Digital Financial Reporting

Malcolm Gladwell, author of Blink, helps one understand variability and how grouping things into clusters can be used to better understand which is the best pickle and what the best spaghetti sauce is.  The answer is that there is no best pickle or spaghetti sauce.  But there are best clusters of pickles and spaghetti sauces.  Watch this TED video to understand how to meet peoples needs.

So, I am sure you are asking what the heck this has to do with XBRL.  Profiles of XBRL is basic a clustering of user needs.  

There is no one right approach to using XBRL.  It is also true that each system making use of XBRL and inventing their own specific approach to using the general functionality which XBRL provides.  Each system creating its own architecture is simply too inefficient.

The middle ground is to cluster needs of a system. Is extensibility needed? If yes, then you take the pieces from XBRL which cause the least issues relating to extensibility.  You wrap your set of characteristics into a bundle, that is your profile.  Or, rather than building your own XBRL profile, even better is using someone else's XBRL profile which is known to work well.

Watch the video and you will better understand how clustering user needs into profiles can help you see XBRL just a little differently.

The Financial Accounting Foundation (FAF), a not for profit entity of which the Financial Accounting Standards Board (FASB) is a part, will be charged with maintaining the US GAAP Taxonomy, per the following WebCPA post and FAF press release.  When the SEC began funding the US GAAP Taxonomy it originally started at the FAF but was transferred to XBRL US as the progress progressed.

This is an interesting twist.  The first thing that came to my mind is the potential switch to International Financial Reporting Standards (IFRS) by US companies.  I think there will, at least for the foreseeable future, be a US GAAP Taxonomy going forward if this occurs.  The US GAAP taxonomy adds information for many industries, details not found in the IFRS taxonomy, and SEC rules which will never be covered by the IFRS taxonomy.

The fact that the FAF maintains the US GAAP Taxonomy could cause even more "market provided support" for things which make the US GAAP Taxonomy usable by reporting entities.  This is similar to the fact that the FAF publishes the accounting standards, but Wiley and others publish books which explain and make the standards easier to use. 

Also, the AICPA publishes things like Accounting Trends and Techniques.  When this SEC XBRL filing really gets going, I think people will realize that using the US GAAP Taxonomy as the starting point is not the way to go, rather there will be XBRL templates which are better starting points.  The end result will be valid XBRL which can be submitted to the SEC.  It is just that the market will be able to better decide what is useful.

I do find the timing of the next update interesting:

The FAF and FASB plan to assemble a small team of technical staff who will be dedicated to maintaining the taxonomy and will work towards the release of the next taxonomy update in early 2011.

Users need better search capabilities in taxonomy creation software so they can FIND the right concepts.  The use of synonyms to help identify concepts would be very helpful to users.

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There are two incredibly useful free software applications which are helpful in modeling things in general.  My specific interest is to help me model some things related to XBRL.

• ArgoUML: This is a tool for modeing UML.
• VUE (Visual Understanding Environment): This is a tool for modeling pretty much anything visually.

Thank you to the people who made me aware of these tools.  Both are of these tools are quite useful!

OK, you need to use your imagination here but this will give you an idea of what life could be like.

Take a look at Digital Photography Review side-by-side comparison of cameras.  (Me, I did a comparison of the Nikon D200, D300s and the D700 which you can see here.)

I am not saying that the comparison of digital cameras has all the desired characteristics of a comparison of financial information.  You can look at this as perhaps a benchmark.  Think about how you might change the interface to be the "dream financial comparison tool" which an investor might like?  Imagine that the initial lookup list is a list of companies.  Imagine that the list of camera features is rather a list of financial ratios, financial concepts, and other information.  Imagine the "our in-depth review" being the complete rendered financial statement.  What stands in the way of having this? 

This is somewhat similar to the prototype SEC XBRL viewer worked.

This digital camera side-by-side comparison can be used in many ways to help determine what a comparison of companies financial information might look like.  Ask yourself what might be needed to make your "dream comparison" work.  We have lots of the pieces, but no one has done all the things necessary to wire things up in a useful way yet.  But, as more and more pieces of the puzzle fall into place, I am sure that financial comparisons will be as easy as comparing digital cameras on this Digital Photography Review web site.

Take this one step further.  Imagine a business user being able to put together their comparison, any comparison they want, making it available to whomever they want, all without the help of the IT department. That is what XBRL is really about, in my view.  

These comparisons really are not that difficult to create.  It is more challenging to create the things you need in order to create the comparisons. For example, if the world has 80 different sets of financial  reporting standards it would be challenging to have one tool which compares companies which use different reporting standards.  No problem, just create IFRS.  Now we have the possibility of having global comparisons.  So we have IFRS and we need a way to generate the information into a structured format.  If every company used a different format, comparisons are harder.  Along comes XBRL and we have the possibility of standardizing on one format.  XBRL + IFRS expressed using XBRL (the IFRS Taxonomy).  Those were the two big challenges.  Everything else is details really.

Imagine!