Digital Financial Reporting

Oracle issued a press release today stating that is introducing two new applications which are intended to improve the timeliness and confidence in financial reporting.  Both products support XBRL-based financial filings.  The two products are: Oracle Hyperion Financial Close Management and Oracle Hyperion Disclosure Management.

See the press release for mode details, but here is a summary of the news facts provided within the press release:

• To help organizations improve the accuracy and speed of financial close and reporting, Oracle today introduced Oracle® Hyperion Disclosure Management and Oracle Hyperion Financial Close Management.
• The new applications extend the capabilities of the Oracle Enterprise Performance Management (EPM) System to address the end-to-end financial close process and the creation of regulatory filings using eXtensible Business Reporting Language (XBRL).
• Oracle Hyperion Disclosure Management and Oracle Hyperion Financial Close Management work in conjunction with other Oracle EPM applications such as Hyperion Financial Management or can be deployed directly with ERP General Ledger systems.
• These new applications are available with Oracle EPM System Release 11.1.2, also announced today (read today's related news release).

Last week I saw a demo of the disclosure management product.  The most striking thing about the product is that it looked like a financial reporting application and not an XBRL application.  Finally, a business user application which can be used to then output XBRL.

While XBRL applications have improved year after year during the 11 years which I have been working with XBRL, the disclosure management product does a lot to make XBRL disappear into the background where it belongs.  Users of the application can leverage the benefits of XBRL without having to struggle with the XBRL technology.  This is as it should be.  The product probably is not perfect, but it certainly is a huge step in the right direction from my perspective.

Anyone know of other financial reporting products taking this type of an approach?  I know of a few, I am always trying to find more.  Please let me know if you come across a good one.

XBRL US has launchedwhat they are calling the "XBRL Consistency Suite".  They say that tool is "a set of online XBRL tools that help public companies identify inconsistencies in XBRL documents related to the use of the US GAAP Taxonomy."

Per a PRNewswire press release, the XBRL Consistency Suite performs over 6000 US GAAP Taxonomy specific tests which help reduce errors.  XBRL US says that of the 1400 SEC XBRL submissions to date "thousands of errors have been identified".

XBRL US also published a document titled Avoiding Common Errors in XBRL Creation.  The final sentence of that document says:

Following a standardized set of guidelines can provide the peace of mind that the best possible practice is being used.

That document explains some of the types of errors the XBRL Consistency Suite checks.  One of these categories from the table of contents is "Value is Required if Another Value is Reported".  Now, this is not an XBRL thing, this is an financial reporting type error which something like a disclosure checklist would catch.  What is up with that you might ask?

Well, now we are getting into the real value of XBRL for filers.  Software able to tell you that you forgot to report something?  Yes sir.  I have been saying that for years.  XBRL can also help you be sure that all your numbers cross cast and foot also.

I see this XBRL US Consistency Suite as a best practice.  What do you think?  There are a lot of other things which the existence of this consistency suite brings up, but I will go into this later.  Stay tuned.

Will IFRS (International Financial Reporting Standards) for SMEs (small and medium sized  enterprises) be the way private companies in the United States report?  Personally, I hope so.  It is looking like this may be a possibility.  I hear estimates that there are between 8 million and 20 million such private entities in the US.

First, let me provide some useful IFRS for SME resources which are helpful for US private companies: 

• IASB IFRS for SME Web Site: Here is the official web site for IFRS for SMEs.
• AICPA IFRS for SMEs to US GAAP Comparison Wiki: The AICPA is making available a wiki which compares IFRS for SMEs to US GAAP which you can find here.
• IASB IFRS for SMEs Training: This web page has training materials you can download for free.
• IFRS for SMEs: The Next Standard for U.S. Private Companies?  This is a Journal of Accountancy Article which looks at this question.
• Moss Adams Presentation: This is a Moss Adams presentation on the topic of IFRS for SMEs, a nice summary.
• IFRS Training: Here are some IFRS training courses in Seattle and Vancouver.
• AICPA IFRS FAQ: Here is a web page with frequently asked questions about IFRS for SMEs maintained by the AICPA.

Now, why would I personally like to see the US go to IFRS for SMEs for reporting by US private companies? Here is my list of reasons: 

1. IFRS for SMEs is easier than US GAAP.  The standards are something like 230 pages.  US GAAP is way bigger than that, most of which is not relevant to 99% of smaller and medium sized entities who report to say a bank in support of a loan.
2. The rest of the world is moving toward IFRS and IFRS for SMEs.  The US should be part of the broader global community, not an island.
3. IFRS for SMEs is high quality.
4. Using IFRS for SMEs globally turns the very fragmented accounting software market into a global market.  This will reduce the cost of accounting software and improve the quality of that software for everyone.
5. A global set of financial reporting standards means the possibility of a global framework for auditing those financial reports.  Today, auditing is more locally oriented.  If private companies around the world use IFRS for SMEs, auditing (reviews, compilations also) costs will go down.
6. The AICPA has  recognized the IASB as an accounting standards setting body.  You can actually use IFRS for SMEs today, if your financial institution will accept it.
7. If the SEC (Securities and Exchange Commission) mandates IFRS for public companies, which it just might do; private companies reporting alternatives could be one of the following: IFRS for SMEs, a US adapted version of IFRS for SMEs, full IFRS, a new separate GAAP for private companies, or US  GAAP as it exists today.  The IFRS for SMEs alternative seems to make the most sense, all things considered.

Will IFRS for SMEs be used by private companies in the US?  Time will tell.  My bet is yes. IFRS for SMEs is a concise, complete, simplified set of accounting principles which better meets the need of financial statement users, particularly if you see the world as a global economy.  On the other hand, the US conversion to the metric system didn't go that well.  We shall see what happens.

The list of SEC XBRL filings which has received my 5 Star Rating has now reached 92!

You can see the list of filings receiving my 5 Star Rating below and you can go to this web page to see the detail of the analysis. (Recall that last week I posted a blog entry stating that I had found 24 SEC XBRL filings to which I could assign a 5 Star Rating.)

Criteria for Receiving a 5 Star Rating

The following is a summary of the criteria for receiving my 5 Star Rating (For more details see this blog post):

1. No XML, XBRL, or EFM syntax errors. This is indicated by having a "0" in Column 8 which is marked with "E" under "Edgar Filing Manual" on the XBRL Cloud validation report.
2. Calculation consistent.  (i.e. no calculation inconsistencies reported during XBRL validation)
3. Pass one basic business rule.  One business rule must be passed, basically checking for the existence of net cash flows and the reconciliation of the beginning and ending balance of cash.
4. [Table]s must be correctly created. The [Table] structure must follow the US GAAP Taxonomy Architecture as specified.
5. Extension concepts reasonable.  The extension concepts added must appear reasonable.  This is admittedly subjective, it would take a blatant error to be dinged for this, if everything else was satisfied.

Remember that this set of criteria is just a basic set of minimal criteria which an SEC XBRL filing should, in my view, meet at this stage of the game.  There are many other things which need to be considered in order to be considered a high quality filing.  See this blog post for more information.  This blog post relates to things accountants might need to consider.

Summary of Filings Analyzed and Analysis

The SEC XBRL filings which I analyzed were 10-K's and 10-Q's submitted between January12, 2010 and March 2, 2010.  Here is summary information about that set of filings.

• There were a total of 422 filings in this set.  Of that total, 92 received a 5 Star Rating, which is 22%.
• Of the 422 filings, 401 of them (95%) had no XML, XBRL, or EFM errors reported (criteria 1). So only 21 had these types of errors.
• Of the 422 filings, 317 of them (75%) had no calculation inconsistencies. So only 105 had calculation inconsistencies.
• Of the 422 filings, 319 of them (75%) modeled [Table]s correctly.  So only 84 had [Table] modeling issues.
• Because checking the business rules and extension concepts is labor intensive, I only checked filings which passed the other three tests for these criteria.  As such, I don't have data for the how the complete set of filings did against these two criteria.

While there were many filings doing well against one of the critera above, only 92 SEC XBRL filings did well against all 5 criteria.  Kudos to those 92 SEC XBRL filers!

Browsing These Filings

You can see the list of filings above, or you can view the filings by criteria here (these work best with a big monitor):

• Focusing on Errors
• Focusing on Calculations
• Focusing on Business Rule
• Focusing on [Table]s
• Focusing on Extension Concepts
• Filer Taxonomy
• Mashup of All Information by Filer

List of 92 SEC XBRL Filings Receiving a 5 Star Rating

This is the list of the names of companies which received my 5 Star Rating: 

• AES CORP
• Aflac Incorporated
• AKAMAI TECHNOLOGIES INC
• ALCOA INC
• ALLERGAN INC
• ALTRIA GROUP, INC.
• AMEDISYS INC
• AMEREN CORP
• AMERICAN EXPRESS CO
• AMGEN INC
• ANADARKO PETROLEUM CORP
• AVON PRODUCTS INC
• BANK OF AMERICA CORP /DE/
• BARD C R INC /NJ/
• BB&T CORP
• BOEING CO
• BOSTON PROPERTIES INC
• BOSTON PROPERTIES LTD PARTNERSHIP
• BRISTOL MYERS SQUIBB CO
• BUCYRUS INTERNATIONAL INC
• C H ROBINSON WORLDWIDE INC
• CARDINAL HEALTH INC
• CISCO SYSTEMS INC
• CITRIX SYSTEMS INC
• CLIFFS NATURAL RESOURCES INC.
• CNX GAS CORP
• COGNIZANT TECHNOLOGY SOLUTIONS CORP
• CONSOL Energy Inc
• DANAHER CORP /DE/
• DAVITA INC
• DUKE ENERGY CORP
• EBAY INC
• ELECTRONIC ARTS INC.
• EMC CORP
• ENERGEN CORP
• EQUITY RESIDENTIAL
• ERP OPERATING LTD PARTNERSHIP
• EXPEDITORS INTERNATIONAL OF WASHINGTON INC
• EXXON MOBIL CORP
• FASTENAL CO
• FLIR SYSTEMS INC
• FORTUNE BRANDS INC
• GENERAL DYNAMICS CORP
• GENWORTH FINANCIAL INC
• GILEAD SCIENCES INC
• Google Inc.
• HOLOGIC INC
• HOST HOTELS & RESORTS, INC.
• HUMANA INC
• IMPERIAL OIL LTD
• Ingersoll-Rand plc
• INTERCONTINENTALEXCHANGE INC
• INTERNATIONAL PAPER CO /NEW/
• INTUITIVE SURGICAL INC
• KELLOGG CO
• KIMBERLY CLARK CORP
• KRAFT FOODS INC
• LOCKHEED MARTIN CORP
• MARSH & MCLENNAN COMPANIES, INC.
• MATTEL INC /DE/
• MCDERMOTT INTERNATIONAL INC
• MEMC ELECTRONIC MATERIALS INC
• NETFLIX INC
• NEW YORK COMMUNITY BANCORP INC
• NUCOR CORP
• OPEN TEXT CORP
• PARKER HANNIFIN CORP
• Philip Morris International Inc.
• PLAINS EXPLORATION & PRODUCTION CO
• PPG INDUSTRIES INC
• PRAXAIR INC
• PRECISION CASTPARTS CORP
• PUBLIC SERVICE ENTERPRISE GROUP INC
• QWEST COMMUNICATIONS INTERNATIONAL INC
• REGIONS FINANCIAL CORP
• RR Donnelley & Sons Co
• SCHWAB CHARLES CORP
• SIGMA ALDRICH CORP
• Spectra Energy Corp.
• SPRINT NEXTEL CORP
• STRYKER CORP
• SUNTRUST BANKS INC
• TORCHMARK CORP
• UNITED STATES STEEL CORP
• UNITEDHEALTH GROUP INC
• Unum Group
• VARIAN MEDICAL SYSTEMS INC
• WALT DISNEY CO/
• WELLPOINT, INC
• WINDSTREAM CORP
• XTO ENERGY INC
• YAHOO INC

The following is my list of the top ten things which someone using XBRL information should keep in the forefront of their mind.  This list might be looked at as the biggest challenges one needs to overcome when using SEC XBRL information.  These are all decisions which the domain stakeholders of financial reporting needs to make in order to get XBRL to work how they want it to work.  The best way to make these decisions is to understand how XBRL works for SEC XBRL flings today, what the alternatives are, and what alternative best fits your stakeholder group needs.

My definition of user of SEC XBRL information would include analysts, investors, regulators, data aggregators, and software developers building software for these types of users.

Keep something in the back of your mind as you take a look at this list.  Financial reporting practices used today were developed in an era where paper was the medium for distributing information.  There may have been minor inconsistencies in certain financial reporting practices, but these minor inconsistencies where easily overcome by the humans reading the financial reports.  In a new era where elimination of many of the mundane tasks such as re-keying information is possible, these minor inconsistencies become insurmountable issues as we try and get computers to do these mundane tasks.  Processes must be reliable.  This new electronic medium, XBRL, is different than the paper-based medium of the past.  Certain changes can make achieving some desired characteristics significantly easier.  These historical choices should be reconsidered as to not hold back the possibilities offered by the new mediums.

To understand what you want it is best to understand your options.  The options when it comes to XBRL are the characteristics of how XBRL works.  These are business domain stakeholder decisions.  Knowledge can give you the power to make a case for what your stakeholder group needs from XBRL.

One final thing to consider.  Keep in mind how computers "think".  This thought experiment can help you understand how to look at financial information.  There is a simple goal here as I see it: to make XBRL work the best it can.  Of course "best it can" is subjective.  Are certain changes in the interest of financial reporting?  Maybe they are, maybe they are not.  That is not for me to say.  All I am doing here is providing information so that the right discussion takes place.  All financial reporting domain stakeholders should push for what they want from the strong position of knowing how XBRL actually works.

In looking at SEC XBRL filings, this is what I see:

1. Accounting inconsistencies or errors: This analysis details my point here.  I don't want to make any judgements, I am just delivering a message.  Is it an accounting error to have two different ways of computing net change in cash, as pointed out by this set of SEC XBRL filings?  The answer could be "yes" or it could be "no".  That is not the point.  The point is this.  If the vast majority do it one way, why can't everyone do it the same way?  What is so unique for those 8 compaines that they need to calculate the value differently?  Of course you can see that if there are two ways, adjustments need to be made to convert one approach to the other approach when analysis uses these numbers.  Should analysts really need to do this?  What is the reason for not only using one way?  This issue is not just about this area of the XBRL taxonomy, there are other areas.  The fact patterns are different for different areas of the US GAAP taxonomy, but what rule do you apply to determine whether alternatives in different areas are helpful or hurtful?
2. Filers adding concepts unnecessarily: When should SEC XBRL filers add new concepts in their extension taxonomies?  If you look at the SEC XBRL filings being submitted, there are many inconsistencies in where and when concepts are added.  This analysis of the statement of cash flows shows many of the inconsistencies in this area, the same sort of issues exist in other areas of filings also. Unnecessarily added concepts can may querying the information significantly more challenging. What exactly the rule which determines if a concept should be added and who enforces that rule?
3. Filers not following the US GAAP Taxonomy Information Model: By information model I mean things such as the [Table] structure, the [Roll Forward] structure, and other such structures in the US GAAP Taxonomy.  The US GAAP Taxonomy is very consistent in how it uses, for example, [Table]s and [Roll Forward].  But company extensions to the US GAAP Taxonomy are not.  See this analysis of how filers are constructing [Table]s.  The reason is that there are no validation rules which point out inconsistencies when SEC XBRL filings are submitted. Is this randomness beneficial, or should the free-for-all be constrained in order to realize better comparability across SEC XBRL filings?
4. Locating networks to make comparisons can be challenging: SEC XBRL filings each use their own set of networks to identify sections of the financial filing such as the balance sheet, income statement, or a specific disclosure.  See this analysis for more information.  Now, you may look at the filings and say, "Hey, this is no problem, I can read the network descriptions just fine."  But can a computer read the networks and then make a comparison across multiple companies, say comparing the balance sheets of each company?  How will a computer know WHICH network to grab?  A computer might be able to determine from the concepts within the network what the network is to a degree.  Another way of understanding this is to say that if filings use common structures, in this case network roles, to identify pieces of a financial filing, finding those pieces and comparing them would be more reliable and certainly easier to program. Is it best if everyone uses different network identifiers or would it be better if specific network identifiers were used for common things such as "balance sheet", "income statement", certain specific disclosures in order to enhance cross filer comparability?  Or, are networks meaningless, and it is really the [Table] which provides the comparison point?
5. Inconsistent use of concepts and relations at "higher levels": Financial reporting in the US is dynamic meaning that financial report creators can create reports which reflect their unique organizations.  Basically, creating a US GAAP financial report is not filling out a form, nor should it be.  The dynamic nature makes US financial reporting better.  But, should dynamic mean "free-for-all"? SEC XBRL filings are many times, at least in my view, changing concepts and relations at high levels where changes probably should never occur.  Case in point is the cash flow statement, this analysis provides information about how SEC XBRL flings are changing concepts such as "us-gaap:CashAndCashEquivalentsPeriodIncreaseDecrease".  Another way to look at this is that if the higher level concepts and relations were more solid with extension points more clearly specified, then US financial reporting keeps it's dynamic nature, provides areas where extensions are quite reasonable, and avoids a free-for-all which a computer will simply not be able to deal with when trying to analyze SEC XBRL filings.  For example, a balance sheet has "Assets", "Liabilities" and "Equity" (and sometimes temporary equity).  Do you really want filers changing those high levels?  Why?  Be aware that they can at this point.
6. Calculation inconsistencies and unexpressed computations: Many SEC XBRL flings have calculations which don't properly "foot and cross-cast".  See this analysis which discusses this in more detail.  There are those who believe that calculation inconsistencies cannot be made to go away.  I personally don't buy that and that has not been my experience.  Think about this though.  Would you want to use a financial report where things don't add up?  Would you trust the information?  How would you distinguish something which does not add up because of an error and something which is not supposed to add up?  Further, many times there are important computations which are not articulated by the SEC XBRL filing.  These should be explicitly articulated for two reasons in my personal view: so the information creator knows that things add up and so that the consumer of the information knows what is supposed to add up and how.  What should the rules be for computations?
7. Improper modeling of information characteristics: People have different interpretations about what XBRL Dimensions provides in the US GAAP taxonomy and therefore they are used in different ways by different users.  Even the US GAAP Taxonomy itself has different interpretations, sometimes using XBRL Dimensions and sometimes not to model information.  People will eventually realize that consistently and correctly using XBRL Dimensions makes easier. There are four major classes of things to realize when trying to interpret the US GAAP Taxonomy relative to XBRL Dimensions: (a) Confusing and inconsistent: When SEC XBRL filers create their extension taxonomies their presentation relations and definition relations can be inconsistent, usually the definition linkbase is missing things.  This impacts how the dimensions work because the definition linkbase really controls the workings of the dimensions, it is not the presentation linkbase.  This can occur because there are two ways of articulating the same information: the presentation linkbase and the definition linkbase. The solution to this issue is have only one way of articulating the information model, not two.  (b) Calculations don't work: Improperly modeled information can result in computations which don't add up correctly or you may struggle to figure out exactly how things add up.  For example, consider this calculation validation report which shows that the balance sheet does not add up (look for the red in the last column on the right).  If you look at all of these calculation reports (use the links to the calculation reports on the right hand side of the page), you can see that each of these SEC filers was able to get its balance sheet to calculate properly. (c) Drill down: A financial statement generally consists of summarized information in the primary financial statements such as the balance sheet and detailed information from many of the line items on the primary financial statements within the disclosures.  If the dimensional information is created correctly, "drilling down" from the primary financial statements to details in the disclosures is easy to do.  If they are not constructed correctly, a computer cannot correctly understand the links and therefore cannot possibly navigate between the primary financial statements and the details in the disclosures. (d) Mixing dimensional and non-dimensional information: Mixing XBRL Dimensional and non-dimensional information simply will not work correctly.  For example, XBRL Formula has two aspect models: dimensional and non-dimensional.  People will figure these things out when software improves, but just be aware if these issues.
8. Irregular shaped hypercubes: Information reported in an SEC XBRL filing has different dimensions. For example, a consolidated balance sheet summarizes information for the consolidated entity for two period of time, the current period and the prior period.  Whereas the segment breakdown of the balance sheet information has a different shape because it has different dimensions, usually one period and the breakdown is by business segment.  The two dimensional nature of paper limits how certain information, which may have three or more dimensions, can be presented.  Mismatches between the dimensions of information (i.e. the shape of the information) can make information harder to view.  This situation can be rectified simply by reorganizing the information into the proper [Table]s. Exacerbating this situation even more is the fact that not all information is broken down into [Table]s and many of the "chunks" of information in the US GAAP Taxonomy are quite large.  It might be better to have many smaller chunks of information which fit together, rather than the huge pieces which exist currently in the US GAAP Taxonomy.  How the US GAAP taxonomy is modeled is a choice which you can influence.
9. Extension concepts with poor descriptions:  Not providing quality descriptions for concepts added by an SEC XBRL filer makes it harder to understand the filing and harder to determine if the filer is creating a concept which actually already exists in the US GAAP Taxonomy.  Part of the point of XBRL is to make the meaning of things explicit, rather than have the user of the information guess.
10. Fiscal periods:  This is more of a nuisance than a significant issue, but it is something to be aware of.  As you know, not all companies report on a calendar year end.  When you manually go through paper reports and do comparisons, humans can pick the right periods to compare quite easily.  When you try and automate this process, it becomes a little more challenging.  There is no fiscal period information in SEC XBRL flings, so computer programs have to figure this out in automated processes.  Different software may do this in different ways. Analysts have been dealing with this for years so they are use to it.  But be aware, this can be automated reliably, if fiscal period information is included in the meta data.

Understanding this list of ten things will help you better understand the SEC XBRL filing information that you are working with.  It will also help you understand what you should expect and therefore request from those trying to figure out how to make XBRL work within the financial reporting supply chain.  The points are made not to be value judgments about what XBRL should be, rather they try and point out the spectrum of options which are possible.  It is up the the domain of financial reporting to make the decisions.  If you don't understand how things work and you are a stakeholder in the financial reporting supply chain, how are you going to know what to ask for from SEC XBRL filings?

The CFA Institute published a white paper, eXtensible Business Reporting Language: A Guide for Investors. They outline five guiding principles for what the CFA Institute wants to see from XBRL.  The CFA Institute's white paper articulates what their stakeholder group desires from XBRL. What does your stakeholder group want to see?  How is your stakeholder group making sure you get what you want?

The issues pointed out here, while specifically relating to the SEC XBRL filings, are actually issues which any system which uses XBRL's extensibilty features will need to address. For processes to be automated, the information must be unambiguous and the semantics must be clear and consistent.  Even when you have unambiguous information and clear and consistent semantics, you still have some choices as to how you want your system to operate.  Understanding these points helps business domain users make these choices.