Digital Financial Reporting

I explained in detail in this PDF why the SEC XBRL financial filing information is so hard to use and how to resolve that issue.  This document is helpful to that end, using the information; but it is also helpful to those designing or otherwise creating XBRL taxonomies because it helps them avoid the same problems.

Fundamentally, getting to the information is trivial and I walked you through how anyone with Microsoft Excel who can write rather basic macros can get at 100% of the information from all those SEC XBRL financial filings.  I even point you to a number of prototype applications you can download, reverse engineer, and create your own applications.  And frankly it is near magical how someone with even my limited understanding of programming can get to each piece of information and there is a lot that you can do with that information.

However, when you try to compare information you run into troubles. As I see the facts you run into so much trouble that you basically have to do a one-to-one mapping between each filing you want to use and some target you desire to use in order to compare two or more filings.

What this means, it seems to me, is that the only way an individual investor is going to get to use that information is if they buy it from some third party data aggregator who sorts all that data out for them, inuring substantial costs in the process and therefore having to charge hefty fees for the use of the information.

Is that really what the SEC intended?

If you look at why the information is hard to use by reading that PDF you will realize that solving this issue is really quite simple.  The FASB and SEC need only do a few rather easy things to do and the information will be easily comparable at a level which would make most people happy, it seems to me.

This is not to say that all comparability problems will be solved.  Those issues will take decades to figure out and relate to the nature of US GAAP and financial reporting in the US as practiced.  The easy way to make the information comparable is to turn US GAAP into "a form".  Then comparisons would be trivial, but the information would not be that rich or meaningful.  At the other end of the spectrum is to continue to give the users free reign to do whatever they desire, extend anything they want, report exactly how they see fit.  That will maintain the richness of and I believe highly valued style of financial reporting as practiced in the US today. Clearly what is reported could use some improvements, what I am talking about is the fundamental nature of public companies reporting to the SEC to tell their story, their way.  That is a highly prized characteristic of financial reporting as I see it.

Is it the case that some hybrid solution can be arrived at?  Some information is closer to that of a form and very comparable, but other sections of the report can be more ad hoc so companies can tell their story, their way.  Can some workable balance be struck between the two extremes?

What do you think the right balance should be?  How do you see the facts?

If you follow this blog you know that I post quite a bit of information. I have taken information relating to working with SEC XBRL financial filings and consolidated it into a single resource: Understanding SEC XBRL Financial Filings which you can get to here.

This resource is useful for more than creating SEC XBRL filings. As this HL7 video points out (see slide 4) you need three things to make interoperability work: technical interoperability, semantic interoperability, and process interoperability. XBRL provides the technical interoperability, the XBRL technical syntax. If used correctly XBRL can provide the semantic interoperability also it seems. Process interoperability I don't really grasp well yet. I don't think XBRL provides that.

So check out this resource whether you work on SEC XBRL filings or not. This resource is not for the XBRL novice. But, it can help beginners or those with intermediate or advanced skills add to their skill set. I know that over the three years that it has taken me to accumulate and grasp this information I have learned quite a lot. Hopefully this will help you.

The FASB and IASB have been working to create a common conceptual framework for financial reporting and the accounting information system which feeds financial reports.

The FASB stated in its publication Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information(a FASB Exposure Draft):

A common goal of the Boards-a goal shared by their constituents-is for their standards to be clearly based on consistent principles. To be consistent, principles must be rooted in fundamental concepts rather than a collection of conventions.

Much of this framework relates to things like recognition and measurement concepts which are very important to the accounting information system as they impact the numbers that will turn up on a financial report.  But, they are not really relevant to the notion of a financial report itself.

There are a number of things in the FASB/IASB framework which are directly related to financial reports. Let me point those out.

Objective of a financial report

First of, something of key importance is the objective of a financial report.  To paraphrase, the objective of a financial report and financial reporting is to provide useful information to capital providers.

Financial statements

Phase Aof the conceptual framwork project defined financial statements a company would report as:

• Balance sheet
• Income statement
• Cash flow statement
• Statement of changes in equity
• Related disclosures

"Related disclosures" can be broken down further, basically a categorization of the disclosures, by the FASB accounting standards codification.  I summarized the topics here and mapped the topics to the US GAAP taxonomy. I would venture to break "related disclosures" into the following based on the FASB accounting standards codification and the US GAAP Taxonomy:

• Organization
• Consolidation
• Basis of Reporting and Presentation of Financial Statements
• Significant Accounting Policies
• Disclosures, Financial Statement Accounts
• Disclosures, Broad Transaction Categories

Elements of financial statements

Financial statements are broken down into 10 elements by SFAC 6.

• Assets
• Liabilities
• Equity
• Investments by owners
• Distributions to owners
• Revenues
• Expenses
• Gains
• Losses
• Comprehensive income

Other places have definitions of these elements of a financial statement such as here.

Seeing the "financial report schema"

It is looking more and more like there is a "financial report schema" hiding within US GAAP and IFRS. It seems to me that this schema is a basis for defining what a financial report looks like, somewhat of a blueprint. This blueprint or schema can be read by a computer software application to validate the semantics of the financial report.  Humans use this schema today in the form of a disclosure checklist. But I believe that this schema can also be used by software applications to verify SEC XBRL financial filings.

Not only would SEC XBRL financial filings follow a schema, but the US GAAP Taxonomy should follow this schema also.  The schema may be different for different industries.  For example, the schema of a balance sheet is different for a classified balance sheet and an unclassified balance sheet.  The schema is different for a single step income statement and a multi-step income statement.  The schema is different for a partnership and corporation.  But, financial reports are not random.  They do have schemas.

David Wenberger's book Everything Is Miscellaneous points out two important things:

• That every classification scheme ever devised inherently reflects the biases of those that constructed the classification system.
• The role metadata plays in allowing you to create your own custom classification system so you can have the view of something that you want.

As we move from "atoms" to "bits", people drag along the rules which apply to atoms and try to apply those rules to solve problems in the world of bits. This, of course, does not work. Everything Is Miscellaneous has countless examples contrasting the physical organization of atoms (such as books in a book store) and the organization of books digitally (like Amazon.com).

Third Order of Order

There are three orders of order:

• First order of order. Putting books on shelves is an example the first order of order.
• Second order of order. Creating a list of books on the shelves you have is an example of second order of order. This can be done on paper or it can be done in a database.
• Third order of order. Adding even more information to information is an example of third order of order. Using the book example, classifying books by genre, best sellers, featured books, bargin books, books which one of your friends has read; basically there are countless ways to organize something.

So what does this have to do with the US GAAP Taxonomy? It should be built to allow others to reorganize it as they see fit. Now, don't jump to any conclusions here.  I am not saying that the US GAAP Taxonomy is random and can be organized every which way and still be meaningful. There is key data points which will always be true, these are rules which define the information's financial integrity. Many of these "key data points" don't exist in the US GAAP Taxonomy today. These are just relations between pieces of the taxonomy which relate to financial reporting. Things like the balance sheet must balance.

Third order removes the limitations which people seem to assume exist when it comes to organizing information. Weinberger says this about the third order of order:

In fact, the third-order practices that make a company's existing assets more profitable, increase customer loyalty, and seriously reduce costs are the Trojan horse of the information age. As we all get used to them, third-order practices undermine some of our most deeply ingrained ways of thinking about the world and our knowledge of it.

The US GAAP Taxonomy was built by the accounting standards setter, the FASB. It was built by accountants. It is a consensus-based product. Not one SEC XBRL filer uses the US GAAP Taxonomy as is to file with the SEC.  Every SEC reorganizes the US GAAP Taxonomy.

But the US GAAP Taxonomy is not built to be reorganized. The structure of the taxonomy is more like a book.  Can the US GAAP Taxonomy be reorganized? Of course it can. But it is certainly not optimized to allow for reorganization and reorganization is not even mentioned in the design characteristics. As such, it will cost more and be harder to create and maintain these reorganizations.

So how do you make it easier to reorganize? Many smaller pieces which can be put together as needed is vastly easier for a computer to deal with than having one large piece and trying to break that piece apart.  That is one example of what can be done.  Another is communicating the metadata which exists in the taxonomy, for example the information modeling patterns employed.  A third is to make the existing metadata real metadata, rather than burying it in the labels of the concepts. Another is to add more metadata.

As accountants, analyts, and others use the US GAAP taxonomy ways to make the taxonomy easier to reorganize will become apparent. Just keep the idea of the third order of order in the back of your mind.

And if you can, check out Everything is Miscellaneous.  You can read an insightful review here. You can read the prologue here and read chapter one here.  You can read multiple chapters here at Google books.  You can buy it on Amazon.com here.

I have been struggling and struggling trying to figure out the best way to communicate some things I have been trying to communicate and have settled on a number of model SEC XBRL filings to articulate the message.  You can find the first model SEC XBRL filing here. (If the site is slow, check back; the hosting people are doing an upgrade or something and the site has been slow.)

The key thing that I am trying to achieve is to show CPAs how to correctly model an SEC XBRL filing from an information model integrity perspective. The message is that:

• the balance sheet, income statement, cash flow statement, statement of changes in equity are tightly intertwined
• the policies and disclosures provided details which sometimes are stand alone, but sometimes are details of the aggregated summaries on those primary financials
• properly expressing these relationships from an information modeling perspective allows for features such as "drill down" and moving from one area of the statement to another area
• paper-based and document centric notions such as "presented on the face of the financials" get in the way of getting the most from XBRL

We are rapidly moving from the two dimensional medium of paper and electronic paper to a more feature rich model which leverages things like the multidimensional model. I have heard a few people use the term "model driven reporting".

What I am trying to do is point to specific issues in order to highlight the issues so CPAs and others in the financial reporting supply chain can figure out the best way to apply XBRL to financial reporting.  How XBRL is used is a choice. Information about the possibilities helps get to the appropriate answers, all things considered.

So, I am creating a series of model SEC XBRL financial filings to point out some things. I am starting with a "semi well modelled XBRL SEC filing" to make some specific points.  That is the model above.

This PDF file describes the model SEC XBRL filing.  It provides a narrative which shows how things are tied together and certain choices which must be made by SEC XBRL filing creators.  I submitted the model to the SEC Previewer which shows the resulting renderings.

You can make your own way through the model, here are some suggestions on getting the most of the model and the key points I want to articulate:

• The financials are intertwined.  This XBRL formulas validation report results shows how interrelated. You can go look at the XBRL formulas themselves, but they can be hard to read without a good application.
• Look at the financial as the interrelated fact tablesthat they are. The meta data of one fact table needs to correctly relate to other fact tables in order for the validation report to show no errors.  Every SEC XBRL filing needs to be properly articulated for the information in the filing to be useful.
• Properly articulated information results in properly rendered SEC XBRL filings. Walk through this Excel spreadsheet to see how a fact table is turned into a human readable rendering.
• These relations will be much easier to see when good software exists for viewing and comparing SEC XBRL filings.  By looking at these details you can see the impact.  If you are not comfortable at the detail level of XBRL, try and use the Firefox XBRL viewer addon to read the XBRL instance. It does not render the model very well, but it does show you some of the drill down capabilities and how a financial report will be more dynamic in the future.
• Go grab the ZIP file (line "I") from the model's home page and run it through the SEC previewer yourself.  Edit the XBRL taxonomy and XBRL instance and see how the SEC previewer rendering changes. Notice how the rendering is better if you have many small pieces rather then fewer larger pieces.

(Note that this model consciously points to some label linkbases where others should be used for an actual SEC filing.  I have to do this due to the taxonomy editing software I am using.  That causes one EFM validation error, I realize that. The final version will have that adjusted to use the proper label linkbase files.)