Digital Financial Reporting

In an interview with Craig M. Lewis, SEC Division of Risk, Strategy, and Financial Innovation, the following statement was made:

The SEC was really just allowing firms to have a window to figure out how to tag data. Now that the window has shut, we are just going to start to use the data.

This is a fairly good clue that the SEC is going to clamp down on quality.

There are many other clues.  The interview with Craig Lewis is enlightening in many ways.  I feel this is the most practical look into how the SEC views the evolution toward digital financial reporting. Both software vendors creating software and filers don't want to miss reading the answer to this interview question:

How can companies be sure their XBRL filings are not automatically flagged in the monitoring system you are developing?

I would say, check your work. If you make a mistake in how you record an element, that would affect the score you get from the model and might make you more likely to be pulled up for a review-I would argue, correctly so. The model will tell the reviewer which factor was contributing to the score, and if one factor comes out and has a large impact on the score and can be traced back to a recording error in the XBRL data, you will be flagged because you made a mistake in providing us your XBRL data. I do not view that as a problem.

Software vendors who can keep SEC filers off the "radar" will likely be preferred to those who put filers on that radar.

I would encourage everyone to read the entire article, it is packed with information.  But I will point out one additional important statement.  Note the following comment relating to "two separate documents" (i.e. the desire for one document): 

My view is that the real solution to this is inline XBRL: creating a document where the tags are embedded directly into your filing so that you do not have to have two separate documents. This seems to be where the industry is moving, and I fully support that.

While Mr. Lewis' statements may not be what the SEC is thinking, it does offer clues into where SEC filings are headed.

Most of the prior analysis which I have done related to the ability to discover the identity of a reported fact from the perspective of the concept characteristic of that reported fact.  For example, this web page summarizes information I was able to extract from the 30 companies which make up the DOW, the Fortune 100, and the S&P 500. If you look for "cells" which are orange, I could not find that piece of information.

So for example, if you look on the DOW list, you see that I cannot find only one value: Net cash flow for General Electric.  This is because GE created an extension concept for that commonly reported fact.  If you look on the Fortune 100 list you see 3 information points which I could not find. If you look on the S&P 500 list you see two things. First you see about 35 missing information points, that is about 1.4% as compared to .6% of the total number of information points for the DOW and Fortune 100.

But if you look at row 232 which is Host Hotels you see numerous missing information points. Row 270 which is Legg Mason has a similar issue.  What is going on here which is different?

So, here is the deal.  Of 7,160 reporting entities which I analyzed (I trimmed my set of 7,199 down slightly due to duplicate CIK number issues and multiple CIK issues which don't relate to XBRL); I could not idenfity ANY INFORMATION for 54 reporting entities. It also means that I could effectively discover information for 7,106 of the SEC XBRL financial filings, or 99.2% of all filings.

Why? Well, the graphic below summarizes the reasons and this PDF provides all the details.

Results of root reporting entity analysis

Basically, 99.2% of SEC filers model their information and you can discover the "root" reporting entity or what is called the "economic entity" or "accounting entity".  That accounting entity might be broken out in the report as different legal entities.

And so the vast majority of SEC filers allow for the discovery of the root accounting entity and may provide additional details for different legal entities, variable interest entities, or other reporting entity or accounting entity breakdowns.

There are some very specific things that these reporting entities do which make it challenging to identify the root of the reporting entity/accounting entity.  Generally, these are inconsistencies with the ways other filers report information (the remaining 7,106 where you CAN discover the information).  Here are a few examples (go through the entire PDF above if you are interested in the details and want to become a digital financial reporting master craftsman):

• Extension for consolidated entity: Legg Mason does something different than most filers. Click on the link to go to their balance sheet and look at the value of the Legal Entity [Axis]. Rather than using the Entity [Domain] to represent the consolidated entity, they created an extension concept, lm:ConsolidatedLeggMasonGroupMember.  But that WOULD have worked, however they also made another mistake, they provided the Entity [Domain] report element which would have represented the consolidated group in their modeling, but they did not USE that report element.  The dynamics of both these things make the root reporting entity unidentifiable explicitly like most other filers.
• Successor/predecessor: There are two ways SEC reporting entities articulate successor/predecessor related information: using the Scenario [Axis] (18 filers use this approach, here is one) and using the Legal Entity [Axis] (4 filers use that approach, here is one).  There could be others, I did not check this.  Having two approaches is unnecessarily inconsistent.  These 22 filers stood out because again, each of them also modeled some sort of root entity but reported no facts for that entity which they modeled.  This is similar to Legg Mason above, leading to not being able to detect the root entity using automated approaches.
• Equity component [Axis] used on balance sheet: I have no idea why but 11 SEC filers saw fit to model the balance sheet using the "Equity component [Axis] which is both rather strange and leads to not being able to discover the root accounting entity. Here is one example.

There are other funky things that SEC filers do, again look through the PDF. A great way to learn how to do things correctly is by learning from the mistakes of others.

One thing that I find particularly interesting is that if you consider the fundamental accounting relations which I had mentioned in a prior blog post and consider these reporting entity/accounting entity breakdown approaches; that frames the primary financial statements nicely into a neat little "package".  Of the 7,160 SEC filings in my set of 2012 10Ks, there are only about 210 which have specifically identifiable errors/issues which, if fixed, would provide a solid set of financial information.  The list of errors/issues is finite.  These are all very fixable.  In fact, I believe that all of these errors are detectable using automated verification processes. This set of reporting entity/accounting entity errors is likewise finite and fixable.

While it might be challenging to get the SEC to implement the inbound verification necessary to make these issues go away (and achieve a solid information set) at least for the primary financial statements; maybe the market would do it.  Maybe XBRL Cloud would.  It just builds on the framework which they already have in their EDGAR Dashboard.

When the FDIC implemented their XBRL-based system, on day one the FDIC said 18,000 mathematical errors simply disappeared from call reports. (Read page 26 in XBRL for Dummies) Granted, the SEC XBRL financial filings are more complex that FDIC call reports.  However, it seems like we could be getting close to a similar benchmark for these SEC filings.  Granted, it is only an incremental step but is seems both achievable and useful if achieved. I would go as far as predicting that primary financial statement information (balance sheet, income statement, cash flow statement) reuse could be very real within one to two years even if the SEC does nothing.

In my last blog post I pointed out a set of fundamental accounting relations which exists for all financial statements.  These relations focused on the primary financial statements.  This blog post expands on that idea.

So, I created a form in an analysis application which I had and put all these high-level concepts on that form.  You can see a screen shot of that below (click on the image below to get a larger image):

Fundamental accounting relations

Within the analysis tool which I created using Microsoft Access, I both hooked all these concepts together and I also put in check values to be sure the relations were correct.

Now, granted, not one SEC filer reports every one of the totals or line items that I provide for.  For example, if a reporting entity does not have an equity method investment, it is not going to have "Income from equity method investments" and it will not report the concept "Income before equity method investments".  So the line items which they do show depends on the line items which they have and therefore report.

However, that does not change where "Income from equity method investments" WOULD go.  I just provide all these placeholders.  Accountants creating a financial statement cannot move this stuff around.  For example, an accountant simply cannot include "Income from equity method investments" within Gross Profit, Nonoperating income (loss); there is exactly one appropriate spot for that line item.

There are only two areas of this set of concepts that I am having slight problems fitting the puzzle pieces together.  The first is the line items which make up "Operating income (loss)". There is such a wide variety of line items and subtotals provided that this is a bit of a challenge.  There is also one significant error that about 50 SEC filers make.  What the filers do is take the concept "Interest and Debt Expense" which is basically a category of expenses and "repurposing it" (in my view misusing it) as a line item within a different category, "Nonoperating income (expense)".  That is like using the concept "Assets" within the liabilities section of a balance sheet.  And so this area is a bit challenging.

Another area where this model does not quite work correctly is the cash flow statement and the placement of "Exchange gains (losses)" in that statement.  There are two different approaches SEC filers take. The first approach includes the exchange gains (losses) within the computation of "Net cash flow", contributing to that total.  Well over 98% of SEC filers use this approach.  A small minority of SEC filers include "Exchange gains (losses)" within the roll forward of the cash and cash equivalents beginning and ending balance.  I have pointed out this issue previously.  Some accountants I talk to consider this an error on the part of the filers in creating their financial reports.  Others acknowledge an ambiguity within US GAAP which could lead to this second interpretation used by the minority of SEC filers.  There is no real business reason for having two approaches to where this line item should show up.  OK, so that means there are two possible representations for that particular line item.  Fine.  That does not break the idea of the existence of these fundamental accounting relations.

And so there really is not just one representation.  If a reporting entity provides an unclassified balance sheet, they won't report current assets or liabilities.  No big deal, just a slightly different representation.  Same thing for whether a filer provides a single-step or multi-step income statement.  That does not change every fundamental relation, it only changes a small handful.  Likewise if a filer reports using net assets instead of equity, like a small number of SEC filers do.  These are all just minor adjustments to this underlying representation, it does not break the representation.

Another thing that I did was provide a wiki page which captures the concepts and relations which I am using.  You can get to these fundamental accounting relations here.  If you have any other relations which you want to add, go for it.  If there are any that you disagree with, post a comment to the discussion page.

Thus far, no one has made a sensible argument against any of these relations.  Also, the SEC filings that I have support the existence of these relations.  Again, not every SEC filer has all of these relations; but there is not one SEC filing that I have seen which leads me to believe that I have any of these relations incorrect.

Accountants, do you dispute any of the following mathematical relations between accounting concepts? If so, which ones would you dispute?

• Assets = Liabilities + Equity
• Assets = Liabilities And Equity
• Assets= Current Assets + Noncurrent Assets
• Noncurrent Assets = Assets - Current Assets
• Equity= Equity Attributable To Parent + Equity Attributable To Noncontrolling Interest
• Current Assets= Assets - Noncurrent Assets
• Liabilities= Current Liabilities + Noncurrent Liabilities
• Liabilities And Equity = Liabilities + Commitments And Contingencies + Temporary Equity + Equity
• Noncurrent Liabilities = Liabilities - Current Liabilities
• Liabilities = Liabilities And Equity - Equity
• Net Cash Flows = Net Cash Flows Operating Activities + Net Cash Flows Investing Activities + Net Cash Flows Financing Activities + Net Cash Flows Discontinued Operations + Exchange Gains (Losses)
• Net Cash Flows Operating Activities = Net Cash Flows Operating Activities Continuing Operations + Net Cash Flows Operating Activities Discontinued Operations
• Net Cash Flows Investing Activities = Net Cash Flows Investing Activities Continuing Operations + Net Cash Flows Investing Activities Discontinued Operations
• Net Cash Flows Financing Activities = Net Cash Flows Financing Activities Continuing Operations + Net Cash Flows Financing Activities Discontinued Operations
• Net Cash Flows Discontinued Operations = Net Cash Flows Operating Activities Discontinued Operations + Net Cash Flows Investing Activities Discontinued Operations + Net Cash Flows Financing Activities Discontinued Operations
• Net Cash Flows Continuing Opertaions = Net Cash Flows Operating Activities Continuing Operations + Net Cash Flows Investing Activities Continuing Operations + Net Cash Flows Financing Activities Continuing Operations
• Gross Profit = Revenues - Costs Of Revenues
• Operating Income (Loss) = Gross Profit - Operating Expenses + Other Operating Income (Multi-step approach)
• Operating Income (Loss) = Revenues - Costs And Expenses + Other Operating Income (Single-step approach)
• Income (Loss) Before Equity Method Investments = Operating Income (Loss) + Nonoperating Income (Loss) - Interest And Debt Expense
• Income (Loss) From Continuing Operations Before Tax = Income (Loss) Before Equity Method Investments + Income (Loss) From Equity Method Investments
• Income (Loss) From Continuing Operations After Tax = Income (Loss) From Continuing Operations Before Tax - Income Tax Expense (Benefit)
• Net Income (Loss) = Income (Loss) From Continuing Operations After Tax + Income (Loss) From Discontinued Operations + Extraordinary Items Of Income (Loss)
• Net Income (Loss) = Net Income (Loss) Attributable To Parent + Net Income (Loss) Attributable To Noncontrolling Interest
• Comprehensive Income (Loss) = Net Income (Loss) + Other Comprehensive Income (Loss)

While the majority of SEC XBRL financial filings do in fact comply with these mathematical relations between accounting concepts, some do not. 

Further it can be hard to reliably extract information from SEC XBRL financial filings because pieces are not reported.  For example, few SEC filers actually report the concept "Noncurrent assets".  Now, it is easy to compute that value, "Noncurrent assets = Assets - Current assets".  Easy enough.

However, it is WAY safer to have as much information provided and NOT have to impute values based on other values. This can lead to errors.  Or said another way, it is best if two approaches to computing a value exist and both are used and checked against the other to be safe that you are interpreting information correctly.

Even if an SEC filer does not report a value such as noncurrent assets, it can be helpful in checking your work to have that concept to verify computations.

I mentioned the WebFilings Taxonomy Analyzer before, but it is worth mentioning again because now you no longer need to log in to use it.

Very useful!