Digital Financial Reporting

Back in November 2009 I gave an A+ to one SEC XBRL filer, Citigroup, for meeting a base set of criteria. By February 2010 the number which got an A+ grew to 24. By March the list grew to 92.  Then in September 2010 it grew to 4875.  If one looks at the XBRL Cloud EdgarDashboard, you don't see much red in the "E" for EFM validation errors column or even the "W" for warnings.

Great job SEC filers!  Lots of improvement.  This is not to say a lot more work is needed.

Another significant milestone has been reached: a readable rendering.

What do I mean?  Well, looking at an extreme example will make the point.  Consider the example below:

SEC XBRL filing with rendering "issues"

It would be hard for me to believe that anyone sees this example as something which should be emulated.

Why do SEC XBRL filings render like this?  Well, let me tell you who has the most readable rendering that I have seen.  There are only two criteria and I am not saying that this is the only SEC filing which meets these criteria.  What I am saying is that it is the first SEC filing which I have run across which meets the criteria.

The first criteria is that the filing must be a 10-K, meaning it has lots of rather complex stuff in it.  The second criteria is that you can look at the information in the SEC XBRL financial filing and you are not totally confused by what you see.

So who is the winner of this distinction?  Google.

• SEC Viewer for Google's 10-K
• XBRL Cloud Viewer for Google's 10-K
• Here is the Google XBRL Taxonomy (so you can see what modeling approach they used)
• XBRL instance (load this into your favorite XBRL software)

What is even more interesting is that I get close to the same renderings in three different software applications created by three different entities.  First of course you have the SEC viewer which was created by the SEC.  The second is XBRL Cloud.  That viewer is freely available to use for looking at SEC filings, thus the link above. The third company is CoreFilings and their product is Magnify.  You have to either buy that software or get a trial version for 30 days to try it out.

Do you understand what this means?  One global standard, three different software vendors.  I am sure that there are more software vendors can load and render Google's filing.  But I have only used three.

And how did Google achieve this distinction?

1. Google created many smaller pieces, rather than fewer larger pieces. Google's filing has 92 networks.  Remember that half of them are XHTML "[Text Block]"s; so I figure that there are about 40 or 50 pieces, given that the primary financial statements do not have [Text Block]s.
2. Google modeled the information.  If you go look at that not-so-good example above, it is pretty easy to tell that whoever modeled that has no notion of a "model" in their mind and that all they did was pick a piece of the financial statement, parsed the HTML presentation into pieces, and then put some "tag" on the piece.  Google did not do that.  Google clearly thought about what they were doing, they modeled the information, and the rendering turned out pretty good as a result. Perhaps not perfect, but there is not one of those pieces which looks even remotely like the example shown above.
3. Google matched up [Axis] and [Line Items] well. A major reason for poor renderings is mismatches between the [Axis] and the [Line Items] for reported facts. This relates to point "1" above (many smaller pieces, rather than fewer larger pieces).  Proper match ups, which Google most of the time, causes better renderings.

That is really all it takes to get a good rendering.  Don't believe me?  Take a look a the renderings of the disclosure templates I am creating. If you find one that you don't understand (clearly you need to understand the accounting) please let me know.  The disclosure templates are small pieces, but don't be fooled by that.  Add more [Axis] or add more [Line Items] and you will still have good renderings.

Bad renderings are caused by: (1) bad models and (2) bad rendering engines.  If you have a good rendering engine and a bad modeling, you will have a bad rendering.  Good rendering engines cannot fix bad modelings.

Great work Google!  I think I will go through all Google's computations and see how well they did on those.

Many movie theaters are going out of business because they cannot make the switch to digital projection equipment. The Borders bookstore that I used to like to go to is now an empty, vacant building.  A couple of years ago I sent thousands of dollars worth (when new) of photography equipment to Goodwill because it was obsolete. My Denon stereo system was scrapped years ago, as were my collection of cassette tapes.  I am still wondering what to do with all my CDs which now live on my iMac within iTunes so I can get them on my iPod.

The switch away from the historical paradigm of financial reporting to the new paradigm of digital financial reporting will occur sooner and faster than you might believe.  Are you prepared?

While XBRL might be a career niche today, it may turn into a constraint if you don't have the skills you need to survive in a world of digital financial reporting.

How do you get those skills?  I summarized this in a blog post a while back.

The real question is not how to get there you need to be, it is whether to make the investment to get there.  IBM seems to be making the shift. Others are also. 

The dynamics of the innovation process can be hard to understand and even harder to predict.  Then deciding whether to make the leap one needs to consider risk.  The global consultancy firm Gartner classifies XBRL as a transformational technology.  Gartner defines transformational as something that "enables new ways of doing business across industries that will result in major shifts in industry dynamics."  Major shifts means lots of change and some winners and some losers.

Don't be road kill in the switch to digital financial reporting.

In order to show how the disclosure templates I am creating might be used within a software application, I have created a sample implementationwhich uses the disclosure templates. The sample implementation, built using Microsoft Excel, interacts with a set of RDF/OWL files which provide metadata which can be leveraged to help interact with the disclosure templates.

For example, in the screen shots below notice how:

• The disclosure templates are organized within the software application using the US GAAP topics which are provided from the RDF/OWL file.
• The disclosure template information can be read directly into the software application.  In this case, the model structure is read from an XML infoset.  Other information is available.
• The US GAAP taxonomy network with which the disclosure template is associated is also loaded into the software application.  That can be used as a "pick list" to add additional pieces to the disclosure template.
• Software which implements this model can help users create the correct model structure by enforcing verification rules during the creation of the SEC XBRL financial report (as opposed to at the end of the process).
• While this example uses the US GAAP taxonomy, the same approach can be used for the IFRS taxonomy or any other reporting scheme.

View disclosure template information

View associated US GAAP Taxonomy information

The Journal of Accountancy published an article, The future is now: XBRL emerges as career niche, pointing out a few things such as:

• The “SERIOUS DEFICIENCY OF XBRL-KNOWLEDGEABLE PEOPLE”
• Merrill, one SEC filing agent, has on staff more CPAs than the vast majority of U.S. accounting firms (Merrill is one of the largest filing agents, but there are many other filing agents
• XBRL is a global phenomenon
• “This is a real global opportunity for students to learn some skills that will be valued around the world.”

Something the article did not mention is that the last group of about 6,000 SEC public companies is moving from having to summary level creation of their SEC XBRL financial reports (most people call this block tagging) to having to provide all the details of the disclosures in the notes (detailed tagging).  There will be a lot of work done in June/July as most filers create their 10-Qs and then another big jump in December/January as filers report 10-Ks.

But I disagree that the opportunity about "XBRL".  The opportunity is more about digital financial reporting than it is about XBRL.  XBRL is simply an enabling technology. There are many, many things that you need to understand in order to satisfy the market need. Sure, XBRL is part of digital financial reporting but the operative word is "part".

This would be my list of necessary skills and how to get those skills:

1. Financial reporting/accounting. If you don't have financial reporting and accounting skills then you really can't be of much value in expressing financial information digitally using the XBRL medium.  Accountants, particularly certified public accountants and chartered accountants, understand what it takes to be at this level and have this necessary building block.  It is way easier to teach accountants the few additional things they need to work with digital financial reports effectively than it is to take a technical person who grasps the XBRL technical syntax and teach them accounting. You can do it and certain types of technical people can provide significant value, but it will always be through working with someone with accounting and financial reporting expertise.
2. Modeling-based reporting.  XBRL is a means of modeling business information.  Accountants today can use the medium of "paper and pencil" or "Microsoft Word" or Excel or HTML to express a financial report.  With digital financial reporting using the XBRL medium, you need to convey that same message using a different medium.  Just as your paper version (or the electronic version of that paper version in HTML, PDF, Word) needs to be a true and fair representation of your financial information which is complete, correct, consistent, accurate and which "foots and cross casts" and otherwise ticks and ties; so to does your digital financial report.  The paper version and the digital version of a financial report must convey the same message. Another term for digital financial reporting is model-based reporting.
3. Understanding the big picture.  The first thing you need to understand is how to convert your thinking from paper-based also called "document-based" or "presentation-based" reporting into model-based reporting or digital financial reporting.  The document Financial Report Semantics and Dynamics Theory does just that.  Once you understand the pieces of the model you have to understand how to be sure you are building your model correctly and expressing your financial information correctly using that model.  The document Guide to Verification of an SEC XBRL Financial Report can help you with that.
4. Get the right software.  This is the tricky task today, finding the right software.  Today every software application for creating something like an SEC XBRL financial report is an XBRL technical syntax editor.  As such, you have to understand the XBRL technical syntax.  This will change.  First, you need to understand the big picture (see above) so you know what to look for in software.  Basically, you need to become an educated buyer.  Second, you need to ask good questions of software vendors.  That will push software vendors to build the right software, financial report creation software rather than XBRL technical syntax editors.  A knowledgeable accountant will know this software when they see it; basically it will let them be successful and they will understand that they are being successful.  The Guide to Verification of an SEC XBRL Financial Report has a list of what accountants need from software, see the section "Role of Software". This is a more extensive but less refined list.
5. Get involved.  Once you get properly trained, get involved. One of my favorite quotes is "The best way to predict the future is to create it."  There is a huge need for accountants, financial analysts, and others to understand how to use this new medium, XBRL.  There are other pieces to the digital financial reporting puzzle such as RDF/OWL.  Few accountants truly understand how to put all the pieces of the puzzle together.  Don't become part of the problem by attacking this change half-cocked; get properlytrained and become part of the solution.  Some accountants will need to dig into the XBRL technical syntax deeply, but most will not.  Digital financial reporting or model-based reporting or however you want to refer to it will be part of the future.

Digital financial reporting is part of a much bigger trend, digital business reporting.  Some people call this "linked data" and prefer RDF/OWL as to XBRL, for example the Government Linked Data Working Group.  The Data Coalition is pushing the US Federal Government to adopt something like XBRL or maybe linked data.  Like the Journal of Accountancy article said, this is a global phenomenon.  If you want to understand the bigger picture, take a look at XBRL for Dummies which puts these pieces together for you.

If you invest wisely, your investment will pay good dividends and position you well for our digital future!