On a recent LinkedIn blog, XBRL founder Charles Hoffman remarked, “Consider this. How many private companies that are not mandated to use XBRL actually use XBRL for creating a financial report as opposed to “just doing it the old way”? That remark started me thinking about how the process of creating financial statements could be/should be the key to finding high quality XBRL reports.
XBRL’s brief history as a tool for representing the financial condition of a company began in the late 1990’s as the Internet began to take hold. The beginnings of all things digital began with rendering web pages with tools called browsers such as Netscape and the early renditions of Internet Explorer. The basic HTML format was a flat presentation of text and graphics that had very little metadata behind it. Those of you who have been in this world since the 1990’s remember “screen scrapping” to obtain data from a web site. Not a very efficient way of gathering data.
Then along came XML, the extensible markup language. Finally, meaning could be directly inferred from data by associating XML tags with structure and definitions. Charles Hoffman was one of the first people to ponder, why not create a set of XML tags to represent financial statement elements? His work with the AICPA in the early years of XBRL led to many world wide applications of a new markup language created for business reporting, the extensible business reporting language or XBRL.
The SEC took note and began a pilot program with XBRL in the mid 2000’s. Mandatory reporting in XBRL was soon to follow. Note, however, that XBRL began as a markup language that would take existing business reports and impose a structure of XML rules to render a financial statement. This order and sequence is important to understand as we look at today’s advanced versions of XBRL.
Companies reporting with XBRL today have several advantages that the early users of XBRL did not have. First of all, the FASB has classified all their accounting standards into a codification system making US GAAP easier to work with. In the years prior to the codification, accountants who needed to check US GAAP might have to refer to several pronouncements, some of which gave conflicting information. Today, checking the Accounting Standards Codification, or ASC, will not only give readers the definitive word on US GAAP, but also give guidance on how the XBRL associated with a section of ASC can be expressed with XBRL. Changes to the ASC are called Accounting Standards Updates, or ASU’s and come with guidance on how to report the updates in XBRL.
In addition, the Proposed 2016 US GAAP Financial Reporting taxonomy, contains definitions for each element in the taxonomy. Below is an example of the details available for the XBRL element Premiums Earned, Net, Life. Note the label, definition (documentation) and authoritative references listed for this item.
Now think in reverse. What if you need to report Premiums Earned for the first time? If we had a financial software program that would accept XBRL elements as an input, the results would be not only simple, but compliant. Here’s what Charlie Hoffman wrote in “Digital Financial Reporting Manifesto” (unpublished, draft version available upon request.):
Digital financial report creation software understands that financial reports contain balance sheets and income statements, that balance sheets contain “assets” and “liabilities and equity” and that balance sheets balance (assets = liabilities and equity) among other things about financial reports.
The purpose of Digital Financial Report creation software is to consciously create a coordinated, shared, commonly accepted, standard, useful view of reality to achieve a specific purpose. What results should be objective and stable enough yet nuanced enough to be useful so that information can be used safely, reliably, predictably, repeatedly by both human and automated machine-based processes. The desired system state is one of balance or equilibrium; of consistency.
Imagine software that uses technically correct XBRL and combines it with generally accepted accounting principles so that the outcome is clear and consistent to both preparers, users and regulators. No more games, no more misunderstandings. Everyone can be on the same page transparently reporting business results in a meaningful way.
Hoffman goes on to say:
“Consistent meaning across presentation mediums is necessary. The meaning represented by any form of financial report must not change based on which medium is used to present that financial information. Information presented on paper, in word processor document, in HTML, a dynamic pivot table or other software application or any other form should convey the exact same meaning irrespective of the medium employed to present the information.”
The world of financial reporting has changed for the better. Machine read financial statements are now being accepted as the norm at regulatory authorities around the world. Although the quality of financial statements is improving, as evidenced here, we still have a ways to go to achieve consistent, reliable and predictable reports read the same by humans and by computers. DataTracks is leading the way to higher standards of quality with each and every quarterly filing season. We will continue to focus on bringing the highest standards of quality to each and every customer in the USA and around the world.
About DataTracks: DataTracks US is part of DataTracks Services Limited, leaders worldwide in preparation of financial statements in EDGAR HTML, XBRL and iXBRL formats for filing with regulators. With a track record of over 10 years, DataTracks prepares more than 12,000 XBRL statements annually for filing with regulators such as SEC in the United States, HMRC in the United Kingdom, Revenue in Ireland, ACRA in Singapore and MCA in India.
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