Digital Financial Reporting

Method of Implementing a Standard Digital Financial Report Using the XBRL Syntax is a document that explains a best practice based, open standard approach to implementing a financial report leveraging the proposed and forth coming Standard Business Report Model (SBRM). (This document describes implementing the method in more detail.)

Here is an abridged version that explain method and a terse explanation of the method.

A general purpose financial report is a high-fidelity, high-resolution, high-quality information exchange mechanism.  That mechanism has historically used the media of "paper".  Over the past 50 years or so, that paper-based mechanism has given way to a new mechanism, "e-paper".  By "e-paper" I mean PDF documents, HTML documents, Word documents and such.

XBRL is a new media, a new mechanism for creating a general purpose financial report.  XBRL is a high-fidelity, high-resolution information exchange media that allows for the creation of high-quality financial reports.

So, how do you use XBRL to create a general purpose financial report?  Today, XBRL tends to be underutilized.  Part of this underutilization relates to people not understanding how exactly to employ XBRL.  Other underutilization relates to an effort to make XBRL "easier".  By "easier" I give the example of not using tools such as XBRL Formula to represent important mathematical computations because "XBRL Formula is too hard".

But, "simplifying" XBRL by not using XBRL Formula and thus reducing the complexity involved has a consequence of allowing errors to slip into XBRL-based financial reports.  This sort of approach to "simplifying" the complexity of implementing XBRL really is dumbing down the problem to make things easier, not solving the problem.

The correct approach to solving this problem is to build better software.  Better software will lead to better taxonomies.  Better taxonomies lead to better metadata.  Better metadata leads to better quality and easier to use software applications.

A best practice is a method or technique that has been generally accepted as superior to any alternatives because it produces results that are superior to those achieved by other means or because it has become a standard way of doing things.

The method describes best practices learned from analyzing thousands of XBRL-based financial reports prepared using US GAAP and IFRS to the U.S. Securities and Exchange Commission and other testing.  An engineering design process was used, not personal opinion, philosophical debates, political discussions, or theological dogma.  Pure engineering.

The method properly adjusts for all the necessary variability that is part of financial reporting.  This method is not about what goes into a financial report, the method relates to the structure, mathematics, mechanics, logic, and a few accounting details when appropriate. 

What goes into a financial report is based on professional judgement.  But if you put a roll up into the report; that roll up better actually roll up.  Even the SEC, ESMA, FASB, and IASB all have to follow the rules of mathematics and logic.  No way around that.

The method has already been implemented by two software applications and two additional software applications are in the process of being created using this method.

Why re-invent the wheel?  Why not use a best practices, open standard, proven approach when one exists?

When I say, "the forth coming Standard Business Report Methodology and the Business Report Meta-Meta Model", this is what I mean.  A financial report is a type of business report. While different reporting schemes that have implemented XBRL do so in slightly different ways; those slightly different "meta-models" can all be represented by one standard "meta-meta-model".

Thus every financial report "model" created by an economic entity that fits into a "meta-model" mandated by some regulator such as the SEC and ESMA; all also fit into a standard "meta-meta model" for a financial report which also fits into the "meta-meta model" of a general business report.

Mind numbingly confusing?  Not to worry.  Good software engineers understand this stuff. This is all about leveraging patterns to make creating software easier.  We are working to make this business report meta-meta logical model a global standard.

If you are a business professional trying to wrap you head around this, here is all you need to know: Good standards make markets.

In a prior blog post, Understanding that XBRL is a Knowledge Media, I pointed out that XBRL enables a knowledge bearer to impart knowledge to a knowledge receiver.  This is similar to how you can impart knowledge using word of mouth, a book, or a video.  Each of these knowledge media has strengths and weaknesses.

XBRL's "sweet spot" in terms of capabilities for imparting knowledge are the following:

• Exchange of rich, complex, high-fidelity information:  The information exchange transaction type for which XBRL was designed is rich, complex, and high-fidelity information as contrast to a simple information transaction of low fidelity.
• Zero to very low tolerance for error:  As accountants say, information must "tick and tie" and "cross cast and foot."  There should be no mathematical or logical inconsistencies, contradictions, or other such anomalies within a financial report. XBRL has a lot of expressive power.
• Information variability, flexibility, reconfigurability: XBRL was intentionally designed to handle the variability of financial reporting.  A financial report is not a ridged form.  Information reported might not be uniform.  But that is not to say the information does not follow patterns and is arbitrary and random.  For example, various intermediate concepts (subtotals) might be used to summarize basic concepts.  XBRL offers flexibility where flexibility is necessary.

What many who look at XBRL and view as complexity is really XBRL's capabilities to enable the exchange of high-fidelity, high-resolution information with a high-degree of reliability, accuracy, and precision.

• Reliability is about getting consistent results each time an activity is repeated.
• Accuracy is about identifying the correct target. Accuracy relates to correctness in all details; conformity or correspondence to fact or given quality, condition; deviating within acceptable limits from a standard.  Accuracy means with no loss of resolution or fidelity of what the sender wishes to communicate and no introduction of false knowledge or misinterpretation of communicated information.
• Precision is the closeness of repeated measurements to one another.  Precision involves choosing the right equipment and using that equipment properly. Precise readings are not necessarily accurate. A faulty piece of equipment or incorrectly used equipment may give precise readings (all repeated values are close together) but inaccurate (not correct) results.

Bad equipment, such as software with the wrong capabilities, leads to poor precision which causes poor accuracy, which causes poor reliability.

Capability is the measure of the ability of something to achieve its objectives, specially in relation to its overall mission.

Quality is a measure of a state of being free from defects, deficiencies and significant variations. Quality is brought about by strict and consistent commitment to certain standards that achieve uniformity of some result in order to satisfy specific requirements.

A significant problem that XBRL suffers from is underutilization of its capabilities.

Per Wikipedia, a methodology is defined as the systematic, theoretical analysis of the methods applied to a field of study.  It comprises the theoretical analysis of the body of methodology and principles associated with a branch of knowledge.  Typically, it encompasses concepts such as paradigm, theoretical model, phases, and quantitative or qualitative techniques.

A methodology does not set out to provide a solution.  A methodology is, therefore, not the same as a method.

Instead, a methodology offers the theoretical underpinnings for understanding which method, or set of methods, or so called "best practices" can be applied to a specific case, for example, to calculating a specific result. 

A best practice is a method or technique that has been generally accepted as superior to any alternatives because it produces results that are superior to those achieved by other means or because it has become a standard way of doing things.

I put together a high-level comparison of reporting schemes.  This is somewhat similar to my comparison of implementations of XBRL which I call profiles, or implementation profiles, or application profiles.

Now, if you are a trained observer and you look at those comparisons and then you read the document Leveraging the Theoritical and Mathematical Underpinnings of a Financial Report, you begin to understand many of the leveragable patterns that exist in financial reporting.

The typical accountant does not think in this manner. The typical accountant is focused on one reporting scheme generally.  The typical accountant is focused on the presentation of information, not the representation of information.  That is why the typical accountant might not understand how to create things like the document Understanding Block Semantics.

If you compare and contrast the US GAAP and IFRS XBRL taxonomies, you see that they are more similar than they are different.  Sure, they are different in that they represent two different reporting schemes.  But both of those reporting schemes start with the logic "Assets = Liabilities and Equity".  All other reporting schemes also start with that fundamental logic.

And then below that first level equation, you have the second level which is also very similar.  Sure, some reporting schemes put current before noncurrent and others put noncurrent before current.  Or, liabilities might be shown before or after equity.  But those are arbitrary presentation matters, not differences in logic.