Digital Financial Reporting

You can now easily watch XBRL-based digital financial reporting training videos in the comfort of your own living room compliments of Apple TV.  Well actually, Roku works also.

Here is how can watch my YouTube play list Introduction to Digital Financial Reporting Terminology using Apple TV.

1. On your Apple TV home screen, go to the App Store.
2. Download the YouTube application.
3. Open the YouTube application and search on "DigitalFinancialReporting" (no spaces)

A screen that looks like this will appear.  Note the list of videos on the top, the play lists on the bottom.  Select the play list in the lower right hand corner, Introduction to Digital Financial Reporting Terminology.

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When you click that image, this next image appears. Simply click the "Play all" icon:

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Those videos are just the beginning!  There will be additional videos coming your way soon.  Perhaps this needs to be a MOOC.  What could be more fun than binge watching XBRL videos!

The basic, common sense fundamental accounting concept relations and the "report frames" or different reporting styles that are used by public companies reporting under US GAAP are the tip of the digital financial reporting iceberg.  Below that you have the disclosures which work consistent with the reporting styles/fundamental accounting concept relations.  All of this information (the report frames, the fundamental accounting concepts, and the disclosure information) can be represented in machine-readable form using XBRL.  Key to this is XBRL definition relations and XBRL Formula.

Already, I have 98.80% consistency with the set of about 22 basic, common sense accounting relations represented. That provides emperical evidence to support these basic accounting relations which are not defined by XBRL; rather they are defined by US GAAP.

Already, I have 80% consistency with a set of approximately 119 different reporting styles used by public companies.  Currently, 2,149 public companies report using the exact same reporting style.  Of that one report style, 82% of all those public companies are also consistent with all of the basic common sense fundamental accounting concept relations.

I was able to figure this out by essentially reverse engineering the rules from XBRL-based public company financial reports submitted to the SEC. This information is incredibly useful for two reason:

1. It provides positive evidence of how to properly represent financial information consistent with US GAAP and consistent with XBRL technical rules.
2. It provides contra examples or positive evidence using negative examples of how NOT to use US GAAP or XBRL technical rules.

And the best thing is that 100% of these business rules can be represented using XBRL definition relations and XBRL Formula and are machine-readable.

No one is really arguing against these fundamental accounting concept relations or reporting styles; yet.  Why?  Because I am focusing on the obvious mistakes that no one really disputes.  But what is going to happen is that at a certain point reaching concensus will become harder.  For example, one issue pointed out by the fundamental accounting relations is rounding errors.  Are rounding errors allowed or are they not allowed?  There are two different positions that people have currently.  Neither view is "right" or "wrong", they are simply different positions with different sets of "pros" and "cons" when it comes to working with digital financial reports.

These fundamental accounting concept relations and reporting styles will, and are, establishing patterns which can be used to think about other aspects of the US GAAP Financial Reporting XBRL Taxonomy and XBRL-based digital financial reports.  These patterns are basically principles of digital financial reporting.

While the fundamental accounting concepts and report frames are not suffecient to make digital financial reporting work correctly; they are necessary.  Digital financial reporting cannot be proven to work unless you can prove that the basics work.

Image is from https://ukpr.files.wordpress.com/2015/09/iceberg.jpg

Digital financial reporting is the future of financial reporting. XBRL-based public company financial reports are defining digital financial reporting.

In a post a few days ago, I mentioned that someone was creating a "triple-entry accounting system". They point out three key pieces to that system:

• InterPlanetary File System (IPFS)
• Ethereum
• XBRL

Those three things might be "technologies" or "implementations of technologies". But I don't think that those are the pieces of the puzzle.  Or, there may be more than three pieces.  For example, Ethereum is one of many blockchain and other supporting technology implementations.

One of the fundamental pieces though is the idea of a digital mutual distributed ledger.  (I have heard "distributed ledger" and "mutual distributed ledger" and "digital ledger" used interchangeably. I will use the term digital distributed ledger.)

So what is a digital distributed ledger?  A digital distributed ledger is an indestructible and uneditable decentralized computer record, or ledger.  It provides a full and complete history of transactions in that ledger.  Ledgers can be as public and open or private and limited as the use case demands. Ledgers can be permissioned or permission-less in determining who can add new transactions. Different approaches can be used to determine how new transactions are authorized (proof-of-stake, proof-of-work, consensus, identity mechanisms) before they can update the ledger. Ledgers can be interlinked with one or more other ledgers.

The key innovation that enables computerized digital distributed ledgers is the blockchain technology.  Blockchain technology is used to maintain what amounts to a continuously growing list of translational data records hardened against tampering and revision, even by operators, using advanced cryptography (basically, cryptographic mathematics). As Gabriel Tumlos of KPMG put it in his paper Blockchains, Distributed Ledgers in Finance and Accounting, "Blockchains introduced a trust-minimizing transactional platform that all but eliminates the need for a vulnerable third party and allows accounting systems to take their logical next step."

What can digital distributed ledgers be used for?  This video mentions the following use cases:

• Regulatory records
• Delivery records
• Chain of custody
• Property titles
• Know your customer
• Digital rights management
• Loyalty management
• Motor insurance
• Proof of authenticity
• Account portability
• Anti-money laundering
• Peer-to-peer lending
• Personal insurance
• Corporate credit
• Trading records

Don't limit yourself by thinking that a "transaction" is an accounting transaction such as an invoice.  While transactions can be recorded, so can events, circumstances, and other phenomenon that affect, say, a business during a period.  That sounds a lot like the sort of information from a financial report.  A report is a transaction.  The "payload" of the transaction is the information in the report itself.  XBRL-based digital general purpose financial reports, say to a regulator like the Securities and Exchange Commission, are really transactions that hold complex information structures about the financial condition and financial position of an economic entity.

What XBRL brings to the table is an ability to agree on and document the relations between the reported facts in the complex transactions we refer to as financial reports.  But XBRL can also be used to make sure that smaller transactions that go into these ledgers adhere to agreed upon business rules.  This keeps information within those digital distributed ledgers correct.

If digital distributed ledgers are used to their full potential, it could enable a fundamental shift in the way economic entities transact business with one another.  How will this impact the role of accountants and auditors?  Time will tell.

Here are some additional resources useful in understanding computerized digital distributed ledgers: 

• How does the blockchain work?
• Demystifying Blockchain and Distributed Ledger Technology – Hype or Hero?
• Mutual distributed ledgers
• Unblock the shared economy - Growing trust in mutual distributed ledgers – such as the Blockchain technology underlying Bitcoin – will change financial services for the better: Three page concise overview of what mutual distributed ledgers do.
• The Digital ledger landscape: This is a 70 slide presentation that provides a lot of details about distributed ledgers.
• InterChainZ: Sharing Ledgers for Sharing Economies: This is a 5 minute video that explains distributed ledgers.
• Crash Course on Mutual Distributed Ledgers (BlockChains):
• Rubix, and initiative by Deloitte: Part of Rubix appears to be "blockchain as a service".
• How to Implement Block Chain and Distributed Insfrastructure in Financial Services: Blockchain’s and distributed ledger technology’s potential to make ledgers more transparent, trustworthy and efficient leads to suggestions that it can possibly revolutionize financial services. But applying the blockchain within each firm’s context is complicated, and it is as yet unclear what business needs, if any, the blockchain will truly resolve. Ernst & Young explains the blockchain’s potential to change financial services, explores possible applications and describes the issues worth considering when applying the technology.
• Distributed Ledger Technologies
• EY, Blockchain reaction: Tech Plans for Critical Mass
• Deloitte, Blockchain technology.  A game changer in accounting?
• A brief history of blockchain
• Hyperledger, an enterprise blockchain
• Multichain, Open source private blockchain
• How bitcoin will disrupt accounting and auditing
• The Truth about Blockchain, Harvard Business Review
• Journal of Accountancy, Why CPAs need to get a grip on blockchain
• World Economic Forum, 5 key concepts for blockchain newbies

The quality of XBRL-based public company digital financial filings to the SEC continued to improve and some important milestones have been reached.  As a reminder, this measure compares XBRL-based reports submitted to the SEC with approximately 22 basic, common sense fundamental accounting concept relations using an automated machine-based process. It is expected that 100% of all XBRL-based financial filings to the SEC would be consistent with all 22 basic, common sense accounting relations.  Certain specific categories of filers have been removed such as "Funds and trusts" which have unique reporting practices and are not expected to follow these basic relations.  The purpose of these tests is to determine the basic abilty of an automated machine-based process to make use of information in XBRL-based public company financial reports. These basic accounting relations consider 100% of the reporting styles of public companies.

There are three possible reasons for an inconsistency with one of the basic, common sense fundamental accounting concept relations:

1. Filer error, where the filer represents a relation which is inconsistent with US GAAP. For example, one common error is to use the concept "us-gaap:IncomeLossFromContinuingOperations" to represent the line item "Operating Income (Loss)" in a financial report.  The proper concept is "us-gaap:OperatingIncomeLoss".
2. US GAAP XBRL Taxonomy error, where a filer cannot possibly represent information consistently because a concept is missing from the taxonomy. For example, the US GAAP XBRL Taxonomy does not have a concept to represent "Operating and nonoperating revenues". Therefore, filers must create an extension concept or use some inappropriate concept and automated processes may misinterpret reported information.
3. Test metadata error, where the mapping rules or impute rules used to obtain information and test the relations between reported facts are inconsistent with US GAAP.  For example, if a test disallows a relation that is allowed under US GAAP, this is a metadata error.

The column "Percent Without Error" in the table below indicates the percentage of a generaor's (software vendor or filing agent) filings which are completely consistent with expectations represented by the set of approximately 22 relations.  For example, the first generator in the list "Merrill" created 469 XBRL-based financial filings which were submitted to the SEC, 454 of those contained no inconsistencies, and therefore 97% of the filings they created were completely consistent with what is expected by the 22 consistency tests.

Other important milestones include:

• 5 software vendors/filing agents have achieved 90% "Percent Without Error" or better.
• 13 software vendors/filing agents have achieved 80% "Percent Without Error" or better.
• 82.6% of all 6,726 XBRL-based financial filings to the SEC were completely consistent with all 22 basic common sense accounting relations.
• Total inconsistencies has dropped below 2,000 for the first time and now stands at 1,782 inconsistencies.

Summary of results by generator (software vendor/filing agent):

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 Summary of results by test:

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Average consistency with each basic, common sense fundamental accounting concept relation and comparison of software vendor/filing agent with average: (Shows Merrill as compared to average) 

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Comparison of information for March 31, 2015 (10-K for 2014), June 30, 2015 and November 30, 2015:

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For more information or to obtain a complete set of test results, please contact me. The documents Arriving at 2014 Digital Financial Reporting All Stars: Summary and Understanding Minimum Processing Steps for Effective Use Of SEC XBRL Financial Filing Information, provides helpful information if you want to better understand the tests and testing process.

Again, great work to the software vendors, filing agents, and public companies who are blazing the digital financial reporting trail!

Previous results reported: October 31, 2015; September 30, 2015; August 31, 2015; July 31, 2015; June 30, 2015; May 29, 2015; April 1, 2015; November 29, 2014.