Bob Schneider is a Partner in 
Wilson So is the Director of Hitachi Consulting Corporation Financial Reporting Reform and XBRL (Part I)
Written by Kurt Ramin Posted September 5, 2007
Kurt Ramin is Chairman (Emeritus) XBRL International and a consultant to the International Accounting Standards Committee Foundation (IASCF). The second and final part of this post was published on September 12.
On August 2, the SEC Advisory Committee on Improvements to Financial Reporting held its first meeting. The Committee was formed to study the financial reporting system with the goals of reducing unnecessary complexity and making information more useful and understandable for investors.
The Committee is a significant and refreshing development to watch. In his welcoming remarks, Chairman Cox outlined several areas of emphasis:
The current approach to setting financial accounting and reporting standards;
The current process of regulating compliance with those standards;
Factors that may drive unnecessary complexity and reduce transparency; and
Any lessons that can be learned from growing use of international accounting standards.
Importantly, Mr. Cox stated:
I’ve also asked the Committee, as part of its consideration of the U.S. financial reporting system, to focus on how technology can help address accounting complexity by making financial information more useful to a greater number of investors. Through the power of interactive data, the opportunity exists to redesign the financial reporting system to deliver precisely the type and level of information that each individual investor needs (emphasis added).
The focus on technology is clear. There is also an emphasis on global standard-setting and the more complex compliance issues. If we are looking at a global solution, we need to keep it fairly simple owing to the various un-converged legal systems (especially recognition and de-recognition of assets and liabilities) and international localization problems. Perhaps that’s what Conrad Hewitt, Chief Accountant of the SEC, had in mind when he suggested to committee members to "think outside the box."
What is financial reporting in essence? It is the data aggregation of invoices received, internal allocations, and entity billings. In addition, there are explanations (i.e. disclosures) on the more important aspects of these transactions.
Invoices and transactions can always be broken down into units (usually quantities) times a particular value (usually in a specific currency). Historically, values were used to allow for the addition of various quantities (measured in liters, gallons, meters, etc.) and bridge the inability to add these units. Now, with modern unit tracking devices (we know where the units are!), we have more flexibility to measure performance at interim stages. We link the units to the various value files at a particular time.
This makes the accounting process much simpler, because we don’t have to carry the values through all the processes all the time. It brings back the "events approach" to basic accounting theory pioneered by George Sorter in the 1960’s. We just didn’t have the computing power then to trace, aggregate, sort, and combine what modern ERP and data warehousing systems allow us now. With the power of XBRL, we can even link the numerous and currently splintered disclosures and management commentaries to specific units and events (e.g. all people-related explanations — such as turnover, pension expenses, stock options, employee benefits, performance, etc. — to the "unit" people).
We still have the problem of deciding at what level of detail we would like to trace these units. This will vary among different industries (e.g., more detailed in pharmaceuticals than perhaps in retail). The important thing is that we are trying, at data entry level, to have standardized units of accounts.
I call these ‘unit feeder systems’ for XBRL. There are attempts in various industries to standardize units of measure along vertical industry lines. RosettaNet PIPs allow trading partners of all sizes to connect electronically to process transactions and move information within their extended supply chains. I also see RosettaNet being leveraged with other standards such as RFID and EPC so that you can not only get information on the ‘what’ and ‘where,’ but also the ‘how,’" says Manish Modi of Oracle.
In the financial and capital markets areas these feeder systems are, for example, MDDL (Market Data Description Language), FIXML (Financial Information eXchange Markup Language), and FpML (Financial Products Markup Language). The technical people are working on SCA (Standardized Service Component Architecture) to make system components more interchangeable.
The current financial statement structure has historically grown into a patchwork of difficult-to-understand information, at least for the average investor (for a historical explanation of the development of international accounting standards see Kirsch and Camfferman-Zeff; see also IASPlus). Unfortunately, XBRL taxonomies have to reflect this structure and actually have to use more complicated technical structures (e.g. tuples, dimensions, rendering tools, etc.) to follow the patchwork.
Given these difficulties with current financial statements, it is time to heed Mr. Hewitt’s call "to think outside the box" and create new solutions to age-old accounting problems. In Part II of this article, I will suggest a different approach to financial reporting that seeks to do exactly that.