Digital Financial Reporting

If you grab information from one of my modern approach to creating a reporting scheme prototypes; you can see that everything distills down to a chain of logic gates that are used to construct a chain of reasoning.

For instance, grab this Excel spreadsheet that contains VBA code that extracts metadata from the US GAAP Ontology-like thing.  You can use that and other metadata to create things like:

• This interface
• This comparison
• This validator
• These extraction tools
• This HTML rendering
• This different HTML rendering
• This SEC viewer
• This metadata interface
• Or anything else...

That is more, most of the associations are very simple "from" one concept, "to" some other concept, and the nature of the relationship explained by some "arcrole".  The most complicated logic represented are the impute rules that look like this:

if (NoncurrentLiabilities = 0 and not(CurrentLiabilities = 0) and not(Liabilities = 0)) then (NoncurrentLiabilities = Liabilities - CurrentLiabilities) else (NoncurrentLiabilities = NoncurrentLiabilities)

That is the toughest software application interface that needs to be created, expressing that relationship.  Yes the volume of rules is rather large and there is a lot of professional knowledge that you need to have to create the rules; but professional accountants have that.  So, accountants will only work with LOGIC to represent knowledge of a domain that they understand.

Fundamentally, a computer is a bunch of "1s" and "0s" and everything you create is about flipping the right bits with some programming language.

What is a bit different here is that all my metadata is declarative as contrast to interpretive.  That changes the programming paradigm.  Rather than creating procedural code that is locked into one sequence of IF...THEN statements; the logic is represented via the XBRL technical syntax (instance, taxonomy schema, linkbases) and they a rules engine is used to process the logic represented via the declarative rules.

Semantics are represented in the form of models. The rules engine understands the semantics, models, and how to read the decarative metadata (logic) and can sort everything out.

This is closer to logic programming that functional programming.  This is a different paradigm than most software developers are use to.

Powerful stuff!

I am big on system theory.  A financial report is a man made logical system. There is nothing "natural" about a financial report.  It was created for a purpose.  A "digital" version of a general purpose financial report is an improved version of the "paper" or "e-paper" version.

The document, Special Theory of Machine-based Automated Communication of Semantic Information of Financial Statements, is my best attempt to explain what it takes to effectively automate the communication of financial information. (This 15 minute video provides an overview of the document. This video play list, Understanding the Financial Report Logical System, contains nine short videos that elaborate on the details.)

These five financial reporting scheme representations use that theory.

This framework is used to represent the models, structures, terms, associations, assertions, and facts that are used to represent information using that theory.

This working proof of concept software application leverages the theory, the framework, and the metadata of the five financial reporting scheme representations.

Artificial intelligence, structured information, distributed ledgers, and Lean Six Sigma are a match made in heaven and will have a significant impact on accounting, reporting, auditing, and analysis in a digital environment that will prevail during the Fourth Industrial Revolution. Lots of synergy!

Want to understand XBRL-based digital financial reporting? Here are six images that explain it.

There is a method to my madness.  As you might know from previous posts I am into systems theory and lean six sigma.  If you want to understand how I created my framework (i.e. analysis, synthesis, models, patterns) and method (i.e. systems theory, systems paradigm) I would encourage you to watch these excellent videos:

• Systems theory: A system is a cohesive conglomeration of interrelated and interdependent parts that is either natural or man-made.
• Systems thinking: 
• Systems paradigm: A paradigm is a model, perspective, or set of ideas that form a worldview underlying the theory and methodology of a particular domain.
• Patterns: A pattern is a systematic regularity in the world. A pattern is any form of correlation between the states of elements within a system. Patterns are structural prescriptions to which model artifacts are meant to conform.
• Pattern formation: 
• Graph theory (Network theory): 
• Synthesis and Analysis: 
• Synthesis: 
• Formal models: A model is an abstract, typically compact representation of some phenomenon.
• Logic: Thinking according to a set of consistent and coherence rules.
• Chain of reasoning:
• Process thinking: 
• Stocks and flows: (From a different channel)

Much more can be found at this YouTube channel, Systems Innovation.  I highly recommend it.  In fact, this playlist, Systems Theory Course, appears to be an excellent introduction.

I am not making this stuff up. What I am seeing is the synergy offered by artificial intelligence, structured information like XBRL, digital distributed ledgers, and Lean Six Sigma principles, philosophies, and techniques.  It is this "match made in heaven" that will enable effective automation of accounting, reporting, auditing, and analysis tasks and processes.

You might want to dust off that Lean Six Sigma Black Belt certification.

If you want to get your head around  this, check out my modern approach to creating a financial reporting scheme.

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The Long Game: Feedback Loops and Desiloed Systems By Design

You perhaps only have to look at one web page to see the opportunity.  Here is that page:

Cross reference

The point of this blog post is to show a new modern approach to creating a financial reporting scheme.  What changes?  Lots of machine-readable information in the financial reporting scheme.  Be it a general purpose financial statement or a special purpose financial statement or even an internal financial report creation process; machine-readable information can add value in many ways for creating or consuming reported financial information. 

This is true whether the report itself is human-readable or machine-readable.  Probably the most benefit is using the machine-readable rules to prove the financial reporting scheme is working as expected and to communicate more clearly (i.e. representing key aspects of financial reporting schemes in machine-readable ontology-like thing).

Every financial reporting scheme has five fundamental things in common.

First, at the foundation of every financial reporting scheme is the double-entry accounting model.  Simply stated, that model is: DEBITS = CREDITS. It is a mathematical model. (If you don't understand this model, this video is helpful!)

Second, building on the double-entry accounting model is the accounting equation: Assets = Liabilities + Equity.

Third, every financial reporting scheme defines a core set of interrelated elements of a financial statement that are fundamentally grounded in some form of the accounting equation (i.e. it could be Assets - Liabilities = Equity). For example, the Financial Accounting Standards Board (FASB) defines these ten elements of a financial statement in SFAC 6; Assets, Liabilities, Equity, Comprehensive Income, Investments by Owners, Distributions to Owners, Revenues, Expenses, Gains, Losses.  Then, additional elements are defined based on that core set.

Fourth, every financial reporting scheme has what is called "articulation".  Articulation is the notion that the elements of a financial statement are interrelated and therefore depend on one another and so the four core statements; the balance sheet, the income statement, the changes in equity and the cash flow statement are all mathematically interrelated.  (This is explained very methodically by the FASB in SFAC 6; see section "Interrelation of Elements—Articulation" on pages 21 - 22.)

Fifth, every financial report has inherent variability that is the result of explicitly allowing intermediate components of a financial report (i.e. subtotals) to be combined in appropriate but perhaps different ways depending on the needs of the reporting economic entity. (See paragraph 77 on page 47 of SFAC 6.)

Because of the inherent mathematics and logic of financial reporting schemes they lend themselves beautifully to computer-based processes.  A financial report is a logical system. I have taken the time to both prove this idea and to perfect the idea by representing six different financial reporting schemes in machine-readable XBRL.  Now, none of these is 100% complete, they are sophisticated enough working prototypes.  But they definitely can be used to communicate the essence of the idea and they are robust enough to make certain that everything works. Here are the six best plus others in the works: (all XBRL is tested using four different XBRL processors)

• US GAAP to SEC Financial Reporting Scheme: Financial reporting by public companies using US GAAP to report to the SEC.
• IFRS to SEC Financial Reporting Scheme: Financial reporting using IFRS FULL to report to the SEC.  (International Financial Reporting Standards).
• IPSAS Financial Reporting Scheme: Based on IFRS, International Public Sector Accounting Standards (IPSAS) is intended to be used by governments and other public sector entities around the world.
• FRF for SMEs Financial Reporting Scheme: The AICPA created the Financial Reporting Framework for Small- and Medium- Size Entities (FRF for SMEs) framework to provide something of high quality but not as complex as US GAAP.
• MINI Financial Reporting Scheme: This is a working proof of concept that is 100% complete and rock-solid.  It is used to test ideas and to make sure everything is working as expected.  This is particularly useful for special purpose financial statements and internal financial reporting.
• XASB Financial Reporting Scheme: This is also a working proof of concept that is used for testing.  This is not totally complete, but it does have a bunch of important test cases.

Here are others in the works:

• US GAAP general reporting: Financial reporting by private companies using US GAAP generally.
• Not-for-profit general reporting using US GAAP: Financial reporting by not-for-profit entities using US GAAP.
• IFRS to ESMA using ESEF Financial Reporting Scheme: Financial reporting using IFRS FULL to report to the ESMA.
• IFRS for SMEs general reporting: Financial reporting by unlisted private companies using IFRS for SMEs generally.
• GAS to create CAFR: Financial reporting of CAFR (Comprehensive Annual Financial Report) to U.S. Census Bureau using Governamental Accounting Standards (GAS).  Provided by GASB.

There are three other test cases worth mentioning because they can really help you get your head around XBRL-based digital financial reporting.  The first is the accounting equation test case. This is really good because it helps you see the big picture even though the example is small.  Expanding on the accounting equation slightly is the SFAC 6 test case.  Expanding a little more is the common elements of a financial report of four statement test case. All of those small test cases are incrementally expanded and explained in this document that proces that all these work effectively and correctly. And this sophisticated example of an XBRL-based digital financial report ties everything together into a nice little bow.

All of the above is based on the forthcoming OMG Standard Business Report Model (SBRM).

Suffice it to say that all of this is based on methodical, rigorous, and thorough testing. Everything is based on proven best practices.  Rather than repeating the mistakes of others, I learn from their mistakes and avoid them.

Why would I take the time to do all this?  You won't get it unless you have the right background understanding. Once you understand that, and then you watch this PBS Front Line Video, In the Age of AI, you will undoubtedly understand.

Want to learn more?  Download this free software application and look at the examples.  Check out Intelligent XBRL-based Digital Financial Reprting.  I will be improving that resource over the next year.  Something missing that you need? Let me know and I will try and help you find it.

The Federal Energy Regulatory Commission published their XBRL taxonomy yesterday.  You can get to it here.  It is a good taxonomy. You can download it via the YETI XBRL taxonomy tool.  I downloaded FORM No. 1, validated it successfully with two high-quality XBRL validators.  I generated this HTML rendering of FORM No. 1 from the XBRL taxonomy.

I would point out the readability of the taxonomy and the excellent use of hypercubes.