Digital Financial Reporting

Here is the EU law that mandates the European Single Electronic Format (ESEF) and mandates that the financial statements be submitted to the European Securities and Markets Authority (ESMA) using Inline XBRL.

Fortunately, the ESMA will be using an approach that is very similar to the U.S. SEC's approach to XBRL-based financial reports with a couple of incremental improvements.  The ESEF introduces the notion of "anchoring" and "wider-narrower" concepts.  So, that is good.

However, other information is still not represented that is necessary (see the ontology spectrum) to help assure quality XBRL-based financial reports.  As such, you can expect quality issues simiar to the quality issues being experienced by the U.S. SEC XBRL-based financial reports.  The ESMA field test already shows quality issues when the 23 reports are run through a good validator.

This is kind of disappointing but not really unexpected.  When people keep seeing the same issues appear over, and over, and over; perhaps these regulators will figure out that they need to modify their approach.  Some times people need to learn by making their own mistakes.  But I really don't see why the ESMA did not learn from the SEC's mistakes.

Also, today each different regulator creates their own approach to XBRL-based digital financial reporting.  Why is that necessary?  If you look at the high-level financial accounting concepts of different reporting schemes, they are essentially very similar or even identical.

Why the inconsistencies between different regulators?  These inconsistencies are unjustifiable.  What if someone created a standard approach to business and financial reporting?  Well, the Object Management Group (OMG) is creating such a standard.  You can find information about that proposed OMG standard, Standard Business Report Model (SBRM) here.

Why are the ESMA and SEC both making these mistakes?  I suspect that it has to do with the four misconceptions most people have about XBRL-based reports in general.

Today, when it comes to XBRL-based digital financial reports, there tends to be three broad groups that people fall into: believers/optimists, naysayers/skeptics, and deniers that believe XBRL-based reporting will never happen.

All three groups tend to be equally confident in their positions.  Whether you share the vision of someone at the FASB who believes XBRL-based reports is a replacement of traditional paper or e-paper reports or simply see XBRL as an alternative format; you will want to at least discuss XBRL-based reports intelligently.

This guide answers some of the most frequently asked questions about the subject of XBRL-based digital financial reporting, presenting both the optimistic and more skeptical viewpoints to arm you with enough knowledge and insight to hold your own in your next conversation about XBRL-based digital financial reporting.

What are the benefits of XBRL-based financial reports?

The case for XBRL-based general purpose financial reports is provided here. Here are the cliff notes.

A general purpose financial report is a high-fidelity, high-resolution, high-quality information exchange mechanism.  That mechanism has historically used the media of "paper".  Over the past 50 years or so, that paper-based mechanism has given way to a new mechanism, "e-paper".  By "e-paper" I mean PDF documents, HTML documents, Word documents and such.

XBRL is a new media, a new mechanism for creating a general purpose financial report.  XBRL is a high-fidelity, high-resolution information exchange media that allows for the creation of high-quality financial reports.  Those reports can be read by human-based processes as before but because of their structured nature are also effectively readable by machine-based processes.

The benefits of machine-readable XBRL-based include better transparency, improved capital allocation decisions, improved management decisions, and better functioning capital markets.

XBRL is not a panacea, it is a tool.  If used correctly, the tool can be used to achieve wonderful things.  Just like anything else created by man, XBRL has it's share of flaws. Will XBRL replace all paper-based or e-paper based financial reporting?  Probably not.  But, XBRL is hear to stay.

What exactly is XBRL anyway?

So that is actually a very good question.  The short answer is that XBRL is a global standard knowledge media or medium for representing financial and non-financial information.  XBRL is a global standard approach that can be used to represent knowledge and information in a form that is both human-readable and machine-readable.  This capability will impact financial accounting, reporting, auditing, and analysis.  It will also very likely impact other types of business reporting.

A financial report is a logical system. XBRL is an approach to representing that logical system in a machine-readable format.

But answering the question is a bit tricky because today, most professional accountants don't really have the correct knowledge set to understand a brief, precise explanation as to what XBRL really is.  Think of understanding XBRL as a journey.  Step one in your journey is to watch these four brief videos.  That will get you started.  But you also need to understand some background information about how computers perform work.  The document Computer Empathy will help you understand that.

Understand that XBRL is part of what will make what Deloitte calls "the finance factory" actually work, or what Blackline calls "the modern finance platform".  XBRL is an enabling technology.

Fundamentally, XBRL enables the high-quality, high-resolution information contained in a financial report to be exchanged between machine-based processes reliably.

The challenge is to (a) get XBRL-based reports to be easy for the average professional accountant to create, (b) the reports be of very high quality (i.e. sigma level six, measurably 99.99966% correct), and (c) safe, reliable, and predictable.  All three of those goals are achievable.

When will XBRL-based digital financial reporting truly work?

Well, if implemented correctly; XBRL-based digital financial reporting already works.  The problem is not making XBRL-based reporting work, the problem is overcoming the misconceptions people have about XBRL and what it takes to make it work correctly.   Fundamentally, the issues are (a) getting XBRL taxonomies created correctly, (b) getting software vendors to properly implement XBRL-based reporting in their software leveraging the proper metadata, (b) getting XBRL-based reporting software to interoperate, (c) making the software easy enough for professional accountants to actually make use of the software. If taxonomies were created appropriatly and software leveraged those taxonomies; the software would be easier to use and there would be substantially fewer quality problems.

If software works correctly, quality problems that seem to persist today will disappear.  Today, filing agents tend to create the highest quality XBRL-based financial reports because the filing agents create hundreds if not thousands of reports a year.  So, this proves XBRL-based reports can work.  The problem is that not every software application works appropriately and software tends to be extremely hard to use.

The best thing for professional accountants to do is educate themselves so the software snake oil salesmen cannot take advantage of your ignorance.  Software vendors love ignorant buyers.  Become informed, be demanding of software vendors, test software to be sure it works appropriately.

Knowledgeable buyers ask good questions, get the salesmen to prove their products work, and push the over all capabilities of the market forward.  Ignorant buyers help no one except the snake oil salesmen to separate you from your hard earned money.

What can professional accountants and accounting firms do to get ready for XBRL-based digital financial reporting?

The best thing that a professional accountant or a professional accounting firm can do today is to learn about the new paradigm that exists.  Understand that those coming out of college today are still being trained per the old accounting, reporting, auditing, and analysis paradigms.  You will have to seek out knowledge.  Today, the best resource that I have seen that explains this new paradigm is a document that I created called Computer Empathy.  Others call the change in paradigm "computational thinking".

Understand that the "artificial intelligence revolution" or the "fourth industrial revolution" or whatever you want to call it is real.  The impact will be significant and you need to have a plan. Figure out where you are now, where you want to go, understand consciously if where you want to go is where you should be going, and then figure out how to get there. Don't be left behind!

The transition will take time.  Timing is important. Being knowledgable helps you figure out the proper timing.

Are 47% of accountants and auditors really going to lose their jobs?

The short answer is no.  An Oxford University study and others are predicting that basically every job will be performed by robots in the future which is completely absurd.  However, that said; it is important to understand that a huge shift will occur.  Don't think of this in terms of "jobs", think of it in terms of "tasks".  A job can be broken down into tasks.  Tasks can be broken down into the following categories of work:

• manual repetitive (predictable)
• manual nonrepetitive (not predictable)
• cognitive repetitive (predictable)
• cognitive nonrepetitive (not predictable)

If the work you perform is repetitive and therefore predictable, that task can perhaps be automated.  But, for every job that is replaced by a robot, different more value added work can be performed and/or new jobs and tasks will be created.  No one really understands exactly how all this will unfold, but this change will highly likely be very significant.

But make no mistake, The Digital Industrial Revolution is real.  This 56 minute Ted Talk will help you understand this revolution which is here now, it is happening today.

Action has a risk associated with it.  But inaction likewise has a risk associated with it.

What sorts of innovations will be created relating to financial reporting?

While it is hard to know for sure, the repetitive nature of aspects of accounting, reporting, auditing, and analysis lends itself to automation.  What will enable automation is things like the move from unstructured nature of financial reports to structured, machine-readable financial reports. Personally, I am helping to create what amounts to an expert system for the construction of a financial report.  You can download and experience the application for yourself.

Fundamentally, software applications will be created that leverage artificial intelligence and enable human and machine collaboration to complete accounting, reporting, auditing, and analysis tasks.  This is very much like a calculator helps accountants do math more efficiently and effectively.

No one can predict the future.  But, being knowledgeable helps you make an educated guess.

Why should I participate in creating the technology?  Can't I simply use the technology?

As the authors of the book The Technology Fallacy point out, people create change not technology.  Technology only enables the possibility to create the change, but people do the work and apply a technology to achieve their vision.  Technology does not shape destiny, we shape our own destiny.  A perfect way to understand the change is to participate in creating the destiny of accounting, reporting, auditing, and analysis.

You really don't want to "pass the buck" to the techies.  Do you REALLY want them creating your future without your input???

How does XBRL relate to digitial distributed ledgers?

XBRL-based financial reports and digital distributed ledgers are a match made in heaven. A lot of people use the term "blockchain" when they mean digital distributed ledgers.  But blockchain is only one of many different technologies that can be used to implement a distributed ledger.  Digital distrbitued ledgers are another very important enabling technology what will revolutionize accounting, reporting, auditing, and analysis.

Am I missing something?  What else should I be considering?

Something that most people miss is the connection between the techniques and philosophies of Lean Six Sigma and XBRL-based reporting.  When you combine (a) XBRL-based structured information, (b) the distibuted databases offered by digital distributed ledgers, (c) the capabilities of artificial intelligence to perform work leveraging all that structured information and distributed ledgers, and (d) the measurement and process control techniques of Lean Six Sigma to manage and control quality you can create the sorts of things you see in Deloitte's vision of The Finance Factory. Deloitte calls this "digitized operational finance".  Others call this "mirror worlds".  All this has applications beyond just accounting, reporting, auditing, and analysis.  But putting all these pieces together correctly will have profound impact on many types of systems, especially accounting systems.

Where can I get more detailed information?

I have been working on understanding XBRL-based financial reporting for about 20 years.  I am making my entire set of "lab notes" available for others.  You can get a summary of those lab notes here. I have created a proven and tested framework and method that I use for implementing XBRL-based financial reporting. This approach is consistent with the proposed OMG Standard Business Report Model (SBRM).  I strongly encourage others to create a plan and implement that plan.

The devil is in the details.  Understanding the details is hard work and not for everyone.  But, understanding the details can provide you with an edge.

Some people say that data is the new oil.  In fact, the Economist declares in this article, "The world’s most valuable resource is no longer oil, but data."

Other people say, "If data is the new oil, then metadata is the new gold."  I would tend to agree with that statement.  If you read this article, Data Curation: Weaving Raw Data Into Business Gold (Part 1), the author uses crude oil, refined gasoline, and refined racing fuel as a metaphor to explain the value of metadata.

I explained the power of classification using metadata in a blog post. I explained four common mistakes that I see others making in another blog post.

But here is another way to understand the power of metadata and classification.  You can use the following to behold the power of metadata first hand using this working prototype: >>> IFRS Financial Reporting Metadata <<<.

You still need to use your imagination a bit if you don't have software that leverages the data and metadata that you see.  Information is available in both human redable HTML and machine readable XBRL format.  All the data/metadata was created using the Open Source Framework for Implementing XBRL-based Digital Financial Reporting.  That new version is based on the IPSAS reporting scheme prototype. The fact of the matter is that I can create similar metadata for any reporting schemeusing this same method.  In fact, I am creating the IFRS financial reporting scheme metadata to catch up to the US GAAP financial reporting metadata that I already have.  What you see at the link above for topics is about 5% of what I am going to create.  Next I will build out the disclsoures, then the disclosure mechanics rules, and then the reporting checklist rules.  Then, combine all that with the classes metadata (or this), the reporting styles metadata, and some odds and ends that I have for IFRS.  All of this is human readable, but more importantly it is also machine readable and intended to be used by this software application.

Fiddle around with the IFRS topics.  Be sure to:

1. Click on topic names such as "topic:BalanceSheet" to open up detailed information for the topic.
2. Click on the XBRL taxonomy link to see that the topics are linked to the IFRS XBRL taxonomy.
3. Note that the topics are mapped to the IFRS standards and to IAS Plus that is published by Deloitte.
4. Note the examples for most topics.
5. Note the individual examplesand from there you can go to the XBRL Cloud viewer or view the report information and drill down into details like this if you have an XBRL Cloud subscription. (This Microsoft prototype is a free example.)

Neither the US GAAP nor IFRS XBRL taxonomies provide the data/metadata to enable the sort of functionality that you see from my working prototype.  Both the US GAAP and IFRS XBRL taxonomies provide many of the necessary pieces defined by the ontology spectrum. However, each leaves out other necessary pieces so the taxonomies are not sufficient.  Further, I am supplementing both the US GAAP and IFRS XBRL taxonomies with additional data/metadata which I would never expect those taxonomies to provide in order to achieve what it is that I can achieve.  And honestly; there is much, much more data/metadata that can be provided to supplement more and achieve even more powerful functionality.  Such is the nature of software.

Don't understand what you are looking at or why it is important?  You might want to read Computer Empathy if you are not impressed by what you see.  Want to understand even more?  Read my lab notebook.

Trust me, you should be amazed.  This will be even more amazing after about six months, so stay tuned!

#################

IFRS Full Concepts, Labels, Documentation, and References (2017)

Foreign issuers submit XBRL-based reports to the U.S. Securities and Exchange Commission (SEC) that use the IFRS reporting scheme.  I have put together several resources that help you understand IFRS reports created using XBRL, the IFRS XBRL Taxonomy, and XBRL-based reports in general.

• 451 reports: This is simply a flat list of reports, information about the reports, and links to resources that help you understand the reports. All of these reports use IFRS and are the annual reports (20-F, 40-F).
• Information Extraction Tool: This is a ZIP file that contains a number of Excel applications that can be used to extract information from XBRL-based reports that use the IFRS XBRL Taxonomy.
• Taxonomy Information: This is a viewer that lets you look at the XBRL presentation relations of each of the 451 XBRL-based reports created using the IFRS reporting scheme.
• Model structure extractor: This is a ZIP file that contains an Excel spreadsheet application that lets you extract the XBRL presentation relations information from an XML Infoset which was generated for each of the 451 entiries that report using IFRS.
• Concepts used to create report: This is a ZIP file that contains an Excel spreadsheet. The Excel spreadsheet has a summary of the 110,208 concepts used to create the 451 reports.  Note that 97,722 of the concepts (or 88% of the total concepts) that were used in the 451 filings were used only once and virtually all of those were extension concepts.  263 were not extension concepts.
• Tool for extracting information and understanding reporting styles:  This is a tool for extracting information from IFRS XBRL-based financial reports, an explanation of reporting styles, and confirmed report errors.
• Confirmed errors in IFRS reports: This is an analysis of the confirmed errors found for one specific reporting style.
• More information for last year: This is information about other IFRS reports that I have analyzed earlier.

This information can help you create better XBRL-based reports in general and are specifically helpful in creating IFRS financial reports using XBRL.

Some people prefer the "rush to detail" approach, prematurely focusing on detailed tasks before they have considered the broader goals and objectives. This approach is like starting to build a house by laying bricks, rather than drawing plans and establishing foundations.  It is like taking a journey on a ship and not bringing a compass, a map, or even a rudder.

Me, I don't use that "rush to detail" type of an approach.  I prefer building on a solid foundation.  I prefer establishing a framework, discovering principles, creating a theory, and then testing that theory to be sure everything works as expected.

Over the past 11 years I have maintained a blog related to XBRL-based digital financial reporting.  That blog is like my "lab notebook".  Here are all the entries into my lab notebook.

Periodically, I take the information from my lab notebook and organize it, summarize it, synthesize it, reduce the information to its essence; the goal is to put the information into more useful form.  Here is that summary of all of my notes.

Myself and others have done a lot of experiments.  You can see those experiments throughout my lab notebook entries.

The grandest experiment is Pesseract. Today, Pesseract is a working proof of concept.  Creating Pesseract helped a software engineer and I figure out what it would take to create an expert system for creating financial reports and exactly how to do it. If you are currious and motivated, you can use Pesseract to think about and understand XBRL-based digital financial reporting.  I know, because that is how I learned.

You cannot understand these conclusions if you don't have the correct and complete set of background information.  Trying to understand what is happening is like trying to walk around New York City with a map of Chicago.  A paradigm shift is occurring.  You will need a new map, old maps will not work.  Here is the map that I created: Computer Empathy.  That map is not perfect, but it is the best I could do.  Perhaps someone else can take a stab at it and do better.

Here are the conclusions that I reached related to XBRL-based digital financial reporting, information that supports those conclusions, and resources that might help you understand my conclusions or that you can use to reach your own and perhaps different conclusions.

1. XBRL-based general purpose financial reports provide value: While perhaps not all financial reports will be digital, some portion will be digital and that portion that is digital will increase over time. Here is my case for XBRL-based general purpose financial reports.
2. High-quality XBRL-based reports are necessary: Financial reports are high-fidelity, high-resolution, high-quality information exchange mechanisms. Whether the format is paper, e-paper, or XBRL; the quality level must be the same.  Quality is measurable.  High-quality is achievable.
3. XBRL does work if used correctly: XBRL does work if it is used correctly.  Most regulators are not using XBRL correctly, they are leaving things out.  To make XBRL work internally within your organization or if people are going to use XBRL in situations where it's use is not mandated by some regulator, it MUST WORK.  It can work. Understanding the ontology spectrum and how to implement the ontology spectum using XBRL is critical information. Here is the method that I use for implementing XBRL and the framework that I use to do it.
4. XBRL can provide benefits related to accounting, reporting, auditing, and analysis in a digital environment: XBRL is not just for financial reporting.  Many, many processes will be impacted. While I very much doubt that all of Deloitte's vision of "The Finance Factory" will be realized any time soon, the impact will be very significant. The modern finance platform will be created. A financial transformation will occur. It is already occurring.
5. Digital distributed ledgers is a useful technology: The impact of digital distributed ledgers will be significant.  XBRL and digital distributed ledgers are a match made in heaven.
6. The technology falacy points out that people create change, technology enables change: Technology does not create change, people create change. Technology enables people to create change.  PWC, EY, KPMG, and Deloitte are all telling their clients that the fourth industrial revolution is real.  Their audit departments might not believe that yet, but they will eventually.
7. Best practices are superior because they work: A best practice is a method or technique that has been generally accepted as superior to any known alternatives because it produces results that are superior to those achieved by other means or because it has become a standard way of doing things. Just because someone has a position of authority does not make their approach a best practice.  Here are proven best practices for evaluating the quality of an XBRL-based financial report.
8. Know-how is knowledge: One type of practical knowledge is know-how; how to accomplish something.
9. Elegant and simple is better than a complicated kludge: A kluge is a term from the engineering and computer science world that refers to something that is convoluted and messy but gets the job done. Elegance is the quality of being pleasingly ingenious, simple, and neat. Elegance is about beating down complexity. Creating something complex is easy. Creating something simple and elegant is hard work. XBRL-based financial reporting will be elegant.
10. Rome was not built in a day: XBRL-based financial reporting is an evolution that will unfold over time. There are four common mistakes that both business professionals and technical professionals tend to makerelated to XBRL-based reporting: (1) Thinking "data" when they should be thinking "information"; (2) Not understanding the ontology spectrum; (3) Underestimating the power of classification; and (3) Misunderstanding a machine's capabilities to acquire knowledge.

I say question conventional wisdom related to creating XBRL-based financial reports.  When US GAAP and IFRS filings to the SEC both contain errors related to high-level accounting relations, something is obviously not right.  Ask yourself: What might be wrong?  How do you fix it?  Conventional wisdom is not necessarily true.  These are the four common errors in thinking that I encounter repeatedly.

Don't know where to start to get your head around XBRL-based digital financial reproting?  Start here with this six minute video: How XBRL Works.  After that, read this. And then this. And then fiddle with this. Maybe even download this.