Digital Financial Reporting

Sometimes when you look at something just slightly differently a whole new world opens up. To help accountants understand the benefits of classification, I built this working prototype, remind accountings of financial reporting's conceptual framework, and explain the benefits of classification below.

Sturdy structures are built on sound foundations.  Financial reporting has a conceptual framework which serves as the foundation.  Accounting students learn about financial reporting's conceptual framework in intermediate accounting.  One part of that conceptual framework, first described by FASB's CON 6and then revised by SFAC 6, defines 10 elements of financial statements. These 10 elements are described as "the building blocks with which financial statements are constructed - the classes of items that financial statements comprise."

Yet there is no notion of classes ever referred to in the US GAAP XBRL Taxonomy. Why is that?

Why do some people refer to everything in the US GAAP XBRL Taxonomy as a "tag"? I pointed out that there are different categories of report elements in the US GAAP XBRL Taxonomy in a prior blog post: network, table, axis, member, line items, concept, abstract.

SFAC 6 points out that financial statements are made up of 10 different elements: assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, losses.

Yet, you cannot go to the US GAAP XBRL Taxonomy and have a computer return all the assets.  (But you can go to iTunes and limit a search by genre.)  Wouldn't such a search capability be helpful in making use of the US GAAP XBRL Taxonomy? Certainly.  And if classification were better leveraged even more benefits would be realized.

A classification scheme is an arrangement of types or sets of things into useful groups. SFAC 6 elements are an example of such groups.  'Assets' is one group.  'Revenues' is another group.  Something cannot be both an asset and revenue.

Groups, or classes, are related to other groups. For example, the accounting equation 'assets = liabilities and equity', is an example of a relation between financial report elements.

Now, the 10 elements defined by SFAC 6 are not sufficient for the US GAAP XBRL Taxonomy, but they are a good starting point.  Assets can be broken down into current and noncurrent assets.  Liabilities can similarly be broken down by current and noncurrent.  Revenues and expenses can be broken down by operating and nonoperating.  SFAC 6 does not really address cash flows which can be broken down into operating, financing, and investing.

My poking and proding of XBRL-based public company filings revealed an initial set of 51 fundamental accounting concepts and 21 relations between those concepts.  That initial set expanded to about 71 fundamental concepts when I started to consider the different ways entities report.

So while the number of classes is certainly higher than 71, consider the 71 as perhaps a starting point.  If you look at the classes you start to notice some things.

• Some classes have lots of members such as current assets; others have only one member such as operating income (loss).
• Some classes are required to be reported such as entity registrant name; others are not required such as total noncurrent assets.
• It makes no sense to allowed certain classes to be redefined or extended; others seem to lend themselves to being redefined or extended.
• Some can perhaps have subclasses of additional detail added such as with current assets; others make no sense to have additional subclasses added such as operating income (loss).

Basically, when you group things into classes; then the patterns of each group begin to emerge.

Another significant flaw in the US GAAP XBRL Taxonomy is that for the most part the type of relation between one report element and another is exactly the same, "parent-child".  While it is true that calculations relations and definition relations do provide more information, few people understand and therefore few respect the relations.

By way of contrast, consider these sorts of rather common potential relations:

• Element-class
• Class-subClassOf
• Class-equivalentClass
• Class-sameAs
• Class-differentFrom
• Class-disjointWith
• Class-complementOf
• Class-inverseOf
• Class-unionOf
• Class-intersectionOf
• Whole-hasPart
• IsPartOf-whole

You may or may not understand the specifics of those sorts of relations. (If you want to understand relations better, this is a great overview.)  Basically it all boils down to this: the richer the information, the more machines can do for humans.

Classification is really a type of relation.  The more useful and diverse the information is about relationships between report elements, the more a machine such as a computer can do to help users of the machine.  It really is that straight forward.