Digital Financial Reporting

The AICPA Assurance Services Executive Committee has released a white paper titled The Shifting Paradigm in Business Reporting and Assurance.  This white paper can be found here and is worth reading.

The abstract of the paper explains the paper's purpose:

The purpose of this whitepaper is to highlight significant trends which give rise to emerging reporting and assurance opportunities and needs. This paper is published by the AICPA Assurance Services Executive Committee with the intent of helping to build awareness of these trends and opportunities and to lay out a plan that supports the continued importance and sustainability of the accounting  profession in a changing world. The subject matter outlined in this paper is of interest to AICPA members, including both members in public practice and business and industry, those in the accounting profession as a whole, and other participants in the business reporting process including producers and consumers of business information.

This paper focuses on how to provide assurance services (i.e. audit) business reports.  To understand what the assurance services have to look like, clearly what business reporting will look like needs to be understood.  So, there are insights here on what this new model of business reporting might look like.

When might this happen you ask?  Well, it is happening now:  A global shift to IFRS (International Financial Reporting Standards);  The use of XBRL rather than paper or "electronic paper" (i.e. HTML);  Calls for increased transparency.

There are two things worth thinking about which are not covered by this paper.  And I am not saying this paper should cover them, but they are important to think about as you read this paper.

The first missing aspect is specifics.  What specifically will this new business reporting model look like?  Now, no one can say for sure specifically what this new model might look like.  However, it is also not the case that there are not clues as to what it might look like.

The second missing aspect is sort of dependent on the first which is "which".  There are options.  Which new model will those who are creating this model choose to create?  How will they decide?  Are they qualified to pick from among the specific options available?  Who will make these choices?  Will they be the right choices?

For example, the paper points out that today assurance is issued on a set of financial statements taken as a whole.  But with XBRL, it is quite easy to take pieces of a financial statement and use them outside the context of the whole financial statement.  So, how will this be resolved?

Another notion not really discussed much in the white paper but it has been brought up by others such as the SEC is the idea that we are moving from "documents" to "databases".  What I mean is that the old EDGAR system is basically a big electronic filing cabinet for documents; but the new SEC IDEA system is supposed to be more like a big database.  So what, CPAs are going to issue assurance on databases of information?  Well, maybe.  "The data cube of XYZ Company is fairly stated...."  Who knows for sure.

One thing is for certain though:  things will change.  It will be interesting to see how much of the baggage of the paper-based system will be carried over into this new business reporting model.  Clearly there are some very good aspects of the paper based model.  There are some aspects of the paper based model which should not  be carried over, as they would hinder, as opposed to help, the new model. 

My question is how can we tell the difference between what should be carried forward and what should not and who will make those choices.

The book Financial Reporting Using XBRL has been available for purchase in printed form at Lulu.com for the past several years.

Now, you can get individual chapters of the same book here.  In addition to being able to download the individual chapters, updates for the material are also available or pointers exist to new material or other relevant material for each chapter.

Thanks to UBmatrix for allowing me to make these PDFs available.

The US SEC made available a web page called "Public Validation Criteria".  The web page is located here and states:

"These validation criteria reflect SEC staff’s current views on appropriate validation criteria for XBRL tagging to improve the consistency and quality of XBRL documents submitted to the SEC.  We are publishing this list to help filers and data tagging software companies improve existing products or create new products to automate testing for these criteria. They do not reflect an existing SEC requirement and may change in the future."

This is great addition to guidance which is needed to create the needed "consistency and quality of XBRL documents" as stated by the SEC.  I would speculate that there will be more rules such as these created as inconsistencies and other problems related to data quality are discovered.  It is great that the SEC is doing this proactively.

This is interesting. Below is an XBRL timeline. This is interesting as this is yet another useful way of displaying information.

The SEC recently proposed a roadmap whereby public companies in the US who are regulated by the SEC would be required to move to IFRS.  See the SEC press release relating to this here.   But what does this mean for private companies in the US?

First off, I remember conversations with other CPAs five to seven years ago relating to the question "Would the US ever move to IFRS and would US GAAP go away."  Most of them had the opinion that that would never happen; US GAAP would never go away.  People would talk about the convergence of US GAAP and IFRS, that might occur.  But then the realities of "converging" were considered and people moved to the opinion that the US should not converge, but should rather bite the bullet and move to IFRS.  For example, one reason convergence would not work was trying to reconcile explanations of something in US GAAP and IFRS which used different wording would simply not work.  One set of financial reporting standards needed to exist.  People are also seeing the negative consequences of different "implementations" of IFRS in different countries.  Bottom line is that if the world wants one set of financial reporting standards, there really needs to be one set of financial reporting standards; otherwise, the benefit of one set of standards (the entire point of IFRS) would never be realized.

Other countries have gone through the process of converting to IFRS and are ahead of the US.  For example, Australia and New Zealand are in the process of converting.  One of the interesting things they have discovered is that if listed (public) companies swith to IFRS, what will happen to accounting standards for private companies?

It is expensive to write high quality financial reporting standards.  For example, New Zealand is a small country.  They spend a lot of money to create high quality New Zealand accounting standards.  These standards were used by both public/listed companies and private companies in New Zealand.  The country decided to go to IFRS for listed companies, but then figured that if private companies also used IFRS, then they could shut down the board that created New Zealand accounting standards altogether (or dramatically cut back on what they did).  Australia seems to be doing the same sort of thing as New Zealand.

The US is quite a bit bigger than New Zealand and Australia.  But many of the same issues those countries and other countries have had to go through also apply to the US.

It is highly unlikely that the US will end up with two sets of accounting standards; one for public companies and another for private companies.  Most people that I have talked to which track IFRS and are trying to figure all this out feel that all companies in the US will be moving to IFRS.  That seems the logical route to me also.  As to the time frame, well, that is another story.

But then again, I remember when the US converted to the metric system.  That did not quite work out as was hoped.

Who knows what will eventually happen.  This is certainly interesting times for accounting!