Digital Financial Reporting

This is interesting, triple-entry accounting system. That is part of ConsenSys' vision. Not sure what they mean by "triple-entry".  Double-entry relates to balancing debits and credits.

Ethereum is hard to explain.  ConsenSys explains the four pillers of etherium here. Ethereum uses the same sort of technology as bitcoin, blockchain.  Wikipedia provides this explanation of ethereum:

Ethereum is a cryptocurrency platform and Turing-complete programming framework intended to allow a network of peers to administer their own stateful user-created smart contracts in the absence of central authority.

Read this blog post and you will understand why "Turing-complete" is important.

InterPlanetary File System is basically a distributed file system.  Watch the demo here.

XBRL, well, read this blog if you want more information. Clearly XBRL Global Ledger will be a part of the "XBRL" piece of the puzzle. What they don't mention is the US GAAP and IFRS Financial Reporting XBRL taxonomies. Other taxonomies will likely be important, such as other reporting schemes, tax basis information, etc.  And, of course, when information goes into the digital triple-entry accounting system, you will want to get some of the information out in the form of a structured digital financial report, not old fashioned unstructured reports.

Here is another paper on triple-entry accounting.

Crossing the Chasm, the book by Geoffrey Moore, points out that there is a chasm between the early adopters and the early majority customers when dealing with disruptive innovations like XBRL-enabled structured or digital financial reporting.

One of the big challenges a new technology has relates to having a complete product solution that will serve the market appropriately.  There are different approaches to providing the essential functionality markets demand.

Strategies exist for crossing the chasm, for example here is a blog post by Product Strategy, What is the Chasm and How do I Cross It?, which outlines these essential strategies:

1. Reduction in Scope (Niche Marketing) - focus resources on one target market and provide a complete solution to that niche.
2. Quickly Capture the Lead Market Share - Be pragmatic, work with market leaders, choose technologies and approaches that will likely become industry standards. 
3. Alliances - Don't necessarily build the entire solution yourself but rather partner with others and create alliances to bring a complete solution to the market.
4. Marketing Support - Creating the appropriate marketing materials that will support moving the pragmatists/early majority customers forward.

Is digital financial reporting about to cross the chasm?  Perhaps it is, perhaps not.  The actions of the pragmatists, that early majority, will dictate whether digital financial reporting is or is not crossing the chasm.  But one thing is certain.  Digital financial reporting will never cross the chasm if the products provided by software vendors do not work or do not provide functionality demanded by the market.

The Digital Financial Reporting Manifesto summarizes my views of where digital financial reporting is going and important information related to building software for serving the potential market.

Software vendors don't get to define what a complete solution looks like.  The market defines that.  Miss the mark and your product offering will fall short.  A product offering that has missing pieces will not be useful to the market. If you don't understand these dynamics, go back and read Understanding the Law of Conservation of Complexity.

Digital financial reporting and a mandate to provide XBRL-based financial reports to a regulator like the SEC are not the same thing.  They are related.  But they are not the same.

Blind optimism will not cause digital financial reporting to cross the chasm.  Arrogant ignorance will not keep digital financial reporting from crossing the chasm.  Well-functioning software which provides the necessary and complete set of features will cause digital financial reporting to cross the chasm.  The Digital Financial Reporting Manifesto provides many, many clues as to what that software must be able to do.

Ultimately, digital financial reporting will cross the chasm.  That just makes sense.  The question is which software vendors benefit most as this disruptive change unfolds.

Airtable databases are worth checking out.  Currently you need to use Google Chrome or Firefox to use Airtable (i.e. Internet Explorer is not supported yet).  Here is a quick database I created by importing a CSV file.

Here is another prototype I created.  I took this data and imported it into this database table of information that I extracted from XBRL-based financial filings to the SEC. (Remember, you need to be using Chrome or Firefox to view this, Internet Explorer is not supported by Airtable yet).

There is an API interface!!!  Unfortunately, no XML interface.

Another new tool is Domo.

Here is that database table embedded into this web page:

Open "Main View"online online database powered by Airtable

The U.S. Securities and Exchange Commission (SEC) is one of the very, very few organizations which is showing leadership and vision for the institution of accountancy related to the notion of digital financial reporting.

In a speech Accountants and Capital Markets in an Era of Digital Disruption, SEC commissioner Kara M. Stein made the following comments:

Related to the important role of accountants...

Accountants’ expertise in summarizing and presenting information – that is, data – makes them ideally suited to play a crucial role in ensuring the reliability and accessibility of the data that now drives our capital markets.

Use of common taxonomies...

For example, companies should use common taxonomies to provide up-to-date, accessible, and transparent information to investors.  This is where reporting and standards can be reimagined in the new digital world.  Let’s think seriously:  how should the delivery of information change in the digital age?  How should investors access information?  Should it be pushed to them every few months, or should it be available on-demand?

Enhancements offered by technology...

Further, technology can enhance both the delivery and usability of financial reports.  Most companies keep their financial reporting data in structured databases.  However, the data is often presented to investors and financial statement users in an unstructured manner.

Accountants can and should be driving innovation:

A lot has changed since the early 1880s.  But just as the industrial revolution drove and accelerated growth, the digital revolution is driving change.  Accountants have a unique role to play in our capital markets.  With this role comes the responsibility to move forward with strategies to help businesses, investors, and regulators in an increasingly digitally disrupted world.  Accountants can and should be driving innovations to enhance transparency, accessibility, accountability, and to promote further trust in the integrity of our capital markets.

Yet, despite all the change, at the end of the day, some things remain constant.  This Institute represents a special heritage - a commitment to the public trust that you bring to wherever you work, be it in accounting, management, as investors, or in other capacities.

Others should follow the SEC lead.  If the digital financial report is a good thing for public companies, why would it also not be a good thing for financial reporting in general?  My personal vision is that of the digital general purpose financial report.  Have a look at my personal manifesto.  That is where I am going.  If anyone has any ideas that would improve my vision, I would love to hear them.

Reimagine financial reporting.  Join the 31 others who like this idea!  Hard group to sell?  Not really.  Look at all those who are on the quality band wagon.  While digital financial reporting has to earn its right to exist, it is fast proving its worth.  Its not about volume of understanding, it is about quality of understanding.

What have you done lately to help move the world closer to digital financial reporting? Or, are you holding onto the practices of the early 1880s?

Business rules don't belong in code, they should be metadata.  Why do people sometimes put what should be metadata into code?  Well, I did it because I am not that good of a programmer.

But now it is time to separate the code and metadata.

First, let me explain the metadata.  This is a list of what I call "report frame codes".  A report frame is simply a style of reporting.  Here is the list in human readable form. Here is that same list in machine readable form (RSS). And here is another version of the list in machine readable form (RDF).

Those human and machine readable lists point to information about each report frame.  I will use ONE report frame as an example, INTBX-BSU-CF1-ISS-IEMIX-OILN.  For each report frame you get:

• A human readable summary. This lets you look at the stuff in the report frame. This includes.
  • The model structure of the report frame fundamental accounting concepts and relations between the concepts.
  • The mapping information.
  • A list of economic entities that use this style.
• A schema file. This is a machine readable version of the information in the report frame.  The mapping rules are connected to this schema file.
• Mapping rules. These are mappings from fundamental accounting concepts to US GAAP XBRL Taxonomy concepts.
• Impute rules.  These are rules for deriving values of information that was not explicitly reported.  For example, most economic entities do not explicitly report the line item "Noncurrent assets". Some do.  You can use the rules of logical deduction to arrive at the value if certain other values are reported.  For example if "Assets" is reported and "Current assets" is reported and you know that "Assets = Current assets + Noncurrent Assets"; then "Noncurrent assets = Assets - Current assets".  There is ONE ISSUE with these impute rules.  They are NOT represented in the XBRL syntax.  (I will correct that by eventually expressing these impute rules using XBRL Formula.)

So, that is all the metadata.

Now, here is my mistake.  This Excel application does the following:

1. For a list of economic entities that use the report frame INTBX-BSU-CF1-ISS-IEMIX-OILN that is provided in the "List" worksheet;
2. It gets the XBRL-based filing from the SEC web site,
   1. reads the fundamental accounting concept information per the mapping rules,
   2. goes through the impute rules to derive values for fundamental accounting concepts that were not explicitly reported,
   3. tests the relations between the fundamental accounting concepts,
   4. and then puts all that information into the Excel spreadsheet.

So, what is the problem?  If you look at the Excel code, it DOES NOT use that metadata.  The mapping rules and the impute rules are HARD CODED into the Excel application.  This Excel spreadsheet uses the style of getting the fundamental accounting concept relations of the very first version of the tool used to obtain this information.  I modified the rules to match as much as possible the current rules of the INTBX-BSU-CF1-ISS-IEMIX-OILN report frame.  So, it works; but it ONLY WORKS FOR ONE REPORT FRAME!

And THAT is the problem.

What if I wanted to do the same thing for a DIFFERENT report frame?  Simple, create another Excel application that is hard coded for THAT report frame.  Repeat this same process for all 143 report frames!  Not a good idea.

Alternatively, the Excel application could be modified to use the metadata above rather than hard coding the mapping rules and impute rules with massive numbers of IF...THEN statements that are hard to change, hard to maintain, and therefore not very flexible.

A better way is to point the Excel application to a report frame, read the metadata for that report frame, and then point to the list of filings with that report frame.

If someone who understands how to program reads the code, they will immediately see the problems of the IF...THEN statements in the code.

(PLEASE NOTE!!! The metadata available now is not the most current version of this metadata.  The reason is that I am constantly updating this metadata for new mappings, new impute rules, fixing bugs, adding new report frames and so on as I try and get the fundamental accounting concepts dialed in.  If you need the most current version of the metadata please contact me.  I will update this information publically at the end of the year.)

(PLEASE NOTE!!!!  All of this metadata is represented in XBRL, except the impute rules.  Not representing the impute rules in XBRL was a mistake.  Future versions of this will also provide the impute rules in XBRL Formula.)