Digital Financial Reporting

This is a textbook about digital financial reporting intended to be used by accounting professionals, information technology professionals, and knowledge engineering professionals. The textbook is focused on helping each of these groups understand a digital financial report. The best way to learn about digital financial reports is to help create digital financial reports and make them work the way business professionals need digital financial reports to work.

What is digital financial reporting?

Digital financial reporting is financial reporting using structured, machine-readable form rather than traditional approaches to financial reporting which were paper-based or electronic versions of paper reports such as HTML, PDF, or a document from a word processor which is only readable by humans. A digital financial report is readable by both humans and by machine-based processes. Because digital financial reports are machine-readable the machine can be more intelligent and helpful in understanding where a professional accountant is working in a financial report (i.e. context-aware) and therefore make the software more adaptive, more dynamic, able to provide an advisory role to professional accountants, be more proactive, and provide other knowledgeable guidance related to the creation and review of a financial report. Unlike word processors which understand nothing about a financial report, digital financial report software has an intimate understanding of a financial report.

Digital financial reporting includes the creation of general purpose financial reports under IFRS, US GAAP, governmental accounting standards, or other reporting schemes. Other reporting schemes may also use this global standard approach to creating a machine-readable digital financial report. The focus of this textbook is not specifically what goes into a financial report per one specific reporting scheme; but rather it is about the digital financial report itself. Digital financial reports can be used by any reporting scheme which might choose to express some financial or non-financial information digitally.

Digital financial reporting can be understood by contrasting that process to the process of creating blueprints using Computer-aided Design/Computer-aided Manufacturing (CAD/CAM) software. Just as CAD/CAM software is knowledgeable of blueprints, digital financial reporting software is knowledgeable of financial reports. CAD/CAM software understands what a door is, what a window is, what a wall is, and that a window goes into a wall. Similarly, digital financial reporting software understands what a balance sheet is, what an income statement is, what a disclosure is, that assets goes into the balance sheet and that assets equals liabilities and equity, per the accounting equation. CAD/CAM software is used to increase the productivity of the designer, improve the quality of design, improve communications through documentation, and to create a database for manufacturing. CAD/CAM output is often in the form of machine-readable information which can be printed, provide instructions for machining directly to a numerically controlled machine, or used in other ways for other manufacturing operations. Similarly, a digital financial report will travel through the entire supply chain which is connected via the Internet and information never needs to be rekeyed and different business systems will have the same understanding of the reported financial facts and the relations between the reported facts.

The machine's knowledge of a digital financial report is enabled by the structured nature of the information represented within the machine-readable financial report, metadata that explains business rules related to the creation of the financial report that the machine must follow, and meta-metadata which helps other participants of the financial reporting supply chain such as investors and analysts which make use of the reported financial information interact with these machine-readable artifacts to effectively and successfully exchange meaning between business systems and processes. Knowledge about the mechanics of a financial report and how to create a financial report is carefully expressed in machine-readable form by humans. This is not to say that all knowledge can or will be expressed; rather, only objective knowledge that makes a computer software program capable of helping its human operators can be expressed. Subjective knowledge, such as the judgment of a professional accountant, can never be expressed in terms that is understandable by a machine. Essentially, the machine mimics basic mechanical tasks related to the creation of a financial report.

The machine's understanding is enabled using software algorithms and machine-readable metadata and meta-meta data. Metadata and meta-metadata is stored and managed within formal and informal ontologies which describe the things that make up a financial report, important relations between those things, and other information related to the financial report knowledge domain in machine-readable form. Ontologies are created and managed by knowledge engineers who help business professionals create and manage this metadata. Ontologies both describe the business domain and serve to verify that digital financial reports created are consistent with that description. Machines can assist accounting professionals in the creation of financial reports to the extent that metadata about the financial report and how to create the financial report is articulated in machine-readable form. Another term for these relations is business rules.

Current tools such as disclosure checklists which serve as memory joggers to humans and are not machine-readable. In the context of Digital Financial Reporting these current human readable checklists and memory joggers are made machine-readable and therefore many tasks which can be automated using machine-based processes will be performed by computers. As previously stated, processes which will be automated are the more mechanical aspects of creating a financial report, as opposed to the judgmental aspects which require the knowledge of a professional accountant to get correct. Digital financial reports will free both professional accountants who create these reports and financial analysts and regulators who use information from these reports from tasks such as re-keying information and making sure the objective aspects such as mathematical relations of a report are correct, allowing professional accountants to focus on judgmental and other subjective aspects which cannot be automated.

The benefit of digital financial reporting is enabling machines to take over mindless and mundane mechanical tasks that are involved in the creation of financial reports. Not all tasks, rather tasks that can be effectively achieved using machines. Enabling machines to take over tasks that had been performed by humans results in reduced costs involved in creating financial reports, reducing human errors because machines take over many mindless mundane mechanical tasks, increased quality and reduce the risk of noncompliance because machines take over these mindless mundane tasks, and less time to complete financial reports because of the assistance provided by automated machine-based processes. Automation can be achieved to the extent that machine-readable metadata and data is provided and that software algorithms can be written.

One Global Standard for Digital Financial Report

It serves no one to have multiple standards for a digital financial report other than software vendors who use old, outdated tactics to try to lock in customers using proprietary formats. A better tactic for software vendors is to compete based on value added. If every software vendor supported the same single global standard for a digital financial report, business professionals will be better served.

Vision of Digital Financial Reporting

Imagine if there were a software application for creating financial reports similar to how CAD/CAM software understands blueprints. That is the vision of digital financial reporting. Digital financial reporting embraces Web 3.0 or the Semantic Web ideas and applies those ideas to general purpose financial reporting. These ideas are summarized in the Web 3.0 Manifesto.

Some software vendors are referring to this idea as disclosure management.

Table of Contents

• Introduction
• Digitizing Financial Reports
• Overview of Professional Accountant's Perspective
• Knowledge Engineering Basics for Accounting Professionals
• Understanding Basic Mechanics of a Digital Financial Report
• Understanding Basic Mechanics of an SEC-style XBRL-based Digital Financial Report
• Understanding Advanced Mechanics of a Financial Report
• Differentiating US GAAP Alternatives from US GAAP Ambiguity
• Understanding Fundamental Accounting Concepts and Report Frames
• Understanding Other Moving Parts of Digital
• Additional Resources for Getting Started
• Identifying and Defining Financial Report Semantics
• Identifying and Defining Financial Reporting Domain Semantics
• Identifying Financial Report Model Elements
• Identifying Relations between Financial Report Model Elements
• Verification of Digital Financial Reports
• Analysis and Comparison of Digital Financial Reports
• Special or Specific Modeling Considerations
• Concept Arrangement Pattern Examples
• Business Use Case Examples
• Comprehensive Example
• Financial Disclosure Template Examples
• Reference Implementation of XBRL-based US GAAP Public Company Financial Filing to SEC
• Reference Implementation of XBRL-based IFRS Public Company Financial Report
• Digital Financial Reporting Principles
• APPENDIX: Financial Report Semantic Object Properties
• APPENDIX: Report Element Properties
• APPENDIX: Analysis of 6,751 XBRL-based Public Company 10-Ks Submitted to SEC
• APPENDIX: Top XBRL Technical Syntax Related Modeling Tips
• APPENDIX: Benefits and Limitations of Inline XBRL
• APPENDIX: Notion of Profiles, General Application Profile, and NOLAP

Additional Resources Helpful in Understanding the Vision of Digital Financial Reporting

The following are additional resources which are useful in creating this textbook which explains a digital financial report. These resource will ultimately be removed from this textbook but exist now to enable quick access to information.

• Web 3.0 Manifesto : provides a vision for how digital financial reporting can work.
• Zeroing in on the Holy Grail of Meaningful Information Exchange : provides a vision for how digital financial reporting can work.
• Knowledge Engineering Basics for Professional Accountants : explains important concepts and ideas which are important for every professional accountant working to create digital financial reporting.
• Understanding Blocks, Slots, Templates, and Exemplars : helps business professionals and information technologies understand how semantic software described by the Web 3.0 Manifesto will be made to work.
• Financial Report Ontology : helps business professionals and information technologies understand what metadata is necessary to make digital financial reporting work.
• Business Rules Manifesto : helps business professionals understand that they are responsible for the rules to make digital financial reporting work and more importantly HOW digital financial reporting will work. Pay close attention to Article 9. Of, By, and For Business People, Not IT People.
• Digital Financial Reporting : content accumulated over 20 years of trying to understand and make digital financial reporting work which is free to use and can help to create this textbook.
• Ontology for the Twenty First Century: An Introduction with Recommendations : an introduction to ontology, information ontology and ontology design. This introduction is based on the realist approach to ontology and on the associated Basic Formal Ontology (BFO) and principles for best ontology practices that have been developed and researched at IFOMIS in the last four years.
• Basic Formal Ontology (BFO) : is a small, upper level ontology that is designed for use in supporting information retrieval, analysis and integration in scientific and other domains. BFO is a genuine upper ontology designed to serve data integration in scientific and other domains.
• An analysis of fundamental concepts in the conceptual framework using ontology technologies : explores the notion of using machine-based processes and ontologies to address the problems of vagueness, inconsistency and ambiguity in financial reporting standards.

What Large Accounting Firms Say about XBRL

The messaging around XBRL-based digital financial reporting tends to be all over the board. Here is information related to XBRL, digital business reporting, and digital financial reporting from larger public accounting firms:

• Deloitte : Good video related to XBRL-based disclosure analytics.
• EY : Pretty basic.
• KPMG : Pretty basic.
• PWC : Pretty basic.
• BDO : Pretty basic.
• Crowe Horwath : Pretty basic.
• Grant Thornton : Pretty basic.