Digital Financial Reporting

It is my personal view that the Statement of Changes in Equity in the US GAAP Taxonomy is very odd and will not work properly for the reasons I will list in a moment.  The information in this blog post is to help accountants understand this section of the US GAAP Taxonomy better, help you understand other sections of the taxonomy better because of a better understanding of the statement of changes in equity, and to empower accountants to provide better input so that a better statement of changes in equity can be modeled in the US GAAP taxonomy.

First off, let me give you a few links to help you to go and look at the statement of changes in equity. I am using the commercial and industrial companies (CI) version of network 148600 - Statement of Shareholders' Equity and Other Comprehensive Income.   Here is a link to the taxonomy viewer provided by the US GAAP Taxonomy.  This is the same information presented in a slightly different way, a flat list that you can view rather than a hierarchy which you need to open. There are other statements of changes in equity in the US GAAP Taxonomy.  The ideas in this analysis apply to every one of those.

I am looking at this statement from the perspective of an accountant.  I do understand the XBRL better than most accountants, I realize that.  This is the point of the statement that this is odd.  If more accountants undersood these things, I specualte that they would agree with me.  Here is my list of reasons why the statement of changes in equity is very odd:

1. Nothing else in the US GAAP Taxonomy is modeled in this manner.  There is nothing else in the US GAAP Taxonomy that is modeled in the manner that the statement of changes in equity is modeled.  Sure, the word [Roll Forward] is in some of the concepts, but it looks like no other [Roll Forward].  This makes the statement of changes in equity harder to understand.  Basically the approach used is to have a bunch of [Line Items] and the funky axis "Statement, Equity Components [Axis]" (which you can see here or here) and the intersection of the line item and the axis is the "cell" into which the fact value would go.  Semantically, this is NOT how a statement of changes in equity works.
2. The statement of changes in equity is a collection of [Roll Forward]s.  This goes with the first statement in that there are a lot of things in the US GAAP Taxonomy which are similar to the statement of changes in equity; all the other [Roll Forward]s.  That is what the statement of changes in equity is, changes from a balance on one date to the balance on another date.  That is what every [Roll Forward] articulates.  Why does this statement not follow that pattern?
3. You get lots of strange contexts which makes validating computations significantly more difficult.  The resulting "cells" of information have different XBRL Dimensions information within the context.  This causes two things to happen.  First, you cannot use XBRL calculations to validate a simple calculation which can be validated in normal [Roll Forwards] (the changes piece) and XBRL Formulas to validate the changes in the balance are likewise more challenging to construct.
4. You have no idea which combination of [Line Items] and [Axis] are allowed.  It is not the case that every [Line Item] can be within any or every equity component.  Because of the way this is modeled, additional rules have to be created to tell you which [Axis] is allowed on which [Line Items].  This is unnecessary with other [Roll Forward]s, the [Roll Forward] provides you with the list of useable concepts.  (Again, this is why this statement should be modeled as a [Roll Forward].
5. Concepts used in this statement don't "fit" into other areas of the XBRL instance.  The statement of changes in equity contains lots of things which are used in other areas of an XBRL instance.  For example, Net Income (Loss) from the income statement; dividends paid which are disclosed on the cash flow statement, those sorts of things.  And there are a lot of them.  All these pieces can fit nicely together if a taxonomy is modeled correctly.  The strange axis "Statement, Equity Components [Axis]" used on this statement makes that impossible.  You will see this when you try and model your XBRL instance.
6. Not everything has a class of stock, so why the [Axis].  People don't seem to grasp the fact that the [Axis] of a [Table] apply to all [Line Items] in a [Table].  The class of stock [Axis] (which you can see here or here), modeled in this statement, means that EVERY line item has a class of stock.  Semantically, this is simply not the case from an accounting perspective.

There are some other issues that I have with the statement of changes in equity such as that it cannot handle restatements caused by prior period adjustments due to changes in accounting policies or corrections of an error.  But I will save this for another day.  I want to focus on the fundamental modeling of the statement, not additional things which need to be added to the model.

Part of the reason that the statement is modeled the way it is in my view is because there is a miscommunication between the technical people and the domain people when it comes to this statement.  Many accountants give the misperception that there is an infinite number of things that can go into the statement of changes in equity and this is simply not the case.  Further, it is not the case that the [Line Items] can go under various equity components in an arbitrary manner.  Where things go is not arbitrary at all and filers have little control of where to put things, US GAAP tells them where things go.  And so should the model of the statement of changes in equity.

Another part of the reason certain modeling decisions are made, and incorrectly in my view, is that accountants are obsessed by how things are presented and they don't fully understand the connection between presentation and the modeling of the taxonomy.  Key points missed are that the best thing for presentation is to do things consistently and logically, focusing on semantics, not XBRL syntax.  But as this understanding becomes better as a result of seeing working SEC XBRL filings and filings that don't work so well, practices will drift to the proper effective result.  The sooner and the more accountants understand how XBRL works, the faster we will get there.

Some clues as to how things do work in XBRL can be seen in some things that I had laying around from several years ago (about 2005 time frame) which were used to test the IFRS GP taxonomy.  I could not decide if providing these would be more helpful to people or confusing.  If you focus on the right things you can get the true points.  At the risk of confusing people, I will make these things available.  The point here is to see another model of a statement of changes in equity, how it works, and contrast that to how the US GAAP Taxonomy statement of changes in equity works.  This has nothing to do with comparing IFRS and US GAAP.  This is about how to model information and the results which you derive from modeling things in specific ways.  So, I make this available in that light.  Please don't read the wrong things into what is being shown.  Further, realize that the 2005 IFRS GP was done in 2005.  I learned a lot from that taxonomy.  It is not an example of how a taxonomy should be created today in my view.  That said, there are certain aspects that are created correctly.  That is what I want to focus on.

So first off, here is the end result of my testing:  This PDF.  The PDF may seem a little odd, but the point was to PROVE that the IFRS taxonomy was constructed correctly. What the PDF shows is what is called a [Roll Forward] (IFRS calls it a movement analysis) for EVERY equity line item.  EVERY type of change is shown.

This is the XBRL instancefrom which the PDF is created.  Again, this is test data.  But, the same idea applies whether you are creating a test financial expressed in XBRL or a real one:  do ALL the computations add up?  How do you know that they add up?

Well, we used the XBRL calculations and XBRL Formulas to test the computations.  There are three types of computations:

• The columns add up to what is shown in the right most column which is "Equity, Total".  XBRL calculations are used to express those computations.
• The total changes adds up, that is the second row from the bottom, "Total Changes for Period" in the PDF.  Each column needs to add up.  (Even though this number may not be shown on the actual statement of changes in equity).
• The roll forward (or movement needs to add up.  For each column, the first row which is "Balance at December 31, 2003" + the second to the last column "Total Changes for Period" = the last row which is "Balance at December 31, 2004".  XBRL calculations cannot perform this test.

Here are the two validation reports which test EVERY ONE of these computations:  XBRL Calculations and the XBRL Formulasvalidation results.  The calculations validation comes from the XBRL calculations expressed with the IFRS GP taxonomy, see this calculation linkbase.  The XBRL Formulas come from a formula linkbase I created.  Originally back in 2005 when I was testing this I used a proprietary version of XBRL Formulas which UBmatrix created.  I updated those formulas to the XBRL Formula 2008 specification, which you can see here.  These calculations and formula validation results can be a little hard to read because they are not organized as an accountant would want to see them.  But, all the information is there.  Again, the point is that EVERY computation is validated.  I KNOW that everything adds up.

Another important point on the PDF is that if you look at the numbers, they have the correct "polarity" (whether they are shown as positive or negative).  What I mean is this.  Look at the fifth column from the right which is "Treasury Shares".  Notice how the number in the first column is -1,100.  Now, some accountants would say that should be shown as positive, not a negative.  No worries.  Simply change the style sheet which renders this information.  You can see the style sheet here.  If you know how to read the XSLT you can see that it is very easy to flip the number from a positive to a negative by changing this XSLT:

<xsl:value-of select="format-number(/xbrli:xbrl/ifrs-gp:TreasuryShares[@contextRef='I-2003'] * -1,'#,##0','base')" />

All you would do is change the -1 to a 1 and the value from the XBRL instance would be shown as positive, rather than negative.  People obsessed with wanting to show this as either positive or negative are missing the point that people should be able to show this HOWEVER THEY WANT TO.  XBRL provides what is needed in order to achieve this flexibility.

Conclusions

Here are my conclusions.  Take a look at the evidence above and consider all the other things which my might feel appropriate to consiser and reach your on conclusion.  But my own personal conclusion is this:

1. The statements of changes in equity are [Roll Forward]s and they should be modeled as such.  This would make understanding how to create a statement of equity in XBRL a whole lot easier.
2. Accountants are going to want to validate their computations to be sure the fact values expressed in the XBRL instance properly foot and cross-cast.  All of them, even the reconciliation of the beginning and ending balances.
3. The taxonomy should express the proper financial reporting and accounting semantics.  Not everything in a statement of equity has a "class of stock", so that [Axis] is NOT appropriate in the statement of equity.  It would be very approprate for certain pieces of the statement of equity, but not for the entire statement of equity.  This means that rather than modeling one big herky [Roll Forward], the it would be more appropriate to model each [Roll Forward] separately.
4. The side benefit of number 3 is that you know which concepts you should use in which columns of the statement of equity.
5. The IFRS GP taxonomy of 2005 proves that this can work.  You can see for yourself in the links above.  You can also see how this works and can see that it is, in fact, nothing more than a [Roll Forward].
6. Modeling the taxonomy and rendering the information in the XBRL instance are two different things. A taxonomy with a consistent information model, the base and any extension, is easy to render.

As more and more SEC XBRL filings get made with the statement of changes in equity more and more filers will have to grapple with this statement.

If someone sees a better way to model the statement of changes in equity I would love to know about it.  But you need to provide a well thought out prototype so you can think through all these pieces, rather than providing "vapor XBRL instances and taxonomies" which may not work like you think they would work.  Run what I am showing through the ringer.  Heck, if you have something better let's us that approach.  All I personally care about is that this works for financial reporting.

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.