Digital Financial Reporting

While those SEC XBRL financial filings are far from perfect and not really good enough for automated reuse of the information by financial analysts and investors; that financial statement database is a literal treasure trove of value to professional accountants. And I don't mean just external accounting managers of public companies.  I mean the hundreds of thousands of CPAs who create private company financial statements.

There is already one commercial application that I am aware of which makes use of the XBRL-based database of public company financial reports: GAAPWatch which was created by XBRL Cloud. I tried GAAPWatch and even created some videos which shows the sorts of things you can do with GAAPWatch.

I created a tool which is based on the same web service as GAAPWatch. I took that tool which was origionally created for analyzing the quality of the XBRL-based financial information and tweaked it a little bit and now I have an incredible research tool. To do queries, I cached some other information locally on my computer so that I could search through individual digital financial reports using some techniques which I created.

Similar to GAAPWatch, I can view the pieces of a financial report and get to those individual pieces by searching on the characteristics of reporting entities or by searching for specific disclosures contained within a financial report.

But what I can also do is search for individual facts which are reported in a financial report and find filers who reported those facts, see how and where they were reported, compare and contrast how different reporting entities provided those disclosures, and compare the relationships between reported facts. Those queries are done against the locally cached information to make the queries run significantly faster.

So here are some fairly rudimentary examples that I think provides insight to the possibilities which are available right now. (This ZIP file contains Excel spreadsheets which has the information I pulled from the set of SEC financial filings I am working with.)

• Say you wanted to see how environmental site loss contingencies were being disclosed. First, you would have to find reporting entities which had such disclosures.  Then you have to find the disclosure within the report.  Then you can read through the disclosures and see how specific filers approached the disclosure.  My query discovered 120 such disclosures and the specific location within the report which contained the disclosure.  Press a button, and I can see the disclosure in my application.
• Suppose you wanted to see the relationship between having the line item "Income tax expense (benefit)" on the statement of operations and having an income tax policy provided or whether it is more common to provide the reconciliation between statutory tax rates and the effective tax rates using percentages or amounts.
• Imagine that you wanted to understand the specific sorts of things which are disclosed in the nature of operations for reporting entities who operated within a specific industry.

Research can be done during the process of creating financial report disclosures where, say, private companies can leverage the high-quality financial disclosures within financial reports submitted to the SEC.

The closest thing that I can think of which exists today which is similar is what used to be called Accounting Trends and Techniques which was renamed U.S. GAAP Financial Statements - Best Practices in Presentation and Disclosure which is published by the AICPA.  The benefits of using the SEC XBRL financial filings is that

• the entire process of creating the resource can be 100% automated
• you can have a different version of this disclosure research resource for specific industries as the marginal cost is so low because of the automation
• you don't need to limit the resource to 500 reporting entities or some specific subset of disclosures because it is just as easy to grab information from every reporting entity

But the ability to search through specific reported facts and other information goes far, far beyond what the AICPA's product provides. Eventually software vendors who make software for the creation of financial reports will realize the utility of having this research information directly within software applications used for creating financial reports.  The software vendors will also realize that any aspects of the tools such as the disclosure guides used to jog your memory to make sure you did not miss a disclosure can be automated.  And obiously software can watch over external financial reporting managers to make sure they did not make other mistakes such as computations which don't add up correctly.

Besides making the human readable copies of financial reports better, all those SEC XBRL financial filings will help the general quality of XBRL also improve.

(Here is a video of the application I used to get this information.)

The reporting entities which are creating all those SEC XBRL financial filings tend to lament that all the benefit goes to those using the structured information and that they have to do all the work.  OK, and so people would likely point out that the information is not even that useful because the quality is not good enough.

Personally, I have never held that belief and I am beginning to be able to SHOW that there is not only benefit to reporting entities creating financial reports whether those reporting entities have to report to the SEC using the XBRL format or not.

While I have not been able to connect all these pieces as good as I would want, I am rapidly getting where I want to be.  But here is some stuff I put together as an interim step which show, I believe, the advantages information structured using XBRL provides.

First, take a look at this document: Financial Reporting Best Practices. Take a look at that and the first thing that you might notice is that you don't really see anything necessarily related to XBRL. What I mean is that anyone creating a financial report would find that information useful.  If you are an SEC XBRL filer you might find it even more useful; but even if you don't, it helps external reporting managers in their task of creating a financial report. I am not talking about only public companies.  I am talking about private companies also.

You say no; I already have resources such as this or I already understand how to report a reconciliation of the statutory rate and effective tax rate.  Sure you do.  You have books.  Well, three things about the books: (a) as soon as they are printed they are obsolete, (b) putting the books together is time consuming and therefore expensive, (c) if the information is in the form of a book a computer cannot really read the information and re-purpose the information in other formats.

Now, I really cannot show the true benefit here by putting this information into a PDF.  To get the full experience, you need to have a subscription to a web service or something which enables you to interact with the information more effectively.  Me, I use the XBRL Cloud Edgar Report Information Web Service.  I would encourage you to get a subscription and experiment with it.

I can emulate how interacting with the information would work.  Here is another application of XBRL Cloud which they call "The Evidence Package". Click here or on the image below to go to that application.

Click on image to open interactive application

Click on any of the report elements (the labels on the left) and you will see documentation about the line item, references to the Accounting Standards Codification, and other helpful information.

Think about what is going on here.  You can look at a specific piece of a financial report.  You can add information to those about what the report component is disclosing, you can reorganize the information and not look at the information by who filed it, but rather by what information is being disclosed.

Never, never, never before was it possible to look at information about what is in financial reports in this manner.  All of this is possible because the financial information is structured, in this case in XBRL.  Before financial reports were just one big blob of which a computer could do nothing with.  Now because the information is structured; you can restructure it and use it in lots of new and interesting ways.

What I find even more interesting is that you can use all those SEC XBRL financial filings TODAY!  Quality issues are less critical to accountants researching trying to figure out how to create a disclosure.  Why?  Simply ignore the poor quality report components and use the good ones.

This information is also useful to SEC XBRL financial filers. Why? Great way to see what other filers are doing and how what you create stacks up.

If you have not seen this blog post yet, go back and read it. This helps you see where all this is going and see how easy it is to get at this information.  I created my own software application and I am not even a programmer!

All I do is access URLs on the internet. Here is one of those URLs:

https://eri.xbrlcloud.com/edgar-report-information/rest/entities/0000874292/filings/0001445260-12-000048/components/4676254/rendering/

Again, you need a subscription to use these, but it represents one piece of a financial report.  My software application just interacts with URLs like that which have all that SEC XBRL financial information broken up into useful report components.

For almost a year I was poking and prodding SEC XBRL financial filings at the primary financial statement level mostly in order to understand those SEC filings.

I am not using the techniques which I have perfected to dive into the disclosures.  Many people think that the disclosures are more complicated than the primary financial statements.  Personally, I don't think that is true.  There is more variety in the disclosures. There are a larger number of disclosures than primary financial statements.  But if you understand Digital Financial Reporting Principles; those same principles apply to the primary financial statements and to the disclosures.

Let me walk you through one disclosure. I will take something which is rather straight forward and a large number of SEC filers have. One of the first things to understand about the disclosures (if you are not an accountant, accountants know this) is that most disclosures are provided if you only have specific types of transactions, events, or other circumstances.

This disclosure relates to share based payment awards of equity instruments other than options, restricted stock, and stock units to share-based compensation arrangements. This is a very specific disclosure.  The terms (jargon) are very precise and important.  The simple explanation is that the disclosure is about stock options.  I will provide an overview of 5 different representation approaches used.  Don't focus on the accounting here though. 

Approach 1: This is not bad.  Notice how readable and understandable this is.  The units and values are shown separately.

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Approach 2: This approach is not bad either, but I think the first approach is better because of the headings provided.

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Approach 3: This approach is less desirable in my view because it mixes the units and values (i.e. weighted average price) together.  This is hard to read.

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Approach 4: This is somewhat of a disaster in my view.  Can you read this?  I cannot.

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Approach 5: I like this approach which is similar to approach 1 in that it has the headings which break up the information; this also adds the "[Roll Forward]" to the label which helps a reader of the information that it is a reconciliation between two periods.  But this has a problem.  The second roll forward is not really a roll forward.  It is information about the balances within the roll forward, but in actually the second "[Roll Forward]" does not really roll forward.  Get out your calculators and check it out.

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My vote for the best approach?  #1 is the best.  That could have been improved by adding the "[Roll Forward]" to indicate that it was in fact a roll forward. But, you can tell because of the beginning and ending balances. 

A question you may have is how do I discover all this stuff?  The answer: software.  All this information is structured.  I am not using XBRL to grab this information, at least not directly. Sure, if the information was not structured (in this case in XBRL) this sort of analysis would not be possible.  But, the information is structured.  So, I can write software to do magical sorts of things.

Here is the interface of the application I created:

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I can extract information for any of 1000 disclosures. How? Well, I mapped the each disclosure to the US GAAP XBRL Taxonomy (actually a remodel version of that).  I then use prototye theory to figure out where the disclosure I am looking for is.

Once I locate the pieces that have the disclosures, I use the XBRL Cloud Edgar Report Information web service to provide the renderings.  In my application it looks like this:

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So that is how I get at all this disclosure information.

This is starting to get really useful.  The information structured in XBRL is helpful in understanding the HTML financial reports.  The HTML and the XBRL must be consistent per SEC filing rules. Researching financial reports is a snap leveraging the information structured using XBRL.

More and more people seem to be understanding the potential of software agentssuch as what the media has dubbed the SEC's "RoboCop". For example, "Robocop" on the Beat: What the SEC's New Financial Reporting and AQM Initiative May Mean for Public Companiesexplains what RobCop is and offers the following prudent advice for staying off of RoboCop's radar:

• Get your XBRL reporting right the first time. There are many reports that public companies are continuing to make numerous XBRL coding mistakes. It is likely the AQM will not be able to identify an innocent coding mistake. Such mistakes, however, may land a company on the top of SEC's "Needs Further Review" list. Though the audit firms have apparently steered away from giving advice on XBLR, there are numerous experts and boutique firms that can help provide guidance to registrants. Making errors in this area, even if innocent, is simply not an option in this new era.
• Consider all of your financial disclosures. The AQM focuses on identifying outliers. One easy way to become an outlier is to be opaque with disclosures where other companies are transparent. Take a fresh look at your financial disclosures for transparency and comparability across your industry.
• Listen to the SEC's guidance. As we have noted above there are a number of new SEC programs and initiatives focused on detecting financial reporting irregularities. Stay current on SEC activity to avoid surprises.
• It is not just the SEC. XBRL is available to the public. As a greater library of XBRL financial statement data is created, analysts, investors, other government agencies, media outlets and others will build their own versions of the AQM. Be prepared for greater scrutiny and inquiries from these groups.
• Be conscious of red flags. For example, a change in auditor is thought to be a significant red flag that might warrant further attention from the SEC.

Sure, I think those five key points are very good advice. But don't miss the real message here: business opportunity.

Ask yourself, how will RoboCop and other similar software agents work?  What makes them work? There are two key things that I am trying to get people to see here.

1. Software: Sure, software algorithms make these software agents work.  So yes, you need software. It is not the type of software which most business users are generally accustom to such as, say, Excel.  Excel is actually pretty dumb in terms of understanding the information that is represented in Excel. What I am talking about is software which DOES understand the information it is working with.
2. Metadata: If you have the right type of software but you don't have the metadata you need that software will not be able to do much.  If you articulate knowledge in books or even web pages that computers cannot read and therefore they cannot possibly understand; then you don't get much either.  However, if you properly connect the right metadata or domain knowledge with the right software applications then "magic" will occur.  It is not really magic, it will just seem like magic to those using the software.

Only domain experts can create the correct metadata.  Only domain experts understand what the correct metadata is.  Until one understands what the correct metadata is, the correct software cannot be built.  Now, there are some general tools out there which generally solve problems but because these are general tools they are extremely hard to use.  In other words, they are not practical.

The business opportunity is to put these two pieces together correctly: software and metadata.  It will take both technical professionals and business professionals working on this together to build the correct software.  Once the software exists, then business professionals will construct and configure metadata to make the software act the way they want.  THAT is what will drive software agents such as RoboCop.  Metadata created by business users.

Most business users don't understand what metadata is though.  Nor do they understand why it is important.  But it is.  Understanding what metadata will drive software such as RoboCop and how that software works is a business opportunity.  Understanding RoboCop and creating counter measures to make sure a companies report stays off the RoboCop radar is also a business opportunity.

If you think about the digital financial reporting paradigm and are bound too strongly to the current paper-based financial reporting paradigm, you won't understand this.

Paradigm shift.

Take a good look at that bullet list from the blog post referenced in the first paragraph.  That is a good starting point.  Take a look at this blog post related to detecting accounting anomalies. This is not about XBRL errors, this is about accounting anomalies.  The structured nature of the information enables the paradigm shift.

While financial reporting may be leading other business domains, this paradigm shift is not limited to financial reporting.

Of the 1262 SEC XBRL financial filings in my set of 7160 SEC filings who report equity attributable to noncontrolling interest on their balance sheet, 1226 (or 97%) use the following US GAAP XBRL Taxonomy concepts to report:

• Equity attributle to parent: us-gaap:StockholdersEquity
• Equity attributle to noncontrolling interest: us-gaap:MinorityInterest
• Total equity: us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest

That is like this SEC filer does and as can be seen in the screen shots below:

Equity attributable to parent:

Total equity:

On the other hand, 36 (or 3%) SEC XBRL financial filings do exactly the opposite and use the following concepts:

• Equity attributle to parent: us-gaap:StockholdersEquityIncludingPortionAttributable ToNoncontrollingInterest
• Equity attributle to noncontrolling interest: us-gaap:MinorityInterest
• Total equity: us-gaap:StockholdersEquity

Here is an example of using that approach which can be seen in the screen shots below:

Equity attributable to parent:

Total equity:

Now, it does not make sense to me to have both approaches deemed correct. So which approach is correct?  The approach used by the majority? Well, if one reads the 2013 US GAAP XBRL Taxonomy labels and definitions it is pretty clear that the first example shown, the majority, has this correct.