I have mentioned the idea of report frames a while back. I don't know if report frame is the appropriate word to use, but that is the best word I have come up with so far. Explaining report frames will help you understand exactly what they are.
One of the problems with the fundamental accounting concepts and the relations between those concepts (old version) is that there was only one set of fundamental accounting concepts and one set of relations. The reality is that there are a number of sets of concepts and relations.
Now, this does not mean that any of the existing relations are invalidated. And it does not mean that the original set is not useful. The original set is very, very useful to the 85% of companies who are commercial and industrial companies who follow the most common approaches to reporting their financial information. But what about the other 15% that are not commercial and industrial companies? What about the license reporting entities have under US GAAP to be flexible?
Here are three examples of what I mean by report frames: (the nice renderings are complements of XBRL Cloud)
- Commercial and industrial company which reports using a multi-step income statement
- Interest based revenues used by a bank
- Insurance based revenues used by an insurance company
An economic entity reporting under US GAAP has some artistic license to tell their story their way. But this artistic license is not infinite nor is it random. You are not going to find any (or many I should say many) commercial and industrial companies reporting using an unclassified balance sheet. Why? Because the reporting rules state that you MUST provide a classified balance sheet which breaks out assets and liabilities into their current and noncurrent portions. But banks and insurance companies do provide unclassified balance sheets, not breaking out current and noncurrent assets and liabilities.
If you look at the income statements of the three examples, that is where most of the differences are. In fact, the most differences are within the section before "Income (loss) from Continuing Operations Before Tax". If you look at the balance sheets and cash flow statements, they are all very similar accept for the classified or unclassified assets and liabilities.
How many report frames are there? Well, I don't know. But I am going to find out. My best guess right now can be seen here in this index of report frame codes. I grouped my test set of 6,674 public companies into 122 report frames. But about 50 of those report frames have only 1 or 2 reporting entities. About 86% of reporting entities fit into 10 report frames.
What I can guarantee is that every reporting entity will fit into a report frame. Some of those report frames might have only one reporting entity. A handful of report frames will have the majority of reporting entities.
The aspect of digital financial reporting that I am looking at here is driven by common sense, rational thinking, empirical evidence, logic, and so forth. There is zero judgement involved. This analysis is about observing what a public company is doing, comparing what they are doing with what others are doing, and noting consistencies and inconsistencies. Basically, if there is no specific explainable reason for something to be inconsistent; then why would it not be consistent?
Now, the judgment comes in the next layer of analysis. So, for example, I pointed out the variability in how public companies report income (loss) from equity method investments. Is that variability useful or a problem? Well, you tell me. That requires professional judgement. I, personally, have enough professional understanding understand that line item to a degree; but I do not have the professional understanding to make the call as to whether all those options public companies use make sense. There are some accountants that I have talked to who say "income (loss) from equity method investments MUST ALWAYS BE REPORTED AFTER TAX!!!" They insist that is the only alternative. Clearly that is not the only alternative if public company financial reports don't all report using that approach.
Now, I don't know why the variablity exist. But I do know that asking WHY this variability is necessary is a very good question. Was the variability:
- a conscious choice allowed by those creating the reporting standards?
- an unintended mistake caused by not paying enough attention to details?
But I can tell you this. You will not find income (loss) from equity method investments reported as part of current assets. It will never be included in net cash flow from financing activities. That is not where it goes. Extreme example? Yes. To make a point. The relations between concepts follow logical, rational, sensible rules of US GAAP. Most of these rules are not disputed. Some are disputed. Some "artistic license" is allowed by external financial reporting managers. Some is not.
Machines can do a really good job of checking stuff what is not in dispute. You simply need to put the rule into a form that a machine can understand, and then the machine can do really useful things. The fundamental accounting concepts are just the tip of the financial reporting iceberg.
Check this out: Future minimum payments under capital leases
These ideas apply to disclosures also. Think automated disclosure checklist. How much can be automated? Well, I don't know. But I will find out.