Digital Financial Reporting

The IASC foundation released todaythe 2010 version of the XBRL taxonomy for financial reporting under IFRS. The taxonomy includes an IFRS for SMEs (small and medium enterprises) entry point for the taxonomy.  Here are links to:

• 2010 IFRS XBRL Taxonomy Home Page
• Link to physical files
• Link to documentation (which they say is coming soon)

Also, I took the IFRS for SMEs presentation information and imported that into an Excel spreadsheet, ran some macros against the information to format, color, and otherwise made it easier to read.  You can grab that Excel spreadsheet here if you want to have a look at the IFRS for SMEs taxonomy.

This XBRL taxonomy is likely a good sign of things to come in terms of XBRL taxonomies for financial reporting.  I believe that this is the first financial reporting XBRL taxonomy which incorporates decisions made by the Interoperable Taxonomy Architecture group (IASCF, SEC, EDINET).

Will IFRS (International Financial Reporting Standards) for SMEs (small and medium sized  enterprises) be the way private companies in the United States report?  Personally, I hope so.  It is looking like this may be a possibility.  I hear estimates that there are between 8 million and 20 million such private entities in the US.

First, let me provide some useful IFRS for SME resources which are helpful for US private companies: 

• IASB IFRS for SME Web Site: Here is the official web site for IFRS for SMEs.
• AICPA IFRS for SMEs to US GAAP Comparison Wiki: The AICPA is making available a wiki which compares IFRS for SMEs to US GAAP which you can find here.
• IASB IFRS for SMEs Training: This web page has training materials you can download for free.
• IFRS for SMEs: The Next Standard for U.S. Private Companies?  This is a Journal of Accountancy Article which looks at this question.
• Moss Adams Presentation: This is a Moss Adams presentation on the topic of IFRS for SMEs, a nice summary.
• IFRS Training: Here are some IFRS training courses in Seattle and Vancouver.
• AICPA IFRS FAQ: Here is a web page with frequently asked questions about IFRS for SMEs maintained by the AICPA.

Now, why would I personally like to see the US go to IFRS for SMEs for reporting by US private companies? Here is my list of reasons: 

1. IFRS for SMEs is easier than US GAAP.  The standards are something like 230 pages.  US GAAP is way bigger than that, most of which is not relevant to 99% of smaller and medium sized entities who report to say a bank in support of a loan.
2. The rest of the world is moving toward IFRS and IFRS for SMEs.  The US should be part of the broader global community, not an island.
3. IFRS for SMEs is high quality.
4. Using IFRS for SMEs globally turns the very fragmented accounting software market into a global market.  This will reduce the cost of accounting software and improve the quality of that software for everyone.
5. A global set of financial reporting standards means the possibility of a global framework for auditing those financial reports.  Today, auditing is more locally oriented.  If private companies around the world use IFRS for SMEs, auditing (reviews, compilations also) costs will go down.
6. The AICPA has  recognized the IASB as an accounting standards setting body.  You can actually use IFRS for SMEs today, if your financial institution will accept it.
7. If the SEC (Securities and Exchange Commission) mandates IFRS for public companies, which it just might do; private companies reporting alternatives could be one of the following: IFRS for SMEs, a US adapted version of IFRS for SMEs, full IFRS, a new separate GAAP for private companies, or US  GAAP as it exists today.  The IFRS for SMEs alternative seems to make the most sense, all things considered.

Will IFRS for SMEs be used by private companies in the US?  Time will tell.  My bet is yes. IFRS for SMEs is a concise, complete, simplified set of accounting principles which better meets the need of financial statement users, particularly if you see the world as a global economy.  On the other hand, the US conversion to the metric system didn't go that well.  We shall see what happens.

Perhaps it is not clear exactly what financial reporting will look like in the future, but there are some things that provide some clues and glimpses that I have come across.

IFRS

First, IFRS (International Financial Reporting Standards) will play a major role.  I personally did not even know IFRS existed prior to working with XBRL.  Frankly, I really had no need to know about it, I did financial reporting for smaller organizations which only operated in the United States.  I learned about IFRS when working on XBRL.  IFRS makes a lot of sense.  I look at IFRS as something somewhat similar to the metric system.  There really is no good reason for the entire world not to use the metric system.  There are a lot of bad reasons.  There is perhaps a lack of will to push and make a change to the metric system.  I remember when the US "converted to the metric system".  Did not quite happen all at once. But you can see that gradually changes are occurring.  You can see products being labeled using the old standard measuring system plus metric measurements.  Look down at your odometer.  I bet it shows both miles and kilometers.  The US will eventually move to the metric system.  May take 25 or 100 years, but it will get there.

The same with IFRS.  The US will use IFRS eventually.  And I am not talking about multinational public companies.  I am talking everyone.  Even the smaller companies I worked for.  Think about it.  Public companies will likely convert to IFRS soon, pushed by the SEC.  There is no way one set of financial reporting standards would be used for private companies and another for public companies.  That does not make a lot of sense.

One set of robust financial reporting standards used globally makes a lot of sense to me.  People talk about cultural differences as a reason this will not happen.  Cultural differences did not seem to have an impact on the universal product code, MP3, HTTP, HDTV, Blueray, or other standards.

Anyway, personally believe that IFRS is a great idea and that it will be used globally by anyone who wants to play in the global markes sooner than one may think.  The AICPA has already begun making financial and accounting reources such as IFRS Accounting Trends and Techniques available.

Less Obsession with Presentation

It has been my observation that most accountants are obsessed with how information looks on a printed page.  I think this will change.  The FASB and IASB are already looking into this.  The FASB published this discussion paper: Preliminary Views on Financial Statement Presentation. Take a look at pages 123 through 126. 

Here is a link to one statement from that discussion paper: Reconciliation of Statement of Financial Position. In my view, this is precisely how what information which should be disclosed should be articulated.  Many years ago I was taught by an audit manager how to prepare audit schedules used to create or check a cash flow statement using a very similar approach to this.  That was 30 years ago.  There will be other organizations of this information, but that reconciliation organizes the fundamental information which should be into a very clear form which makes the disclosures crystal clear.  I speculate analysts and investors will love this.

On page 125 and 126 of the discussion paper is another incredibly useful schedule: Statement of Comprehensive Income Matrix.  Take a look at that.  If you look at those and all you see is an ugly presentation and something that looks complex you are missing the point.  The point is the clarity that the format requires.  These reconciliations force clarity.  THAT is the point.

XBRL

You can already see the XBRL flowing into the SEC.  You can go to the SEC web site from that "dashboard" and have a look at the financial information in the HTML/SGML formats or in the rendered XBRL format.  You can also go and look at the XBRL format if you are so bold.

While the XBRL part helps provides a peek into what the format of the future financial filings might look like, or at least one version of them which is readable by a computer, there is really a lot of effort going into making the XBRL look exactly like the pretty dead tree (i.e. the paper) format which has been used for hundreds of years.

People will eventually realize that these historical practices, not all of them but many of them, are more of a liability than an asset.  The SEC coined the term interactive data.  Paper is not interactive.  The presentation formats of the past hinder this interactivity, not help it.

I have had a couple of posts on my blog which show prototypes of what this interactive financial statement might look like.  See this blog post where I talk about and even show a prototype of an interactive data viewer.  Here is that prototype.  Most people probably won't get this yet, but some will.

Financial Information is Not Enough

I think the people who are pushing things like the triple bottom line and enhanced business reporting are moving in the right direction.  The Global Reporting Initiative pushes these sorts of things.  Another term used is sustainability reporting.  There are many other terms like corporate social responsibility reporting and environmental, social and governance practices reporting.  The list is long.

The bottom line here is more relevant information.  Companies who focus on quarterly earnings are misguided in my view.  However, they tend to respond to investors who analyze based on quarterly earnings.  This is a cycle which needs to be broken.

Pulling The Pieces Together

Imagine financial reporting where:

• The financial reporting meta data used globally is IFRS and other global standard meta data.
• The reporting format is XBRL.  In fact, maybe it is not even XBRL.  I frankly have no bias here other than it needs to be structured and computer readable like XBRL, not unstructured or structured for presentation like PDF, HTML, the current SGML, etc.  It has to be readable by a computer, that is all.
• Computers do all sorts of helpful things for the preparers of such statements such as making sure the numbers all add up and that the required disclosures are there much like a manual disclosure checklist is used today.  The quality goes up because computers are doing the checking and the costs go down because it takes less effort.  Computers cannot check everything clearly, only what they can check.  Accountants will still have lots to do, just in other areas.
• The report is interactive.  It is a "flow" of hypercubes.  This flow can be organized into a printed report, which can look like these reports look today.  But they can also be organized in other ways because of the structured format of the information.
• More relevant information will be reported.
• Reporting will be more often.  Quarterly made sense when reporting was manual with no electronic calculators, no electronic spreadsheets, no Web.  We are still doing quarterly reporting why? How about real time reporting and real time auditing?
• Financial reporting standards will are written to enable this new world of electronic reporting not get in the way of it.  Paper has its limits.  Why constrain this new era with these old limitations?  This simply makes no sense.  Notions such as "presented on the face of the financial statements" make sense with paper, but make less sense using electronic medium.

Could financial reporting have some of these characteristics?  I think so.  Who knows.  Maybe someone has an even better vision of what might be possible.  What you can be sure of is that things will change.  You can already see many of these changes today.