Updated Financial Report Semantics and Dynamics Theory
Sunday, July 20, 2014 at 06:37AM
Charlie in Becoming an XBRL Master Craftsman

In his book Models. Behaving. Badly. the author Emanual Derman points out:

Theories discovered by great leaps of individual insight eventually become transformed into formulas anyone can learn.

Not that I think we are there yet, but we are getting closer. It takes hard work to master a model or create a theory.  A creator is attempting to discover the seemingly invisible principles that hide behind appearances. Theories don't simplify. Theories describe the principles by which the world operates. A theory is characterized by its intent: the discovery of essence.

Theories make things easier to understand.  Theories articulate rules that anyone can follow.

Rene van Egmond and I have been collaborating, trying to figure out how to properly apply XBRL to financial reporting since the very first XBRL International meeting in 1999.  Rene has a strong technical background, I have a strong financial reporting background. We both know people all around the world who know bits and pieces about XBRL.  We have both looked at this information attentively.  We have both looked at it closely.  We have both looked at it over, and over, and over. I was funded by UBmatrix to do nothing else but understand XBRL for over 12 years and took full advantage of that opportunity.  I worked with world class accountants on creating both the IFRS and US GAAP XBRL taxonomies. I was lucky.

Rene and I put our knowledge together to create the Financial Report Semantics and Dynamics Theory two years ago. We are in the process of updating that document, the update which is a work in progress is available here.  Suggestions, feedback, and other comments which lead to improving the document are greatly appreciated.

Nothing significant has really changed in this document. We are mainly honing and tuning. What is significant is that there are two commercial implementations which make use of the model of a financial report proposed by this document: Edgar Report Information web service of XBRL Cloud and SECXBRL.info of 28msec.

The most interesting of the two is SECXBRL.info because anyone can see the implementation for free because 28msec makes the DOW 30 information available for free. The XBRL Cloud implementation costs $9.95 per month to use.

Neither of these impelmentations provides a complete financial report model processor.  Both focus on the underlying information which is the first step. Both implementations are a big step in the right direction of providing real value to business users and prove the model.

Another important thing to understand is that the partial proof which was undertaken in the document has been repeated two more times and results are consistent with that first partial proof. Basically, SEC XBRL financial filings prove this theory.

"What?", you ask. "That seems to be a contradiction.  What good is the Financial Report Semantics and Dynamics Theory if SEC filings follow that theory but the quality of SEC filings is so poor?  How does that compute?"

Well, you can see what is going on if you have a look at the Digital Financial Reporting Principles document or if you look at the Understanding Minimum Processing Steps for Effective Use of SEC XBRL Financial Filing Information document which explains how to look at certain specific details of SEC XBRL financial filings.

Basically, this is a TWO step process, not a ONE step process.  You don't just blindly consider the SEC filing.  You must consider the filing itself and the CORRECTNESS of the thing that you are looking at in the filing.  The perfect example of what I am talking about is the part of the theory which says "Assets = Liabilities and equity" because I checked 100% of the population of SEC XBRL financial filings.

Let me walk you through this so that you are clear as to what I am saying.

First, I wanted to pick something which was absolutely uncontroversial and probably had the fewest errors so that I can test 100% of the population.  That is why I picked "Assets = Liabilities and equity".  The accounting equation. No rational accountant disputes this fact.

Second, you apply pure logic.  Nothing subjective, nothing which can be remotely disputed; logic and common sense.  Either an SEC filing's current balance sheet balances or it does not.  This is the process of seeing if the balance sheet balances:

  1. You have to have the financial report with the information in it.
  2. You have to figure out the accounting entity or "entity of focus" to use from the report.
  3. You have to figure out what the current balance sheet date is of that report.
  4. You want to get the correct concept(s), two concepts in this case, "Assets" and "Liabilities and equity" from the report.
  5. You want to be sure that you don't get the wrong facts, the incorrect reporting scenario or some other aspect which you did not want.
  6. You want to see if the two concepts have the same value, see if the balance sheet balances.
  7. You repeat this process for 100% of the population of reports.

You perform those steps and you look at the results.  I have performed this task numerous time, here are the results for the last time.  On page 7 you see the results for this one test. 

Of 6,674 SEC filings, I was able to obtain 6,674 reports (#1). I was able to figure out the "entity of focus" for 6,622, all but 52 (#2). I manually looked at all 52 that I could not discover the entity of focus for.  Because of the process I was using, the error related to either not finding the entity of focus (#2), not being able to figure out the current balance sheet date (#3), or not being able to find the concept "Assets" or "Liabilities and Equity" (#4). Common errors included representing the entity of focus incorrectly, an inconsistent articulation of the balance sheet date, the wrong current balance sheet date, the filer incorrectly creating an extension concept for expressing "assets" or "liabilities and equity", or using the wrong concept from the US GAAP XBRL taxonomy such as "us-gaap:AssetsNet" to express "Assets".  Basically, every fact was accounted for and I could prove that they were correct or that they had an error.

For the 6,622 where the facts were found, I found the concept "assets" and I found the concept "liabilities and equity" and the two fact values were the same which is what I expected for 6,593. That left 29 filings where the balance sheet did not balance.  I looked at each of those manually and found that either the filer was using a "tolerance" (i.e. they had a small rounding error), they transposed numbers in their report, they provided the wrong fact in their XBRL which did not match the value in the HTML, or they simply make a mistake and their balance sheet did not balance.

And so, 100% of the set of filings was accounted for. Of the set, on ever occasion "assets" SHOULD have equaled "liabilities and equity" or it ACTUALLY DID.

My hypothesis was correct!  Balance sheets balance.

OK, so the logic seems to work.  Can the same logic be applied to other situations?  Well, turns out that there are plenty of situations where the logic can be applied.  First, all the things in the Financial Report Semantics and Dynamics Theory.  That is WHY those things were put into the theory, BECAUSE they apply.

How do I know these things apply?  Well, go read the FASB conceptual framework of financial reporting.  If that is too hard, the Wiley US GAAP guide and the intermediate accounting text book (a) explain the conceptual framework in terms which are a little easier to understand and (b) they are likewise consistent with the Financial Report Semantics and Dynamics Theory.

Digging in a little further, you see other logical and sensible situations articulated within the Digital Financial Reporting Principles document which you would always expect to be true. You can summarize this stuff and organize it into what I am calling a digital disclosure checklist.

Folks, this is stuff that accountants do today! Now, two things are going on.  First, external financial reporting managers are simply misapplying XBRL. Here is an uncontroversial example of that.  Can a fact be both a finite lived and an indefinite lived intangible asset at the same time?  Or course it cannot.  But that is exactly what this filer is saying in this disclosure. This has nothing to do with someone's opinion.  XBRL works in specified ways (i.e. the XBRL Specification is called a specification for a reason).  You don't get to make stuff up.  Besides, suppose you could just make stuff up.  How would that work for exchanging information?

Am I seeing things incorrectly? If I am, please enlighten me.  All Rene and I are trying to do is create the best, most elegant and well crafted work that we can.  Is there some more logical, rational approach which works and all those SEC XBRL financial filings are really right, it is just that no one understands how to interpret them?  Something else, some other theory? Some other model?

If someone knows about some other theory which explains what is going on, please enlighten us.  Alternatively, if you are looking for some way to wrap your head around what is going on with SEC XBRL financial filings, Rene and I hold out to be a model what works.  Leverage our formula. Our formula is proven by SEC XBRL financial filings themselves and by two commercial implementations of the base model.

Any ideas or other feedback to make this theory even better would be gladly accepted.

Article originally appeared on Intelligent XBRL-based structured digital financial reporting using US GAAP and IFRS (http://xbrl.squarespace.com/).
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