to differentiate these two areas (nonoperating income (loss) and interest and debt expense.  Clearly there is a bright line as to what is contained within operating income (loss) and what is not.
• Crossing boundaries of broad categories is generally never allowed:  Putting detail which is clearly identifiable as an "asset" as defined by the FASB conceptual framework(or IASB framework for that matter) into the "equity" section of a balance sheet is clearly not OK. On the other hand, there is less clarity say as to what should be classified as net cash flows from financing activities and what might be classified as net cash flows from investing activities. Understanding what goes into which of these broad categories and when crossing the boundaries of these categories might be OK due to ambiguity in the accounting rules is helpful information.  Looking at the 7,160 SEC XBRL financial filings is a wealth of information in this regard, very helpful to accountants.

Now notice that none of the issues above have anything to do with XBRL really.  These are accounting issues.  Using all that XBRL-based information turns the SEC XBRL financial filings into a treasure trove of useful information.

Now, are these high-level categories also useful for working with the XBRL-based information.  Yes, very much so.  For example, in terms of concept selection having these categories and knowing which concept relates to which category is very useful in avoiding concept selection mistakes.  For example, let me point out two clear mistakes. (Not to pick on these filers, they are just two very good examples.)

Procter & Gamble, in their 10-K filing, created a balance sheetand on that balance sheet they did not include a total for noncurrent assets. No big deal, having a total for noncurrent assets is not required on the balance sheet.  However, notice the line item "OTHER NONCURRENT LIABILITIES" within the balance sheet.  Using the XBRL Cloud viewer, if you click on the report element or fact a dialog box appears and you can see from that dialog box (go to the "Occurrences" tab) that the line item is detailed in another section of the report, "2403402 - Disclosure - SUPPLEMENTAL FINANCIAL INFORMATION (DETAILS)". Go to that section and you see a listing of the pieces which make up that total.  In that list of details you see the line item "Other Non-Current Liabilities" which has the US GAAP taxonomy concept "us-gaap:LiabilitiesNoncurrent".  Oops!  That is clearly a mistake in concept selection.  You can see for yourself that in the US GAAP Taxonomy, this means something different than how P&G is using it.

3M, in their 10-K filing, created an income statement and in that income statement they provided the line item "Total interest expense - net".  The US GAAP Taxonomy concept used to express that line item is "Nonoperating income (expense)". Now, I guess that is not so bad, but perhaps "Interest and debt expense" could be another choice. HOWEVER, look closely what is going on.  See the 3M line item "Interest expense".  That concept is the US GAAP Taxonomy concept "Interest and debt expense". What 3M did was use one high-level total concept, repurposed it, and included that high-level concept into the category "Nonoperating income (expense)".  That is a bad, bad thing in my book.  Under no circumstances should a high-level concept be used as a line item within some other high-level concept.  Further, it is a very bad idea to take a concept from one category and use that concept within another category.

As a side note, I know how this sort of error occurs.  What happens is accountants creating SEC filings are presented with a flat list of concepts in software applications when they are trying to find the correct concept to use.  The accountants fail to examine the concept relative to other concepts before they make their selection of concepts.  It is always best to take a look at a concept within its context to other concepts in the US GAAP Taxonomy prior to making your final choice.

There is one final thing worth mentioning about this set of fundamental accounting relations.  Take the term "Assets".  Pretty straight forward, I bet you know what that concept means.  And in the US GAAP Taxonomy, there is exactly one concept which could ever be used to express that fundamental accounting concept, "us-gaap:Assets". And that is the way it should be: one fundamental concept, one  representation of that fundamental concept within the US GAAP Taxonomy.  This is supported by the fact that all 7,160 SEC XBRL financial filings either DID use the concept "us-gaap:Assets" or SHOULD have used that concept (i.e. they had a modeling error, see here for detailed information).

Liabilities also works this way.  As does current assets, current liabilities, noncurrent assets, noncurrent liabilities, commitments and contingencies, and numerous other concepts which fit into this pattern.

However, this is not alwayshow the US GAAP Taxonomy works.  Look at the concept "Liabilities and equity".  You used to have "Liabilities and Stockholders' Equity" and "Liabilities and Partner Capital".  That is 2 US GAAP concepts which represents only one fundamental accounting concept.

Now, evidence of this idea (multiple US GAAP concepts represent one fundamental accounting concept) is the fact that the 2013 US GAAP Taxonomy fixed that problem! If you go to the US GAAP Taxonomy (2013 version) you see that the concept "Liabilities and Stockholders' Equity" was changed to "Liabilities and Equity" and the concept "Liabilities and Partner's Capital" was deprecated and can no longer be used.

Other areas of the US GAAP Taxonomy have not been corrected.  For example, there are multiple "Equity" concepts (stockholder, partner, LLC).  There are other areas where this occurs.

And so now think about querying SEC XBRL financial information and you want to find the concept "Equity" and you don't care whether the entity type is corporation, partnership, LLC, membership organization, proprietorship, or that ever.  You can see how such a query can be complicated by multiple different US GAAP Taxonomy representations of the same fundamental accounting relations can cause issues.

This points to another example of why the fundamental accounting concepts and the relations between those concepts can be useful.  They can make querying the information easier.

Do you see other ways this fundamental accounting concepts/relations layer can be useful?  If you do, please let me know.