Financial reporting comparability: toward an XBRL

Int. J. Electronic Finance, Vol. 7, No. 1, 2013

Financial reporting comparability: toward an XBRL ontology of the FASB/IFRS conceptual framework Mitchell R. Wenger Patterson School of Accountancy, University of Mississippi, 200 Conner Hall, Oxford, MS 38677, USA E-mail: [email protected]

Manoj A. Thomas Department of Information Systems, Virginia Commonwealth University, 301 W Main St, Richmond, VA 23284, USA E-mail: [email protected]

Jeffry Stephen Babb* Department of Computer Information and Decision Management, West Texas A&M University, 2403 Russell Long Blvd., Canyon, TX 79016, USA E-mail: [email protected] *Corresponding author Abstract: As a mechanism for the exchange, transmission, and reporting of accounting and financial data, eXtensible Business Reporting Language (XBRL) makes great strides toward standardisation. However, given the global nature of contemporary financial markets, XBRL reporting must transcend or accommodate differences in reporting standards. Presently, the two standards for XBRL reporting, the US Generally Accepted Accounting Principles (US GAAP) or International Financial Reporting Standards (IFRS), make reconciling meanings between these standards a laborious and error-prone affair. As the audience for this reporting often spans countries and cultures, many have a stake in digesting XBRL-formatted financial reports. This paper addresses the question of how cross-cultural and transnational consumers of XBRL statements can derive meaning from these reports. We present an ontological approach toward solving this problem which includes a financial reporting ontology and associated architecture for comparing concepts across XBRL taxonomies. The architecture is explained, evaluation criteria offered, and future research approaches toward realising artefacts using this architecture are proffered. Keywords: e-Finance; XBRL; eXtensible business reporting language; XML; eXtensible markup language; taxonomy; ontology; financial reporting; US GAAP; US generally accepted accounting principles; IFRS; international financial reporting standards; financial statement analysis.

Copyright © 2013 Inderscience Enterprises Ltd.

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M.R. Wenger et al. Reference to this paper should be made as follows: Wenger, M.R., Thomas, M.A. and Babb, J.S. (2013) ‘Financial reporting comparability: toward an XBRL ontology of the FASB/IFRS conceptual framework’, Int. J. Electronic Finance, Vol. 7, No. 1, pp.15–32. Biographical notes: Mitchell R. Wenger is an Assistant Professor in the Patterson School of Accountancy at The University of Mississippi. He earned his BS in Accountancy from the University of Illinois, his MBA from the University of Texas at Arlington, and his PhD from the Virginia Commonwealth University School of Business. He is a CPA in the state of Texas and brings 20-plus years of practice and industry experience to the classroom. His primary research interests are in the area of information systems and emerging technologies in accounting – their impact on organisational dynamics and the ways in which they facilitate changes in internal measures of success. He is an active member of the American Accounting Association, the AICPA, ISACA, and the Association for Information Systems. Manoj A. Thomas is an Assistant Professor in the Department of Information Systems at Virginia Commonwealth University. He holds a PhD in Information Systems, Masters in Information Systems, Masters of Business Administration and Bachelors in Engineering. His primary research interests focus on knowledge engineering, emerging technologies and ICT for Development. He has published in many practitioner and academic journals and presented at various Information Systems conferences. He rides and works on motorcycles when he wants to get away from the digital realm. Jeffry Stephen Babb is an Assistant Professor of Computer Information Systems in the College of Business at West Texas A&M University. He has a PhD in Information Systems from Virginia Commonwealth University in Richmond, Virginia. His research interests are in software systems development, small team development, mobile applications development and information systems security. Many of his other interests are student-focused where he advises student organisations and coaches students in software competitions.

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Introduction

Recent research in financial accounting and reporting systems has focused on eXtensible Business Reporting Language (XBRL), a subset of the eXtensible Markup Language (XML) standard, as a means of rationalising information and meaning in business reporting. Many believe that XBRL provides broad benefits to the firms that utilise it, and that XBRL will eventually provide benefits to a larger audience of economic stakeholders both inside and outside the organisation (Baldwin, 2006; Bovee et al., 2002; Bonson, 2009; Callaghan et al., 2012; Efendi et al., 2011; Gray and Miller, 2009; Mejzlik and Istvanfyova, 2008; Qin, 2011). Currently, financial reports issued by publicly-held companies around the world are relatively difficult to compare for all but the most sophisticated financial analysts. However, the impact and importance of making decisions based on this data remains compelling (Bekhet and Al-alak, 2011; Chan and Wickramasinghe, 2006; Solli-Sather, 2011; Zhou et al., 2007; Zulkifli et al., 2008). In the US, the Generally Accepted Accounting Principles (US GAAP) provide some level of consistency across financial reports, but US GAAP still allows a certain degree

Financial reporting comparability

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of flexibility in categorising business activities within financial statements. On an international scale, accounting standards vary from country to country, which has historically made financial statements from different countries extremely difficult to compare. Adoption and use of XBRL is taking place worldwide in a variety of applications, including financial statement reporting, tax preparation, and insurance and financial services regulatory reporting. The adoption rate and application areas vary by country, however, based in part on institutional requirements and in part on normative pressures (Abdullah et al., 2008, 2009; Bonson-Ponte et al., 2007; Dragomir, 2011). The International Accounting Standards Board (IASB) has been working on a project designed to converge and standardise financial statement reporting standards worldwide as the International Financial Reporting Standards (IFRS). Early this century, with most countries already members of the IASB, the effort gained significant momentum when the US Financial Accounting Standards Board (FASB) indicated a desire to participate in the convergence efforts (IASB, 2003-1, 2003-2) While the USA has not fully adopted IFRS, the FASB has nevertheless worked and cooperated with IASB officials to define issues, highlight areas of agreement and departure, and provide general input and guidance to the overall convergence process (IASB, 2003-1). Together, the two groups have released an exposure draft of a conceptual framework for financial reporting (Barlev and Haddad, 2010). Progress on the framework, initially released in 2008, has been intermittent, and is currently paused (Information technology tools designed to leverage the framework, however, are lacking). In the USA, the Securities and Exchange Commission (SEC) began requiring publicly traded companies to file quarterly and annual financial statements using XBRL in 2008, starting with the largest 500 firms the first year and continuing with remaining firms over the next two years. In addition, the SEC used a phased approach regarding the level of detail required. First-year filers were required only to tag financial statement line items, leaving their additional disclosures as large text blocks. Filings over the next two years required increasing detail until all significant textual and numeric data in statement disclosures (i.e., the “footnotes to the financial statements”) are fully tagged. US-listed companies file using the US-GAAP taxonomy, which is updated and maintained by the Financial Accounting Foundation (FAF) and FASB. Most other countries have either adopted or are moving toward adoption of XBRL filing requirements as well, using the base IFRS taxonomy as the starting point. XBRL International, a non-profit standards group, is the guiding organisation behind development of the XBRL standards, and has launched an effort to develop taxonomies based on IASB requirements for various countries (XBRL, 2004-1; XBRL, 2004-2). Although financial analysts, accountants, and XBRL governing bodies recognise the need for financial statement comparability, there is concern that the multiple standardisation efforts presently underway may result in a set of taxonomies that: •

do not address the full range of financial reporting requirements

•

are incompatible with each other (Bovee et al., 2002).

One of the primary purposes of financial statement reporting is to provide investors, financial professionals, and other constituents a basis for analysis and comparison with a company’s competitors and other investment alternatives. Approaches to date for gathering current, comparable financial data from many companies have been costly and or time-consuming. The problem intensifies when

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evaluating companies using different reporting standards, as many figures reported using one standard must be deconstructed and allocated to different financial reporting concepts in the other standard. Only financial analysts with the largest resources to draw from can afford to perform comprehensive financial statement analyses and comparisons for companies across the globe. XBRL holds promise for equal access to financial data in electronic form for anybody with access to regulatory bodies’ or firms’ websites, yet fails to ease the burden of comparability for firms reporting under different XBRL taxonomies reflecting US, IFRS, or regional reporting standards. The purpose of this paper is to: •

propose an ontological approach to XBRL financial reporting

•

present a framework for building the ontologies

•

introduce criteria that can be used to evaluate the success of future efforts ontologically-based reasoning efforts related to this research problem.

The remainder of this paper is organised as follows. The XBRL Taxonomy Framework section will review the XBRL specification in greater detail, as well as current efforts to develop taxonomies covering the two major sets of accounting standards. Next, the Ontological Approach section will review current financial ontologies and whether they can be leveraged to enhance the taxonomy efforts. Next, the Research Problem section will describe the limitations of the current taxonomical approach and where this paper can address them. We next outline the solution approach where we use an ontological approach to comparative XBRL reporting in greater detail. We next present an evaluation criteria section in which we identify key factors that researchers should examine when studying this problem. Finally, we conclude with a summary and discussion section which reviews the contributions and limitations of this research, as well as outlining potential topics for future research.

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The XBRL taxonomy framework

XBRL is an XML vocabulary designed specifically to be used for business reporting. As an application of XML, it enables the exchange of data via any electronic network, including the internet. One key advantage XBRL has over other technologies such as Electronic Data Interchange (EDI) is that it affords platform independence, simplicity, and the relatively low implementation cost of XML, an open standard. XBRL taxonomies are freely available from the appropriate regulatory bodies. Despite many years of industry efforts to promote EDI, it remains a tool used mainly by the largest organisations due to the variety of proprietary, incompatible formats required by the major players, each of which is relatively expensive to integrate. XBRL International, the consortium working on coordinating the worldwide standards for financial report presentation through XBRL, continues to develop a number of taxonomies for various reporting requirements (XBRL, 2004-1; XBRL, 2004-2). Each XBRL taxonomy defines a set of XML elements and schemas that identify the elements of financial reports, company profile information, auditor reports, additional disclosure, and other components typically included in a financial statement package.


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Figure 1 shows the current international XBRL taxonomy framework. As illustrated in the figure, the taxonomy begins with a basic schema, which incorporates the actual element names (tags) used in the taxonomy. The schema references other namespaces in the Discoverable Taxonomy Set (DTS) for guidance on the authoritative definition and accounting standards related to the element, labels to be used with the element, references to other elements in the taxonomy, calculations the element is a part of, and guidelines for presenting the element data and its attributes. As the ‘X’ in XBRL indicates, taxonomies can be extended. The US GAAP taxonomy is typically extended by individual companies for their filings, while the IFRS taxonomy, based on the IASB reporting standards, can be extended at the regional or country level before individual companies consider additional extensions. Figure 1

International XBRL taxonomy framework (see online version for colours)

Source: IFRS (2011)

XBRL taxonomies can utilise a hierarchical folder structure for presentation in order to allow users to focus on the subset (or sub-tree) of the taxonomy relevant to a particular industry, element type, etc. Industries typically use these ‘entry points’ as their starting location for creating XBRL instance documents. Figure 2 shows the folder structure of the current US Financial Reporting Taxonomy. Most companies will use the Commercial and Industrial (CI) entry points for their instance document creation. Some industries’ regulatory bodies (i.e., banking) have additional XBRL filing requirements using a predefined set of element tags. Each taxonomy consists of a group of XML schemas which define the reference taxonomy, tag labels, presentation, calculations for reporting purposes, and definitions, plus an XML schema document. Sample instance documents are available for several of the taxonomies.

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M.R. Wenger et al. US GAAP XBRL taxonomy folder structure (see online version for colours)

Source: XBRL.US (2011)


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XBRL US has just released the 2012 US GAAP taxonomy, but most current filings on the SEC website are presented using the 2011 taxonomy (XBRL.US, 2011). New taxonomies are typically released for comment prior to being approved. Until a taxonomy has received final approval by the SEC, FASB recommends using the previous taxonomy for company filings. For the IFRS taxonomies, a similar approach is used. In a financial reporting taxonomy, each aspect of a company’s financial report can be considered a concept. There are many concepts presented in a typical corporate filing. For example, a concept may describe a single number on an income statement, an entire footnote to the financial statements, or a specific range of text within management’s statement on internal controls. Each of these concepts is ‘tagged’ with an XBRL element. The element itself must be defined in precise detail within the taxonomy and in the company’s instance document. In the taxonomy, attributes such as financial currency code, reporting context, and display decimals are assigned to an element. The reporting company then populates those attributes with the appropriate values (i.e., ‘EUR’, ‘2011EOY’, and ‘–6’). The taxonomy contains multiple schemas that prescribe a variety of such attributes. Attributes can be as basic as describing the label to use on reports, what type of data can be associated with the element, the definitive accounting standards that define proper use of the element, and so on. Likewise, the element must be defined in the scope of the overall taxonomy. This is done by defining relationships such as calculations associated with the element, where the element should be presented in various documents, and which dimensions it is a part of. Although the XBRL specification provides a great deal of flexibility to meet individual country, industry, and company reporting requirements, this flexibility can also present some problems. In the scenario where each company decides to create numerous extensions to the taxonomy, statement users will be limited in their review, as that company’s specific taxonomy extensions would not be comparable to the same concepts presented by peer companies (either as their own extensions or elsewhere in the base taxonomy). For less sophisticated statement users attempting to review financial statements from multiple countries, this could result in misunderstandings ranging from minor to disastrous. Some innocuous terminology differences may be seen as merely inconvenient, such as the use of the word ‘stock’, which means shares of ownership in the USA and levels of inventory in the UK. On the other hand, some terminology mismatches which influence values reported in financial statements could have a major impact on the bottom line. Germany, Switzerland, and Austria, for example, have historically encouraged the use of hidden reserves to help smooth earnings over multiple years. This practice provides greater income stability, which is viewed positively by the primarily creditor owners of public companies. Manual translation of financial statements from local standards to US GAAP, which does not allow the use of such hidden reserves, often results in a large shift in net income and other totals from the financial statements. As the previous examples illustrate, accounting is not necessarily an exact discipline with a rigid set of rules. Instead, many factors influence the ways countries implement financial statement requirements, including their political systems, their cultural and economic environments, the nature of the primary investment community, and which investment vehicles they use (Radebaugh, 1975). In turn, companies within each country add their own unique perspective to financial statement reporting. Globalisation of the world economy is a driving force for companies and countries moving toward a common set of requirements, but many obstacles remain. Despite the efforts of the IASB and

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FASB, the path to true harmonisation of international accounting standards will take some time to come to full fruition. Because XBRL is still a developing standard, there are other limitations that companies must address. A study performed on the 2000 XBRL specification identified 866 specific shortcomings in the tag listing: 340 that would require company specific tags, 296 that were common enough to recommend adding the tags to the taxonomy, and 230 items where there was a disparity in the grouping of the item in the statement hierarchies (Bovee et al., 2002). Much work has been done since then, but the latest US GAAP taxonomies (arguably the most mature of the taxonomies to date) still show a great deal of flux. The 2009 US GAAP taxonomy added more than 1500 new elements and removed (deprecated) around 350. The 2011 taxonomy added an additional 1900 new elements, deprecated 500, and changed the definition of around 2200 elements (Financial Accounting Foundation, 2011). It can become a full time job keeping up with taxonomy developments for just the US GAAP taxonomy, let alone trying to monitor what is going on with the IFRS taxonomy and country-specific extensions for international filers. With the flexibility of the XBRL standard, the variety of country, industry and company reporting requirements, and issues related to comparability, there is potential for another EDI-like situation where financial statement users will not be able to correctly interpret company documents.

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Methodology

3.1 The ontological approach XBRL allows companies to present their financial statements in a somewhat uniform electronic format. Once financial statement users receive the documents, however, they must assign their own meaning to the items in the report. In other words, each user must apply his or her personal ontology to the financial statements being reviewed. For the purposes of this research, we use automated ontologies to develop a way that financial statement users can interpret statements developed in different industries and countries. Ontological research for accounting and financial systems has focused mainly on the transaction side of business. The Resource-Event-Agent (REA) model has been widely adopted for financial systems, and covers the broad range of activity from sales transactions to inventory movement. Ontology research on the REA model has been significant, and ISO 15944-4 implements a version of the REA ontology (Geerts and McCarthy, 2002; Boyle, 2003). Some ontology work has been done with respect to the accounting general ledger, but with the exception of an introductory document on automation of GAAP, this work also focuses on the transactional aspect of the financial cycle (Boyle, 2003). Clearly, the amount of financial information available to investors is enormous and growing; previous research has demonstrated the utility of using ontologies to represent such financial information as a series of meanings associated with key concepts and business events (Rabhi et al., 2009). The XBRL taxonomy effort addresses some of the ontology requirements for financial statement reporting. By developing common definitions, formats, and structures, a certain level of common meaning and understanding can be achieved. Unfortunately, the existence of two fundamentally different top-level taxonomies, along with the variety of country-, industry- and company-specific taxonomy extensions and


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entry points, calls for an additional level of understanding. An ontology that can provide meaning to financial statement users in a format and terms they are comfortable with will be a useful contribution to both researchers and practitioners.

3.2 Research problem One of Radebaugh’s key factors in the development of accounting standards involves discerning the key types of company stakeholders (Radebaugh, 1975). In today’s global economy, with multinational corporations managing operations around the world, the stakeholders in a company can be widely dispersed. The accounting profession, through US GAAP and the IASB, recognises the need to increase the utility of financial statements beyond the traditional audience of financially-savvy investors and analysts. Equity market participation has grown globally, resulting in a large number of less-sophisticated financial statement recipients. Determining how to compare the information presented in quarterly and annual reports prepared using different standards is problematic. Even comparing financial reports prepared using IFRS, although from different countries, requires a significant amount of analysis (Cole et al., 2009). Non-financially oriented statement users may want to review environmental impact statements or employment figures as multinationals set up operations in their cities and regions. Another aspect of financial statement comparability is the cost companies incur when they wish to issue equities on exchanges outside their home country. Securities regulations differ from exchange to exchange, as do registration and reporting requirements. In the USA, the SEC used to require a reconciliation report (Form 20-F) outlining material differences between US GAAP and the accounting standards used to prepare an international company’s financial statements, but now allows international filers to report using IFRS. Even so, the cost of reconciliation compliance is typically the highest cost associated with listing on foreign securities exchanges (Hora et al., 1997). Analysis of Form 20-F reconciliations over time reveals that although IFRS and US GAAP convergence efforts are making progress, significant differences still exist (Blanco and Osma, 2004; Ernstberger, 2008). A solution that can reduce the effort required by companies and analysts to convert financial results in order to meet the requirements of multiple regulatory bodies would result in significant savings. The key research problem addressed in this paper is that the parallel taxonomies present in the current XBRL standard do not provide a mechanism for comparing financial information across the two taxonomies. Financial statement users need a way to review financial information using formats, structures, and terms that are meaningful to them. As the target population of financial statements grows beyond professional investors and auditors, and as companies expand their operations throughout the globe, the need to present corporate information in multiple formats compatible with the requirements of this diverse stakeholder population increases. Of course, non-financial stakeholders still need to invest some effort of their own in understanding basic financial statement formats and concepts for their country – they should just not be required to learn and understand all of the many formats used worldwide. At a minimum, XBRL financial reports should be transparent across IFRS and US GAAP. Ideally, transparency should extend even further down the IFRS taxonomy hierarchy, providing conversion capabilities for major country groupings.

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3.3 Using an XBRL ontology as a solution approach We present an ontological approach that utilises the shared meanings across countries and cultures. The use of ontologies provides the opportunity to extend the usefulness of the taxonomies beyond their strict hierarchical structure. Indeed, additional and alternate definitions of the relationships between ontology domains can be implemented in a manner that would let a US user view a set of German financial statements in a format consistent with US GAAP and vice versa. XBRL International and partner organisations, along with major accounting firms and many national accounting standards organisations, continue the development of taxonomies and taxonomy mapping tools for implementing and testing XBRL. Although this taxonomy work is extremely important, it does not attempt to provide a framework for bridging the differences between taxonomies in an automated manner. The work in this paper aims to extend existing efforts by incorporating an ontological approach into the taxonomy effort in order to map financial statements across XBRL taxonomies. The proposed solution approach to the issue of financial statement comparability and utility is an ontology-based approach to coordinating XBRL financial statements. This approach will provide benefits to a broad range of corporate stakeholders, and could result in significant restatement savings for firms implementing XBRL. The proposed ontology model is based on the knowledge map techniques discussed by Gordon (2000) and Lin and Hsueh (2003). In the knowledge map approach, the key concepts are displayed as the nodes, with relationships depicted by the lines between the nodes.

3.4 The XBRL ontology implementation architecture The knowledge map in Figure 3, which presents a high-level view of the proposed XBRL ontology, bears some similarities to the taxonomy frameworks presented earlier, and maps into ontologies for other aspects of financial systems. As with the taxonomies, there is a hierarchical arrangement to the various nodes in the map. However, the relationships between the nodes form a network of connections, which allow the specific domain ontologies to interact with each other as required. The relationships in the knowledge map define how the variations between taxonomies can be reconciled with each other. With such an approach, users requesting XBRL financial statements from companies would then have the opportunity to select their desired presentation format, which could be the originating company’s schema instance, a higher level view of the same taxonomy branch, a different branch of the taxonomy (with a different structural view), or even a branch from a completely different taxonomy. As long as the relationships remain consistent in the XBRL ontology, users will have their choice of any available format, with appropriate warnings if the desired format is not suitable for the originating document. Figure 4 presents an overview of this process.

Financial reporting comparability Figure 3

Financial statement ontology (high level) (see online version for colours)

Figure 4

An architecture for the use of the XBRL ontology (see online version for colours)

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3.4.1 The XBRL ontology The XBRL ontology is at the heart of the implementation architecture. It has the concepts, relationships between concepts, and axioms (constraints and conditions) defined in OWL Web Ontology Language (usually referred to as OWL). OWL is a good fit for facilitating out ontology approach as it too is based on XML. A screenshot of the ontology in Figure 5 shows the concepts as they are being modelled in the Protégé Ontology editor. Assuming that a user uploads an IFRS company filing via the application interface, the Input Transformation logic is responsible for loading the XBRL

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document into the XBRL ontology engine. The Input Transformation logic maps the XBRL tags to the appropriate concepts defined in the XBRL ontology. Figure 5

Snapshot of XBRL ontology in Protégé Ontology Editor (see online version for colours)

For example, the given XBRL tag in Figure 6 will the interpreted as a reference to the CashAndCashEquivalentsAtCarryingValue concept defined in the XBRL ontology. The attributes of this tag (contextRef, decimals and unitRef) correspond to ValuePartitions in the ontology. Value partitions are design patterns in ontology engineering used to refine class descriptions (Foy and McGuiness, 2001). The actual data associated with the tag (1849000000) becomes the instance of the CashAndCashEquivalentsAtCarryingValue concept. From an ontological standpoint, the taxonomy mapping process is relatively straightforward. Much of the work will merely require mapping terms and statement formats between the XBRL taxonomies and the ontology concepts. The more difficult exercise will be identifying where the differences in accounting treatment can be found in the various taxonomies, along with the calculations required for conversion between one approach and the other. Converting the textual portions of financial statements, such as the footnotes, auditor’s statement, management discussion, and other non-financial disclosures is more of a pragmatic decision on whether to attempt language translation as part of the conversion process. Figure 6

Example XBRL Tag

Once the input transformation is complete, the reasoner is called to perform a consistency check (determine if the inferred ontology class hierarchy conflicts with the manually constructed (asserted) hierarchy) and to determine whether any new inferred instances have been identified. The annotation property (Figure 5) stores descriptive or editorial


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information regarding a concept. Although the current version of the OWL-DL (Descriptive Logic) puts several restrictions on the usage of annotation properties, it can be used to provide meaningful, human readable information about the ontology elements (concepts, properties and instances). They can also hold valuable information regarding backward compatibility, deprecated concepts and URI references to other ontologies that may define related concepts from other financial standards. To demonstrate the architecture, consider the US GAAP taxonomy concept Revenues which is semantically equivalent to the IFRS concept Revenue. These concepts are defined as equivalent classes in the XBRL ontology as shown in the ‘Usage Visualisation’ of the OWL snippet (Figure 7). The ontology, rule base, and instances are passed to the bridge, where JESS executes matching rules from the rule set (those for which the antecedent conditions are satisfied). We require JESS, which is a rule engine which utilises the Java Platform, in order to facilitate the automation of pattern matching required to keep an expert system up to date. Figure 8 shows the Semantic Web Rule Language (SWRL) rule that will be called to reason this classification scenario. The inferred facts (outcome of JESS rule execution) are returned from the bridge to the fact base. A rule expressed in SWRL is the notation that embodies the rules expressed in an antecedent/consequent format. The results are then displayed in the preferred format on the application interface by applying standard XML StyleSheet Language Transforms (XSLT). Figure 7

Usage Visualisation – equivalence relationship between GAAP revenues and IFRS revenue concept (see online version for colours)

Of course, converting financial statements to different sets of accounting standards will not provide all the information a user will need. For example, even after conversion, financial ratios that are frequently used to evaluate companies, such as current ratio and short-term leverage, may differ greatly for successful companies from different countries. This is not necessarily a reflection of the financial statement conversion process, but may be a result of cultural attitudes toward corporate performance that are unique to that country. Japanese companies, for example, have historically had much higher leverage ratios than comparable US companies, reflecting the Keiretsu economic structure of a conglomerate of companies tied very closely to a central bank. Large loans from the Keiretsu bank indicate a favourable outlook by the bank with respect to a company’s

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future prospects. As the ontology matures, the rule base can be extended to incorporate ratio and comparison guidelines that will help close the analysis gap for such situations, whether they result from differences in taxonomy, industry, cultural norms, economic structure, or other identifiable phenomena. Figure 8

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SWRL rule for GAAP revenues and IFRS revenue concept matching (see online version for colours)

Evaluation criteria

We have identified three key criteria for evaluating the success of the XBRL ontology. First and foremost, does it provide meaningful conversion of financial statements to a desired cross-section of financial statement users? To perform this evaluation, a sample (or full) ontology can be built to map the IFRS taxonomy to the US GAAP taxonomy. Several international companies, reflecting a variety of conversion issues, could be converted through the ontology and presented to potential financial statement users. These users could represent financial analysts, the auditing profession, labour interests, citizens concerned about the environmental impact expanded operations may have, individual investors, and other interested parties. This evaluation would be repeated for additional ontology conversions as they are added. Second, the XBRL ontology should be evaluated to determine the benefits, if any, of using it. Providing useful information to an expanded set of financial statement users seems like a worthy objective, but does the ontological approach provide substantive benefits? If so, are they deemed important enough to continue the efforts? Do users get the information they need from the ontologically converted statements, or must they refer back to the originating statements to supplement their analysis? Do securities exchanges accept converted statements for listing and reporting purposes, or will companies have to perform additional work to maintain their exchange eligibility? The third criterion for evaluating the XBRL ontology is its maintainability. Is the XBRL ontology a cost-effective exercise, and is it easy to maintain as standards are updated? Would the standards bodies (IASB, FASB, XBRL International) find it useful to devote resources toward ongoing maintenance? An ontology that provides limited benefits at great cost would hardly be worth maintaining. Should the ontology effort pass the first two evaluation criteria, the increase/decrease in the volume of requests will provide a rough benchmark of the perceived utility of the approach.


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Discussion and conclusion

This research has presented an ontology-based approach to developing XBRL definitions for financial statement preparation. This approach shows promise for providing significant benefits in two ways: •

by increasing the utility of financial statements to a broader range of stakeholders

•

by reducing the cost of restatement compliance for companies listing on multiple country exchanges.

From a practical standpoint, the XBRL ontology relationships will begin with general mapping between the US GAAP and IFRS taxonomies, and probably will extend at most to the country/industry level, or possibly to a country group level for countries with similar taxonomies. Since all company extensions will roll up to one of the country/industry combinations, this approach will provide transparency at a reasonable level of comparability without the resource requirements of maintaining relationships for each company listed. As standards are enforced to include XBRL tagging for the footnotes and their details, the XBRL ontology must be revised to address the requisite changes. When elements in the US GAAP or IFRS taxonomies change, evolve, and are deprecated, how will the ontology also evolve? Will the taxonomy updates include the data required to automate such ontology updates, or will they need to be performed manually? These are the questions that future research, empirical work, and design science activities should investigate. This paper has been limited to a conceptual discussion of the solution and presentation of the ontology knowledge map at a very high level. Future research opportunities include further development of the knowledge map to at least the country/industry level of detail. In addition, a researcher could create and test a pilot ontology covering a subset of taxonomies and XBRL document types, which could then be evaluated through an experimental test of stakeholders reviewing financial statements from different points in the ontology to determine whether the statement information is passed across ontology domains in an effective manner. With the XBRL standard still evolving and expanding to additional countries, the opportunities for future research along these lines should continue for quite some time. From another perspective, research into the feasibility of a learning ontology could be interesting. If the ontology can be populated down to a certain level with various financial statement nodes and relationships, would it be feasible to apply knowledge concepts to the ontology such that it can build its own relationships as companies add/modify their instances?

References Abdullah, A., Khadaroo, I. and Shaikh, J.M. (2008) ‘A ‘macro’ analysis of the use of XBRL’, International Journal of Managerial and Financial Accounting, Vol. 1, No. 2, pp.213–223. Abdullah, A., Khadaroo, I. and Shaikh, J.M. (2009) ‘Institutionalisation of XBRL in the USA and UK’, International Journal of Managerial and Financial Accounting, Vol. 1, No. 3, pp.292–304. Baldwin, A.A. (2006) ‘XBRL: an impacts framework and research challenge’, Journal of Emerging Technologies in Accounting, Vol. 3, No. 1, pp.97–116.

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