Digital Financial Reporting

Analysis of the details of why the roll forward computations of the cash flow statement shows some very interesting results.  Also, the results are very encouraging because they show a very finite and solvable set of issues.

The details of my analysis can be found here. This test is explained on this page, it is item "C" on that list. To quickly summarize, what I did is create an XBRL Formula to test the cash flow roll forward to see what would happen.  That formula is "beginning balance of cash + changes in cash = ending balance of cash" per the cash flow statement.  I ran this against 403 filings.  I expected two "satisfied" results from each filing. If I did not get that expected result, I then went on to find out why.

Here is what I found for the 403 filings:

• 348 filings showed two satisfied formulas, which is what I would have expected
• 15 filings used some other concept than the concept provided by the US GAAP Taxonomy cash flow statement (us-gaap:CashAndCashEquivalentsAtCarryingValue).  These included: us-gaap:CashAndDueFromBanks, us-gaap:Cash, us-gaap:CashCashEquivalentsAndShortTermInvestments, us-gaap:CashCashEquivalentsAndShortTermInvestments
• 9 filings put the concept us-gaap:EffectOfExchangeRateOnCashAndCashEquivalents in a different place than the US GAAP Taxonomy in the calcuation (see this blog post)
• 8 filings did something really nasty, a bad practice in my book, but creating distinct concepts for the beginning and ending cash balances, rather than following what the US GAAP Taxonomy does literally hundreds of times which is creating one concept and using context to differentiate the balances at different periods
• 4 filings created custom concept for net changes in cash, replacing the US GAAP Taxonomy concept
• 4 filings changed the computation relating to cash flows relating to discontinued operations
• 3 filings added a concept for cash flows relating to assets held for sale (which probably should be a taxonomy fix)
• 2 filings had tagging errors
• 2 filings added VIE related cash flows (again, this probably should be an adjustment to the US GAAP Taxonomy
• 2 filings created custom concept for cash balance concept
• 1 filing had a zero balance for cash and did not put in a concept that cash balance
• 1 filing had a funky presentation of cash which I would have never anticipated and is different than all other filers
• 1 filing had a rounding error in both their human readable version and their XBRL
• 1 filing had cash classified as a liability because they had a bank overdraft, which was done correctly but I did not anticipate
• 1 filing did not disclose the balances of cash on their cash flow statement; they did have balances on the balance sheet, but a beginning balance which was needed to get two roll forwards was no where to be found
• 1 filing needs additional work, I cannot figure out what is going on, but something is causing the formula to not work correctly

Again, you can see the specific filings here and that page also provides links to the rendering, formula validation report, the XBRL instance, and some other information so you can take a look at these for yourself.

For me, this information yields good insight on how to create and analyse filings as well as how to build taxonomies.

The following analysis points out that of 403 SEC filings, at least 345 (could be more) calculate the net changes to cash and cash equivalents on the cash flow statement one way, 8 filers do this in a different way.

345 use this equasion: Beginning balance in cash + Net changes in cash = Ending balance in cash (i.e. exchange gains in cash are included in the net change in cash, this is also the approach used by the US GAAP Taxonomy)

8 filers use this equasion: Beginning balance in cash + Net changes in cash + Exchange gains (losses) from cash transactions = Ending balance in cash

The difference between the two approaches relates to whether the effect of exchange rate changes on cash and cash equivalents is included in the net changes in cash and cash equivalents.

To me, this raises several questions:

• Are there really two (or maybe even more) ways of computing the net change in cash?
• If so, why?  What benefit does this have to anyone?
• If there are two ways, what would it hurt to use only one way in order to have better comparability?
• Will peer pressure possibly motivate the 8 to follow the approach followed by the majority?
• Are the 8 filers correct and being more progressive than the other 345?  Should this "progressiveness" be encouraged?  Is this being progressive?
• Should the FASB or the SEC or someone address issues like this? Or, should the capital market deal with this in some manner?

This specific financial line item is really not that big of a deal.  And frankly it is pretty easy to do some things to make the 8 consistent with everyone else.  But focusing on this one line item would miss the bigger point which is that this type of issue exists not only where I pointed this out here, but in many other areas of the US GAAP Taxonomy and in SEC filings.  The fact patterns are different for the different areas of the taxonomy.

In some cases different ways of computing things is very important and does, in fact, differentiate one company from another.  In other cases, and I think in this case, the difference is not a significant differentiator.

There is a belief which has reached somewhat urban legend status about calculation inconsistencies in XBRL instances. The belief is that there are certain calculation inconsistencies which can never be made to go away no matter what you do, no matter how hard you try.

Is this belief that not all calculation inconsistencies can be made to go away truly a fact or is it a mistaken belief?

Let's look at some facts.

• A set of 403 SEC XBRL filings I looked at (the second quarter of XBRL filings with the SEC), 313 had no calculation inconsistencies. The 90 that have calculation inconsistencies are listed here.  That is about 22% of all XBRL filings.  That is an improvement from the first quarter of XBRL filings.
• The set of 408 SEC XBRL filings for the first filing period where XBRL was officially submitted there were 123 filings which had calculation inconsistencies.  That was 30% of all filings.
• Of the calculation inconsistencies which existed in the set of 403 filings mentioned above, when I try and figure out why the calculation inconsistencies exist; in 100% of the cases the inconsistencies resulted from either (a) an error in creation of the XBRL instance or (b) an error in modeling the XBRL taxonomy or (c) a combination of both.
• This is a PDF which shows two filings which I looked at and tried to figure out why the calculation inconsistencies existed.  It is not my intension to pick on these two filers.  I did need to show specific details to make my point, so it was necessary to pick specific filings.  It shows how I determined that the existing calculation inconsistencies, were in fact, unnecessary and could have been made to go away by correcting the XBRL instance or correcting the XBRL taxonomy.
• There seems to be a statistically significant relationship between the filing software used and the number of calculation inconsistencies.  If there were no relationship, then it seems to me that the inconsistencies would be evenly distributed between those creating XBRL filings.  But the data that I see does not show this.  Perhaps someone with a better background in statics can check into this further.  Here is the data from XBRL Cloud.  Here is my summary of this information. You look at the data and reach your own conclusions.
• There does seem to be a realization in the filings that there is a difference between the presentation of numbers in a rendering and how that number is put into an XBRL instance (i.e. mixing up the data and the presentation of the data).  This misunderstanding is NOT what is causing calcuation inconsistencies to the extent that it did before.  This is very, very good news.

Now, I would really like to make it through all 90 of the XBRL instances which have calculation inconsistencies to figure out why the calculation inconsistencies exist.  That would take a significant amount of time.  What I may do is wait another couple of quarters until filers fix what amount to obvious errors and then undertake that task, it would yield some good information.

In my personal experience, I have never found the need to create an XBRL instance that needed to contain calculation inconsistencies and have always found that my calculation errors resulted from one of two things: bad fact values in the XBRL instance or a poorly modeled XBRL taxonomy.

Now, don't get me wrong here.  Have I had inconsistencies in XBRL instances?  Absolutely.  Some inconsistencies were down right confounding.  This was particularly true when the validation reports were harder to read. (They are not that great today, but they are WAY better than they used to be!) For example, when I was helping to create the IFRS taxonomy I always tended to have problems getting the indirect cash flow statement and the income statement to both have zero calculation inconsistencies.  What I discovered is that I was making a modeling error in the taxonomy.  To make a long story short, this helped me reach the conclusion that it is critical to create XBRL instances when creating an XBRL taxonomy to be certain that you don't model the taxonomy so that it is impossible to create an XBRL instance which does not have calculation inconsistencies.  I learned a lot about creating XBRL instances from struggling to make calculation inconsistencies to go away.

However, I am not ready to say that it is possible to make all calculation inconsistencies to go away.  And, as such, I can certainly understand the risk management decision to allow calculation inconsistencies in SEC XBRL filings which the US SEC has decided take.  But at the same time I point out that allowing these inconsistencies with no ramifications for the inconsistencies promotes sloppiness.  Evidence of this are the 90 filings with inconsistencies, the two which I pointed out above which are clearly filer errors, and the 10 or so other filings I have been through and see no situation where I would not be able to make the calculation inconsistencies to go away.

Is more evidence necessary to determine if all inconsistencies can be made to go away for every filer in all situations?  I think so.  But should there be something to motivate filers to fix obvious inconsistencies?  Personally, I think that would be a good thing.

I know accountants.  I am an accountant. We accountants like things to add up, tick, tie, etc.  Personally I think that XBRL calculations are getting a bad rap for two reasons.  First, I have personally called XBRL calculations impotent.  Why? Well, they don't cover all the computational situations which exist in an XBRL instance for financial statements.  Roll forwards are an example of something they don't cover.  Cross dimensional aggregations is another.  Second, in the early days of XBRL there was a lack of understanding between calculation and other relations expressed in networks and the XBRL instance which caused poorly created XBRL taxonomies.  I know this because I made these mistakes myself.  A good example is hooking up both indirect and direct cash flow statement calculation networks to one XBRL instance which only has fact values for the indirect network of calculations.  I get that now, others do also.

So what is the conclusion here and what is the answer?  This is what I believe:

• All this will work itself out over time.  We clearly cannot have automated processes without things adding up correctly.  It would  be too difficult to create enough software which effectively overcomes the errors in numeric data where things need to add up to be useful.
• Filers should be more careful in creation of their filings.  Part of this is to become more familiar with modeling XBRL taxonomies.
• If you find yourself blaming XBRL for the calculation inconsistencies, you are missing the point and in my view are hiding behind XBRL in an effort to basically cover up your unfamiliarity with XBRL or sloppiness.  Don't fall into this trap.
• If you feel you cannot get the computations to be expressed correctly with XBRL calculations; fine, then use XBRL Formula.  Use something to help prove out your data.  You may not be able to submit the XBRL Formulas to the SEC, but what you will learn by going through this process are the taxonomy modeling errors you are making.
• Don't mix up poor XBRL taxonomy modeling practices and XBRL calculation inconsistencies.  For example, if you think you cannot make things add up because of "dimensional issues", ask yourself, "Well, do I have my dimensions expressed correctly?"  Generally you will discover that the problem is the taxonomy.
• Look at other SEC XBRL filings which have no calculation inconsistencies and see how they modeled their taxonomy.  Ask yourself, "If they can make the inconsistencies go away, why can't I?"
• This may be asking too much, but what the heck.  It is my belief that the SEC should not give filers carte blanc when it comes to calculation inconsistencies.  There should be something to provide an incentive to not have calculation inconsistencies.  Perhaps having to explain why they need to exist in an XBRL footnote in a filing or having to re-submit if the inconsistencies are subsequently found to be caused by an error would provide enough incentive.

If you do believe you have calculation inconsistencies which you simply cannot be made to go away, I would love to see the situation.  Knowing these situations will help figure out how to tame XBRL in this area.  Personally, I am taking the stance that until there is proof to the contrary, calculation inconsistencies can be made to go away if you try.

For the first two quarters of SEC flings of XBRL documents I have taken a look at those documents to learn more about XBRL. What I am learning is quite helpful and the filings provide a lot of insight into the realities of using XBRL for financial reporting. I hope to document what I have learned to help those who desire to create quality XBRL filings.

Accounting Trends and Techniques, published by the AICPA, is a survey of the accounting and disclosure characteristics of corporate annual reports. Accountants have a notion called common practice which guides how some aspects of financial reporting are carried out, even though there are no laws pushing the practices.  Technical people refer to these sorts of things as best practices.  These practices are important to get the most out of XBRL. Accounting also has what is called a model financial statement which helps financial statement creators understand how to best put together a financial statement.  We need model XBRL filings also; this is the closest to such a model that I can point to today.

So I started asking myself what these practices might be, what are the criteria one might use to evaluate these SEC XBRL filings and how might those criteria be communicated.  One of the first things to pop into my mind was the Gartner Magic Quadrant.

I thought about what the axes of the magic quadrant might be.  Perhaps technical interoperability/usability on the vertical axis and information comparabilityon the horizontal axis.  What I mean by technical interoperability/usability is can best be seen by looking at one filing.  Looking at one filing ask yourself, "How well can this filing be used across different software applications."  By information compatibility look at a number of different filings and ask yourself "How well can one filing be compared to another filing."  Maybe those are not the correct axes of the magic quadrant, I am sure that the correct axes will reveal themselves as this is looked at more.

I believe that the criteria for evaluating an SEC XBRL filing can be boiled down into one key notion: investor friendliness. How "friendly" is the XBRL filing?  How easy is it for an investor to make use of to achieve what they desire to achieve?

But to really understand what I mean by investor friendliness, technical interoperability/usability and information comparability, it is best to look at some detail.  Passing the minimum hurtle of passing the SEC XBRL submission validation is really only the beginning.  First off, that minimum set of validation provides no real differentiation of XBRL submissions.  Further, the SEC and in general most everyone is still learning about XBRL and how to best use it.  The SEC use of XBRL pushes XBRL into new frontiers because of how the SEC is making use of XBRL's extensibility features. The SEC has added new validation rules each submission period, trying to understand the new rules which will most certainly be implemented is helpful.

So what might some of these criteria for evaluating investor friendliness be?

• How easy is it for an investor to compare a filing with other filings?Some things make comparing information easier, others make them harder.  For example, adding a bunch of new high level concepts to replace existing US GAAP Taxonomy concepts make comparability harder.  Not doing so makes comparability easier.
• Do the numbers add up?Trying to build a benchmarking model using information where the numbers don't add up because XBRL calculations have inconsistencies make is harder to use a filing, having consistent calculations make automating processes easier.
• Do ALL the numbers add up?It is not possible to test all computations using XBRL calculations.  XBRL Formulas are necessary to validate cross context computations such as those in a [Roll Forward]. Even if the SEC does not require or does not allow the submission of XBRL Formulas yet, it is almost a sure thing that they will.  And even if they never do, creating such validation used in the creation of an SEC XBRL filing is prudent to be certain that all the numbers do, in fact, add up.  It may be a good thing to take this one step further and make these validation rules available on the filer's web site.
• Are filer extensions consistent with the underlying US GAAP Taxonomy?What reason would a filer have for not being consistent with the base US GAAP Taxonomy? Why would the US GAAP Taxonomy go through so much effort to, say, make the [Table]s in that taxonomy always have at least one [Axis] and always have [Line Items]; but then it be a good thing for an SEC XBRL filer to break that rule?  This is not a good thing, even if the SEC does not have a validation rule requiring this practice.  The same is true for [Roll Forward]s and other modeling patterns found within the US GAAP Taxonomy.  Having a free for all in terms of how to model a taxonomy is not a good thing.
• Are extension concepts well documented?This falls into the category of consistency with the US GAAP Taxonomy but is worth specifically pointing out.  The US GAAP Taxonomy does a nice job explaining the concepts within that taxonomy using documentation and references to the US GAAP literature.  The documentation is helpful in understanding the taxonomy.  Seems logical that an SEC filer who adds an extension concept would document the concept they added and in certain cases explain why the concept they added was different than the existing US GAAP Taxonomy concepts.

So those are the fundamental criteria which I might suggest as appropriate in evaluating investor friendliness of SEC XBRL filings.  There are probably others. 

What criteria do you see?  Do you see some other overarching criteria which is even better than investor friendliness?  If you were to create a magic quadrant, what would your axes be?

(Note that I have added a new category to my blog: Creating Investor Friendly SEC XBRL Filings. Watch for information on how to create high quality, investor friendly XBRL!)

OK, this is a good example of something which I have seen over and over in building XBRL taxonomies relating to financial reporting.  This issue is NOT just for the cash flow statement, but rather I am using the cash flow statement to point out the issue.

The question is this: How much leeway should those reporting financial information really be allowed? I am NOT saying that I know the answer to this question.  I can say that I do have an opinion.  What I have seen over and over in building the IFRS and US GAAP financial reporting taxonomies is that there are accountants who misinterpret reporting rules and create reporting inconsistencies as a result.

Here is the what I see.  The US GAAP Taxonomy for the indirect cash flow statement looks like this (this is the commercial and industrial companies taxonomy, basically all the taxonomies look like this in the area being discussed). Here is a view of the calculation relationsto come up with the net change in cash from operating, investing, financing activities as well as the exchange gain on foreign currency transactions. (OK, so here is the presentation view in that same tool.)

OK, so now I am a little confused.  If you look at line number 633 on the first report, you see discontinued operations.  These concepts appear both within operating cash flows from operating (line 316), investing (line 495), and financing activities (line 661) AND separately (see line 664, 665, and 666 on the report).

From the taxonomy, you cannot tell with 100% certainty cash flows from discontinued operations (line 667) is included in the reconciliation of the beginning value of cash to the ending value of cash, it is not shown in the calculation linkbase.  I think it should be included.

Two SEC XBRL filers reconfigured their cash flow statements.  See Citigroup and General Electric XBRL taxonomies to see how they structured their indirect cash flow statements.

The issues here to me are:

• The US GAAP Taxonomy provides a concept "us-gaap:CashAndCashEquivalentsAtCarryingValue" on the cash flow statement (and on the balance sheet) which is the cash balance being reconciled; yet some filers use different concepts in the reconcilation including: us-gaap:Cash, us-gaap:CashCashEquivalentsAndFederalFundsSold, us-gaap:CashAndDueFromBanks, us-gaap:CashCashEquivalentsAndShortTermInvestments
• The US GAAP Taxonomy has the total amount being reconciled as the concept "us-gaap:CashAndCashEquivalentsPeriodIncreaseDecrease".  Does that include or exclude discontinued operations AND should filers be allowed to CHANGE wheter that total includes discontinued operations?
• The same deal seems to be happening with the exchange gain, us-gaap:EffectOfExchangeRateOnCashAndCashEquivalents, is that included or is it not? The US GAAP Taxonomy says that it is per the calcuation it shows.  At least one filer does not include that in the computation, but rather moved the relation (and they did not redefine the concept by creating their own concept).

What I am asking is how should these situations be handled, what sort of flexibility is allowed and/or should be allowed, what sort of comparability between these is appropriate for investors, and so forth.  What level of consistency is appropriate?  At what level of a financial is consistency and comparability important?

XBRL will help see these issues.  Based on decisions which are made or not made, a certain level of consistency and comparability will exist.  Will that be the level which is desired?  Who decides these things:  CPAs who prepare these XBRL filings?  The SEC?  Investors?  Analysts?  No one?

Again, I am not providing my opinion here (I do have one), I am simply raising the question.  This question can only be addressed appropriately once it is well understood.

And remember, this set of cash flow statement issues is an example, not the only issue.  Similar issues exist in other areas of the US GAAP Taxonomy and SEC XBRL filings.  Different areas of the taxonomy will likely require different criteria for arriving at a decision, but the issues are quite similar to the cash flow statement example shown above.