Digital Financial Reporting

Successful engineering is all about understanding how and why things break or fail so that all issues can be fixed so that ultimately nothing breaks or fails.  I have spent 10 years breaking things and understanding failures in order to understand how to not let them break/fail.

As I mentioned in another blog post, the American Institute of Certified Public Accountants (AICPA) publishes a free, open reporting framework for small and medium sized companies that report but are not required to use US GAAP. That financial reporting framework is called FRF for SMEs™.  This short video explains the framework. This is a brief description of the framework provided by the AICPA:

The FRF for SMEs framework provides efficient, meaningful financial statements without needless complexity or cost for those SMEs that are not required to issue GAAP-based reports. The FRF for SMEs framework is a cost-beneficial solution for owner-managers and others who need financial statements that are prepared in a consistent and reliable manner in accordance with a framework that has undergone public comment and professional scrutiny. The accounting principles composing the FRF for SMEs reporting option are intended to be the most appropriate for the preparation of small business financial statements based on the needs of the financial statement users and cost-benefit considerations. Accounting principles in the FRF for SMEs framework are responsive to the well-documented issues and concerns stakeholders currently encounter when preparing financial statements for small private businesses.

I am going to create a high-quality XBRL taxonomy (really an ontology-like thing) for FRF for SMEs;

FRF for SMEs Ontology.

The FRF for SMEs Ontology will follow the informally described open source framework that I created but more importantly it will also follow the OMG's upcoming Standard Business Report Model (SBRM).  I will use this ontology to both exercise and test the SBRM.

Here is the most current version of the knowledge graph for FRF for SMEs.

Why am I doing this?

There are a number of reasons that I am creating this FRF for SMEs ontology:

• To synthesize 20 years of learning.
• The reporting framework is freely available and documentation is good.
• There are 20 million potential users of the framework (not sure how many companies actually use the reporting scheme).
• The reporting scheme has all of the variability characteristics of US GAAP and IFRS.
• To provide an ultra high quality XBRL taxonomy that can be used to raise questions about the approach taken by the very important US GAAP XBRL Taxonomy and IFRS XBRL Taxonomy.
• To help software vendors get their heads around XBRL-based digital financial reporting.
• To provide the metadata for a software application that I am helping to create called Pesseract.  Pesseract is an expert system for constructing a financial report.
• To help some additional software vendors tune their software.
• To help people see the possibilities of having high-quality curated metadata.
• To help people compare and contrast different approaches to creating XBRL taxonomies.
• To help introduce the benefits of XBRL-based reports to private companies.
• To provide information for academics to study.
• To create a complete system that works for those 20 million private companies to report to banks in support of commercial loans.

If you don't know why you might want to get involved in this project, you might want to read this document. If you want to get involved, contact me via email or LinkedIn.  If you have any suggestions or questions, I am always looking for good ideas.

If you want to follow the blog posts related to the FRF for SMEs, follow this category on my blog.

You don't need to understand anything about XBRL to contribute to this project.  All you need to do is have an understanding of financial reporting.  Professional accountants can both learn and contribute by creating a podcast, creating a YouTube video, creating commentary about or interpretations of FRF for SMEs, making sure the information in the ontology is correctly conveyed, providing examples of reporting use cases that need to be provided for by the ontology, etc.  Again, contact me if interested.

Steven M. Bragg, CPA, author of GAAP Guidebook (which is an excellent resource) publishes a series of podcasts related to accounting topics, The Accounting Best Practices Podcast.

Here is one podcast example, Bragg's Laws of Accounting.

Here is a podcast on XBRL, XBRL Tagging.

Here is a podcast on Artificial Intelligence: How AI might impact the accounting department.

When you want to represent a reporting scheme within an XBRL taxonomy; I am recognizing that there are three XBRL taxonomy creation approaches.  I have documented the three approaches in this PDF.  The following is an explanation of the essence of each of the three approaches:

• Top-Down XBRL Taxonomy Creation Approach: You start by listing all the topics of a reporting scheme; you then list each of the possible disclosures for each of those topics; you create the networks into which each disclosure will be placed in the XBRL taxonomy; you create the report elements that will be used to represent the disclosures; you create the rules used to explain and verify against the explanation for each disclosure; you create a template to test each of the disclosures; and you finally create a reference implementation which combines all of the templates to test to be sure the disclosures interact with one another appropriately and that there are no inconsistencies or contradictions.
• Bottom-up XBRL Taxonomy Creation Approach: You start by creating the primitive report elements which will be used to create each disclosure; next you organize those report elements into individual disclosures; then you organize each of the disclosures into XBRL networks and topics to help you work with the many individual disclosures.  Again, you test by creating a template for each individual disclosure and then you combine a set of templates which would be used together into a reference implementation to test the entire XBRL taxonomy.
• Iteration XBRL Taxonomy Creation Approach: You start by generally taking an existing XBRL taxonomy, templates, reference implementation, list of disclosures, list of topics, rules, etc., all of which are known to work correctly; you then modify that existing XBRL taxonomy by adding, deleting, or editing its pieces until you turn the existing XBRL taxonomy pieces into what it is that you want.  (This might seem like a bit of an odd approach, but if you really think about this approach it actually makes a lot of sense.)

Note that when I say "XBRL Taxonomy" I am really talking about creating an ontology-like thing which is explained here using this open source framework.