Digital Financial Reporting

In my last blog post I pointed out a set of fundamental accounting relations which exists for all financial statements.  These relations focused on the primary financial statements.  This blog post expands on that idea.

So, I created a form in an analysis application which I had and put all these high-level concepts on that form.  You can see a screen shot of that below (click on the image below to get a larger image):

Fundamental accounting relations

Within the analysis tool which I created using Microsoft Access, I both hooked all these concepts together and I also put in check values to be sure the relations were correct.

Now, granted, not one SEC filer reports every one of the totals or line items that I provide for.  For example, if a reporting entity does not have an equity method investment, it is not going to have "Income from equity method investments" and it will not report the concept "Income before equity method investments".  So the line items which they do show depends on the line items which they have and therefore report.

However, that does not change where "Income from equity method investments" WOULD go.  I just provide all these placeholders.  Accountants creating a financial statement cannot move this stuff around.  For example, an accountant simply cannot include "Income from equity method investments" within Gross Profit, Nonoperating income (loss); there is exactly one appropriate spot for that line item.

There are only two areas of this set of concepts that I am having slight problems fitting the puzzle pieces together.  The first is the line items which make up "Operating income (loss)". There is such a wide variety of line items and subtotals provided that this is a bit of a challenge.  There is also one significant error that about 50 SEC filers make.  What the filers do is take the concept "Interest and Debt Expense" which is basically a category of expenses and "repurposing it" (in my view misusing it) as a line item within a different category, "Nonoperating income (expense)".  That is like using the concept "Assets" within the liabilities section of a balance sheet.  And so this area is a bit challenging.

Another area where this model does not quite work correctly is the cash flow statement and the placement of "Exchange gains (losses)" in that statement.  There are two different approaches SEC filers take. The first approach includes the exchange gains (losses) within the computation of "Net cash flow", contributing to that total.  Well over 98% of SEC filers use this approach.  A small minority of SEC filers include "Exchange gains (losses)" within the roll forward of the cash and cash equivalents beginning and ending balance.  I have pointed out this issue previously.  Some accountants I talk to consider this an error on the part of the filers in creating their financial reports.  Others acknowledge an ambiguity within US GAAP which could lead to this second interpretation used by the minority of SEC filers.  There is no real business reason for having two approaches to where this line item should show up.  OK, so that means there are two possible representations for that particular line item.  Fine.  That does not break the idea of the existence of these fundamental accounting relations.

And so there really is not just one representation.  If a reporting entity provides an unclassified balance sheet, they won't report current assets or liabilities.  No big deal, just a slightly different representation.  Same thing for whether a filer provides a single-step or multi-step income statement.  That does not change every fundamental relation, it only changes a small handful.  Likewise if a filer reports using net assets instead of equity, like a small number of SEC filers do.  These are all just minor adjustments to this underlying representation, it does not break the representation.

Another thing that I did was provide a wiki page which captures the concepts and relations which I am using.  You can get to these fundamental accounting relations here.  If you have any other relations which you want to add, go for it.  If there are any that you disagree with, post a comment to the discussion page.

Thus far, no one has made a sensible argument against any of these relations.  Also, the SEC filings that I have support the existence of these relations.  Again, not every SEC filer has all of these relations; but there is not one SEC filing that I have seen which leads me to believe that I have any of these relations incorrect.

Accountants, do you dispute any of the following mathematical relations between accounting concepts? If so, which ones would you dispute?

• Assets = Liabilities + Equity
• Assets = Liabilities And Equity
• Assets= Current Assets + Noncurrent Assets
• Noncurrent Assets = Assets - Current Assets
• Equity= Equity Attributable To Parent + Equity Attributable To Noncontrolling Interest
• Current Assets= Assets - Noncurrent Assets
• Liabilities= Current Liabilities + Noncurrent Liabilities
• Liabilities And Equity = Liabilities + Commitments And Contingencies + Temporary Equity + Equity
• Noncurrent Liabilities = Liabilities - Current Liabilities
• Liabilities = Liabilities And Equity - Equity
• Net Cash Flows = Net Cash Flows Operating Activities + Net Cash Flows Investing Activities + Net Cash Flows Financing Activities + Net Cash Flows Discontinued Operations + Exchange Gains (Losses)
• Net Cash Flows Operating Activities = Net Cash Flows Operating Activities Continuing Operations + Net Cash Flows Operating Activities Discontinued Operations
• Net Cash Flows Investing Activities = Net Cash Flows Investing Activities Continuing Operations + Net Cash Flows Investing Activities Discontinued Operations
• Net Cash Flows Financing Activities = Net Cash Flows Financing Activities Continuing Operations + Net Cash Flows Financing Activities Discontinued Operations
• Net Cash Flows Discontinued Operations = Net Cash Flows Operating Activities Discontinued Operations + Net Cash Flows Investing Activities Discontinued Operations + Net Cash Flows Financing Activities Discontinued Operations
• Net Cash Flows Continuing Opertaions = Net Cash Flows Operating Activities Continuing Operations + Net Cash Flows Investing Activities Continuing Operations + Net Cash Flows Financing Activities Continuing Operations
• Gross Profit = Revenues - Costs Of Revenues
• Operating Income (Loss) = Gross Profit - Operating Expenses + Other Operating Income (Multi-step approach)
• Operating Income (Loss) = Revenues - Costs And Expenses + Other Operating Income (Single-step approach)
• Income (Loss) Before Equity Method Investments = Operating Income (Loss) + Nonoperating Income (Loss) - Interest And Debt Expense
• Income (Loss) From Continuing Operations Before Tax = Income (Loss) Before Equity Method Investments + Income (Loss) From Equity Method Investments
• Income (Loss) From Continuing Operations After Tax = Income (Loss) From Continuing Operations Before Tax - Income Tax Expense (Benefit)
• Net Income (Loss) = Income (Loss) From Continuing Operations After Tax + Income (Loss) From Discontinued Operations + Extraordinary Items Of Income (Loss)
• Net Income (Loss) = Net Income (Loss) Attributable To Parent + Net Income (Loss) Attributable To Noncontrolling Interest
• Comprehensive Income (Loss) = Net Income (Loss) + Other Comprehensive Income (Loss)

While the majority of SEC XBRL financial filings do in fact comply with these mathematical relations between accounting concepts, some do not. 

Further it can be hard to reliably extract information from SEC XBRL financial filings because pieces are not reported.  For example, few SEC filers actually report the concept "Noncurrent assets".  Now, it is easy to compute that value, "Noncurrent assets = Assets - Current assets".  Easy enough.

However, it is WAY safer to have as much information provided and NOT have to impute values based on other values. This can lead to errors.  Or said another way, it is best if two approaches to computing a value exist and both are used and checked against the other to be safe that you are interpreting information correctly.

Even if an SEC filer does not report a value such as noncurrent assets, it can be helpful in checking your work to have that concept to verify computations.

I mentioned the WebFilings Taxonomy Analyzer before, but it is worth mentioning again because now you no longer need to log in to use it.

Very useful!