Digital Financial Reporting

XBRLogic.com published their Q4 quality scores.  The bottom line is that there has been no change really.  Business as usual. This PDF provides a summary of this information, details, and explanations.

Why did I stop providing my fundamental accounting concepts quality score?  Because (a) XBRLogic is providing something quite similar and (b) all those who wanted to fix their issues did so.  Here was my last post, March 31, 2019.

You perhaps only have to look at one web page to see the opportunity.  Here is that page:

Cross reference

The point of this blog post is to show a new modern approach to creating a financial reporting scheme.  What changes?  Lots of machine-readable information in the financial reporting scheme.  Be it a general purpose financial statement or a special purpose financial statement or even an internal financial report creation process; machine-readable information can add value in many ways for creating or consuming reported financial information. 

This is true whether the report itself is human-readable or machine-readable.  Probably the most benefit is using the machine-readable rules to prove the financial reporting scheme is working as expected and to communicate more clearly (i.e. representing key aspects of financial reporting schemes in machine-readable ontology-like thing).

Every financial reporting scheme has five fundamental things in common.

First, at the foundation of every financial reporting scheme is the double-entry accounting model.  Simply stated, that model is: DEBITS = CREDITS. It is a mathematical model. (If you don't understand this model, this video is helpful!)

Second, building on the double-entry accounting model is the accounting equation: Assets = Liabilities + Equity.

Third, every financial reporting scheme defines a core set of interrelated elements of a financial statement that are fundamentally grounded in some form of the accounting equation (i.e. it could be Assets - Liabilities = Equity). For example, the Financial Accounting Standards Board (FASB) defines these ten elements of a financial statement in SFAC 6; Assets, Liabilities, Equity, Comprehensive Income, Investments by Owners, Distributions to Owners, Revenues, Expenses, Gains, Losses.  Then, additional elements are defined based on that core set.

Fourth, every financial reporting scheme has what is called "articulation".  Articulation is the notion that the elements of a financial statement are interrelated and therefore depend on one another and so the four core statements; the balance sheet, the income statement, the changes in equity and the cash flow statement are all mathematically interrelated.  (This is explained very methodically by the FASB in SFAC 6; see section "Interrelation of Elements—Articulation" on pages 21 - 22.)

Fifth, every financial report has inherent variability that is the result of explicitly allowing intermediate components of a financial report (i.e. subtotals) to be combined in appropriate but perhaps different ways depending on the needs of the reporting economic entity. (See paragraph 77 on page 47 of SFAC 6.)

Because of the inherent mathematics and logic of financial reporting schemes they lend themselves beautifully to computer-based processes.  A financial report is a logical system. I have taken the time to both prove this idea and to perfect the idea by representing six different financial reporting schemes in machine-readable XBRL.  Now, none of these is 100% complete, they are sophisticated enough working prototypes.  But they definitely can be used to communicate the essence of the idea and they are robust enough to make certain that everything works. Here are the six best plus others in the works: (all XBRL is tested using four different XBRL processors)

• US GAAP to SEC Financial Reporting Scheme: Financial reporting by public companies using US GAAP to report to the SEC.
• IFRS to SEC Financial Reporting Scheme: Financial reporting using IFRS FULL to report to the SEC.  (International Financial Reporting Standards).
• IPSAS Financial Reporting Scheme: Based on IFRS, International Public Sector Accounting Standards (IPSAS) is intended to be used by governments and other public sector entities around the world.
• FRF for SMEs Financial Reporting Scheme: The AICPA created the Financial Reporting Framework for Small- and Medium- Size Entities (FRF for SMEs) framework to provide something of high quality but not as complex as US GAAP.
• MINI Financial Reporting Scheme: This is a working proof of concept that is 100% complete and rock-solid.  It is used to test ideas and to make sure everything is working as expected.  This is particularly useful for special purpose financial statements and internal financial reporting.
• XASB Financial Reporting Scheme: This is also a working proof of concept that is used for testing.  This is not totally complete, but it does have a bunch of important test cases.

Here are others in the works:

• US GAAP general reporting: Financial reporting by private companies using US GAAP generally.
• Not-for-profit general reporting using US GAAP: Financial reporting by not-for-profit entities using US GAAP.
• IFRS to ESMA using ESEF Financial Reporting Scheme: Financial reporting using IFRS FULL to report to the ESMA.
• IFRS for SMEs general reporting: Financial reporting by unlisted private companies using IFRS for SMEs generally.
• GAS to create CAFR: Financial reporting of CAFR (Comprehensive Annual Financial Report) to U.S. Census Bureau using Governamental Accounting Standards (GAS).  Provided by GASB.

There are three other test cases worth mentioning because they can really help you get your head around XBRL-based digital financial reporting.  The first is the accounting equation test case. This is really good because it helps you see the big picture even though the example is small.  Expanding on the accounting equation slightly is the SFAC 6 test case.  Expanding a little more is the common elements of a financial report of four statement test case. All of those small test cases are incrementally expanded and explained in this document that proces that all these work effectively and correctly. And this sophisticated example of an XBRL-based digital financial report ties everything together into a nice little bow.

All of the above is based on the forthcoming OMG Standard Business Report Model (SBRM).

Suffice it to say that all of this is based on methodical, rigorous, and thorough testing. Everything is based on proven best practices.  Rather than repeating the mistakes of others, I learn from their mistakes and avoid them.

Why would I take the time to do all this?  You won't get it unless you have the right background understanding. Once you understand that, and then you watch this PBS Front Line Video, In the Age of AI, you will undoubtedly understand.

Want to learn more?  Download this free software application and look at the examples.  Check out Intelligent XBRL-based Digital Financial Reprting.  I will be improving that resource over the next year.  Something missing that you need? Let me know and I will try and help you find it.

There are few things that are as precise, elegant, carefully engineered, and lovingly put together than a Swiss watch.  And that is how an XBRL-based digital financial report should work - like a Swiss watch.

In their most current XBRL Taxonomy Development Handbook, XBRL US provided a picture of a set of gears working together (see page 64) and say that it is "vitally important to engage all relevant parties during the [taxonomy] development process".  I could not agree more.

via GIPHY

The SWIFT Institute used the metaphor of an orchestra and pointed out that the stakeholders need somewhat of an orchestra leader to put the music together.  The paper provides excellent definitions of "harmony" and "dissonance" and explains the relationship between stakeholder harmony and information quality. This is very similar to the gears metaphor.

There are leaders and there are those who lead.  Leaders hold a position of power or authority, but those who lead inspire us.

Be one of those who lead.

CPAs will play a significant role in making sure XBRL-based digital financial reports "work like a Swiss watch" and that the "gears" are not grinding or skipping but rather running smoothly.  CPAs will be the orchestra conductors in the digital era to help make sure the financial reporting supply chain "music" is what it needs to be.  I believe that financial reporting can be significantly improved in terms of both efficiency and effectiveness.  Why should accountants toil in the salt mines each month to get the important financial information out to those that need it?

Digital is both the problem of increased information volume, information complexity, and the resulting information overload; and the solution to that volume/complexity/overload problem.  Rekeying information might not become a thing of the past era, but it will be significantly reduced.  Human/computer collaboration will be the way accounting, reporting, auditing, and analysis is done in the future.  Can you imagine doing accounting without a calculator?

Digital financial reporting can work like a Swiss watch if you know now to do it. Learn how to do it right.  Practice does not make perfect; perfect practice makes perfect.  Up your digital maturity. Understand that this is a paradigm shift, not an incremental innovation.

Inspire someone!

via GIPHY

XBRL US has published the XBRL Taxonomy Development Handbook.

I have use the best-practice based method I developed and framework I have created to construct a high-quality sophisticated example of an XBRL-based report.  This report happens to be a financial report; but it can help you see to possibilities of general business reports also.

You can interact with this sophisticated example XBRL-based report by:

• Looking through this human-readable representation created by a commercially available software application that is currently available.
• Loading the XBRL instance into the software application of your choice.
• Downloading the noncommercial working proof of concept software application Pesseract and using that application.
• Downloading and using the open source Arelle XBRL processor.
• Using the XBRLQuery web service.
• Downloading the ZIP file with the XBRL instance, XBRL taxonomy, XBRL linkbases, XBRL formulas, etc.
• Looking at this auto-generated Inline XBRL document or this human readble HTML version of the same Inline XBRL format (this has some issues related to improperly formatted XHTML, I will eventually fix those)

The techniques that I use are based on about 10 years of poking and prodding XBRL-based financial reports that have been submitted to the SEC (thank you public companies SEC!), my knowledge of XBRL, and my accounting knowledge.  A trained observer with the right tools can learn a plethora of information by observing the good and bad patterns of all those public company XBRL-based financial reports.

Here are some key things to understand about this report:

1. This report was validated using four different XBRL processors including XBRL Cloud's processor, UBmatrix XPE 4.0 processor, XBRL Cloud's evidence package, Pesseract, and the UBmatrix Taxonomy Designer.  All give consistent results per XBRL syntax and XBRL formula validation.
2. There are 53 XBRL Formulas that verify 123 different facts with consistent results (UBmatrix XPE; XBRL Cloud). Most of these XBRL formulas are roll forwards, member aggregations, or cross dimensional computations that XBRL calculation relations cannot explain or verify.
3. There are 39 sets of XBRL calculation relations all of which are verified to be consistent with expectation across all software applications. (UBmatrix XPE; XBRL Cloud)
4. There are 60 different disclosures and all 60 disclosures have rules that explain how the disclosure should be created and all disclosures are created as document by those machine-readable rules (Pesseract).
5. There are 7 high-level fundamental accounting concept relations that are verified to be consistent with expectation (Pesseract).
6. There are 55 sets of reporting checklist rules that verify that all required disclosures are provided, all disclosures that must be provided if a specific line item are provided, there are matching sets of level 1 notes text blocks, level 2 policy text blocks, level 3 text blocks, and level 4 detailed disclosures (Pesseract).
7. All of the XBRL presentation relations are tested against a set of rules to make sure they are valid relations.  There are 10 relations, all within one report fragment, that are "odd" to make a point.  Look at the representation which (a) is inconsistent with other fragments and (b) is not detected by XBRL validation.  Notice how you have to look at them a bit in order to figure out what is going on.
8. Note that every report fragment is logical and readable.  Now granted, there is room for improvement in the rendering and there are a few cases where a fragment, if moved to a separate network, would cause both separate facts sets to look better than the rendering where the fact sets are combined.
9. Note that 100% of the reported facts are properly mathematically interrelated, that there is no duplication of facts in the XBRL instance, and there are several rather unique use cases.  For example, there is a correction of an error (i.e. the same fact as originally reported containing an error and restated where the error has been removed).  Reporting information using two different reporting scenarios used. (actual and budgeted)  Note that all the mathematical relations tick-and-tie; cross caste-and-foot.  And 100% of these mathematical validations are visible in the report (the green) and can be seen to be correct.

Now, consider something.  Imagine thousands of these high-quality reports inside a repository of reports of some sort.  Here is another view of that repository.  None of this has to be "technical" or hard in any way.

If you are having trouble understanding that business reporting can use XBRL because this example relates to financial reporting, check out this Lorem Ipsum example. (i.e. any words or numbers can be represented using XBRL, not just financial words and numbers)

If you are considering purchasing XBRL-based digital financial reporting related software; check this example out throughly and then have the software vendor load this XBRL-based report and compare that software with what you see here.  Don't be an ignorant buyer.

There is a lot that can be learned by exploring this report.  There are subtleties and nuances that abound that you do not want to miss understanding.  I am thinking about doing a weekly digital financial report study group.  Let me know what you think of that idea.  Send me an email.