Transcript It’s All About the Accounting

It’s All About the Accounting
December 5, 2007
Neal J. Hannon
Director, Financial Reporting Technologies
Financial Accounting Foundation
Predicting the future is easy. Just note what is
possible today then anticipate how people will use
it when simplified.
The views expressed in this presentation are my own
and do not represent positions of the FAF or FASB.
Positions of the FAF /FASB are arrived at only after
extensive due process and deliberations.
It’s All About the Accounting
Sub-theme: If the accounting’s not right, the XBRL is not right
Evolution and Structure of Accounting
Nature of US GAAP
XBRL and the US GAAP
The triad of accounting embedded in XBRL
Tagging the accounting
Your role in the review of the US GAAP taxonomy
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Structure and nature of accounting
Translating accounting into software
Digesting and assimilating hundreds of
accounting packages into a standardized way
of representing business data to a computer
First surviving accounting textbook:
“The Summa” written by Fra. Luca Pacioli in 1494
(included illustrations by L. Da Vinci)
A best seller in its day
Publicized the Method of Venice
Helped to spread literacy in the middle class
Luca Pacioli—the “Father of Accounting”
A mathematician and merchant
Became a Franciscan friar
Franciscans came out of, and ministered to, merchant class
Did not invent double-entry accounting but spread the knowledge
The Method of Venice
(Double-entry Accounting)
A binary (0,1) method for recording economic events
Invention of the “Debit” and “Credit” concepts from the Italian terminology
Allowed for much easier addition and subtraction before calculators were invented
Debit
Comes from the Italian “debito”
which comes from the Latin “debita” and “debeo”
which means:
OWED TO the proprietor
or an asset of the proprietor
Credit
Comes from the Italian “credito”
which comes from the Latin “credo”
which means:
Trust or belief (in the proprietor)
or OWED BY the proprietor
From the 13th century to the present:
Double-entry accounting spread throughout the world
Accountants in each country adapted accounting practices to
suit their:
Cultures
Laws & regulations
Capital market structures
Environments
National differences in accounting rules and practices render
financial statements of companies based in different
countries UNCOMPARABLE
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Often referred to as the "truth in securities"
law, the Securities Act of 1933 has two basic
objectives:
◦ require that investors receive financial and other
significant information concerning securities being
offered for public sale; and
◦ prohibit deceit, misrepresentations, and other fraud
in the sale of securities.
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With this Act, Congress created the Securities and
Exchange Commission. The Act empowers the SEC
with broad authority over all aspects of the securities
industry. This includes the power to register,
regulate, and oversee brokerage firms, transfer
agents, and clearing agencies as well as the nation's
securities self regulatory organizations (SROs).
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On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002, which he characterized
as "the most far reaching reforms of American
business practices since the time of Franklin Delano
Roosevelt." (the 1930’S)
The Act mandated a number of reforms to enhance
corporate responsibility, enhance financial
disclosures, combat corporate and accounting fraud
Created the "Public Company Accounting Oversight
Board," also known as the PCAOB, to oversee the
activities of the auditing profession.
Robert K. Herdman
Former Chief Accountant, U.S. Securities & Exchange Commission
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The SEC has a unique position in the financial reporting
process. The Commission not only has authority under the
securities laws of the United States to set accounting
standards to be followed by public companies but also the
power to enforce those standards.
Practically since its inception, the Commission has looked to
the private sector for leadership in establishing and
improving the accounting methods used to prepare financial
statements.2 The body currently performing that function is
the Financial Accounting Standards Board, or the FASB. As a
result, the FASB has the power to set, but not enforce,
accounting standards to be used by public companies.
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Non-stock, Delaware corporation
Incorporated in 1972
IRC Section 501(c)(3) Status
Operating exclusively for educational
purposes
Located in Norwalk, CT
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Establish and improve financial accounting
and reporting standards
Educate constituents as to standards
Responsible for oversight, administration,
and finances of Standards Boards (FASB and
GASB) and Advisory Councils
Protect independence and integrity of
standard-setting process
Generally Accepted Accounting Principles (GAAP) is the
standard framework of guidelines for financial accounting, mainly
used in the U.S.A.. It includes the standards, conventions, and
rules accountants follow in recording and summarizing
transactions, and in the preparation of financial statements.
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New and unique situations arise continuously
During “pre-clearing” process, SEC often
consults FASB for guidance but remains the
final arbitrator of accounting
Will/should future guidance from the SEC
include how to properly tag a transaction?
GAAP accommodates variation in applied
accounting methods as long as the methods
generally adhere to GAAP’s set of
principles…..
This drives computers crazy!
Had to Play
from start to
finish
Record could be damaged if you attempted
to play a specific track.
Similarly , Notes and Disclosures today
are made to be read and understood in one way,
the whole Note from start to finish.
•Individual Tracks Separated
•Choose Your Own Order for Play
•Start and Stop
The technology dramatically changed how we relate to music
and gave us more power to select individual cuts suited to
musical tastes and preferences
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The task
◦ Collect, identify, classify the entire set of music
created by the Beatles
◦ Using master tapes, break out the riffs
◦ Re-configure music into digital sound bytes
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The results
◦ New Music.. The Beatles Love Album
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The task
◦ Collect, identify, classify the entire set of GAAP
created by US Authoritative Sources of GAAP
◦ Using financial statement hierarchy, break out the
elements into an XBRL taxonomy
◦ Re-configure accounting into digital bytes
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The results
◦ New Filings.. The SEC Interactive Data initiative in
XBRL
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How do you tag a principle?
Computers need consistency
◦ Like transactions reported the same way
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How was it constructed?
Analysts
Investors
Current
reporting
SEC
CFO
Investor Relations
GAAP,
SEC Regulations
Codification project
Audit check lists
US GAAP Taxonomy
Development Effort
XBRL US
Internal and Public
Testing
XBRL
protocols
Taxonomy
Release
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Labels
Definitions
References
Label – may or may not be close to a
company’s financial statement presentation.
The common language label could also be
different from the XBRL label
Definition – Definitions for US GAAP required
disclosures will most likely contain language
directly from authoritative literature.
References – References point to
authoritative literature with disclosure
requirements or to directional references
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Getting the accounting right means the XBRL
must create an alignment of the company’s
reporting intent with the accounting
treatment suggested by the combination of
the label, the definition and the authoritative
references. In XBRL, meta data counts.
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Revenue Recognition: Hardware
Revenue from hardware sales or sales-type leases is
recognized when the product is shipped to the client and
when there are no unfulfilled company obligations that affect
the client’s final acceptance of the arrangement. Any cost of
these obligations is accrued when the corresponding revenue
is recognized. Revenue from rentals and operating leases is
recognized on a straight-line basis over the term of the rental
or lease.
Revenue Recognition: Hardware
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Revenue from hardware sales or sales-type leases is
recognized when the product is shipped to the client and
when there are no unfulfilled company obligations that affect
the client’s final acceptance of the arrangement.
Any cost of these obligations is accrued when the
corresponding revenue is recognized.
Revenue from rentals and operating leases is recognized on a
straight-line basis over the term of the rental or lease.
Revenue Recognition: Hardware
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Revenue from hardware sales or sales-type leases is
recognized when the product is shipped to the client and
when there are no unfulfilled company obligations that affect
the client’s final acceptance of the arrangement.
Description of accounting policies associated
with the recognition of gross revenues and
gross revenue adjustments, which are
components of net revenues in the statement of
operations for the period.
From the
taxonomy
Label
Standard label in English:
Revenue Recognition Accounting Policy, Gross and Net Revenue Disclosure
Standard label in XBRL:
RevenueRecognitionAccountingPolicyGrossNetRevenueDisclosure
Definition
Description of accounting policies associated with
the recognition of gross revenues and gross revenue
adjustments, which are components of net revenues
in the statement of operations for the period.
Authoritative Reference
Accounting Principles Board Opinions (APB)
Number 22, Paragraph 8
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XML is a wonderful language for describing objects in
computer readable formats. XML depends on meta
data to describe the contents of its digital message.
XBRL must contain several attributes in order to
transform numbers into meaningful business
reporting interactive data.
When we move from a paper based reporting world to
an interactive data world, the data contained in a
finding will not be complete or understandable
without accurate meta data accompanying the
element reported.
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So.. If a filing contains a label that is further described by a
definition and a reference, the computer referencing the item will
have all three pieces of information as discoverable meta data
 Label
 Definition
 Reference
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If the definition is off or the reference is wrong, is the tagged
data also wrong? What if an investor, reading the XBRL meta
data, relies on the XBRL definition or reference? Shouldn’t the
entire financial information supply chain care about the triad
of accounting?
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Taxonomies must be well developed
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Future standard-setting and XBRL
◦ Complete and accurate tagging system is key to
achieving benefits
◦ Be considerate of whether tags faithfully represent
financial reporting under GAAP
◦ FASB’s Codification project will change taxonomies
◦ IFRS- US GAAP Convergence – tags will converge as
standards do
◦ More accommodative to global comparability issues?
◦ Should Taxonomy guidance issued with new standards?
Let’s look at how a company might want to
use the US GAAP taxonomy for reporting
“Franchise Fee Revenue”
Step One: Review Accounting Literature
Step Two: Find Franchise Fee Revenue in Taxonomy
Note: the 12-05-07 taxonomy has an
Element named “InitialFranchiseFees”
Franchise Revenue; not
Franchise fee revenue
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Step 3:
Examine the Definition for fitness for
use. Does this match your internal
definition of the accounting concept?
Step 4
Check the References
In this case, the taxonomy contains to reference guidance.
However, we did find some guidance in FAS 45. The
accountant should review FAS 45 and determine if the
definition, label combination will provide the accounting
treatment desired.
This is an example of what a practitioner could report to
XBRL US during the public review of the taxonomy.
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A company begins the process of producing financial
statements
Complies with Sarbanes-Oxley
Obtains auditor signoff for the accounting.
Process yields an amount for an account called deferred
revenue.
The US GAAP taxonomy has a label called “deferred revenue”.
In fact, it has several.
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All three accounting points of reference need
to be assessed:
◦ English label
 and its associated XBRL label
◦ Definition
◦ Reference
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Follow the preparers guide for creating entity
specific extensions
Guidelines should be published soon
Make comments to XBRL US for areas your
entity needs additional elements
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Starts December 5th
Feedback on the accounting critical to the
success of the SEC’s initiative.
Anyone in the world can comment on the
taxonomy.
The unique part of this taxonomy is in the
notes and required disclosures
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If you are an SEC filer, examine your current
SEC filings and dissect each piece of
information contained in the disclosure.
After the specific data contained in the note
is parsed, compare to the elements available
in the US GAAP taxonomy.
Match your reported information to the
elements available in the note taxonomy and
determine the fit.
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If you determine that something is missing or
incorrectly stated, file a note with the XBRL US
public test website.
Tagging software should be able to assist you
in this process soon.
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Major multi-year project
Purpose is to develop a comprehensive
codification of all existing accounting
literature
Easily retrievable database will be maintained
Codification will be immediately updated
upon issuance of new standards
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The codification project, which will classify all
authoritative GAAP in one place, will alter the way
accounting in the US is accessed and used.
The 20 or so sources of current GAAP will become
one, rendering all references in the present US GAAP
taxonomy to be incorrect.
In 2008, as the authoritative literature is reorganized, so will the references in the taxonomy.
When the codification becomes GAAP, the XBRL
taxonomy will be ready.
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The leaders of the IASB, SEC and FASB have
consistently stated that the goal is to create one set
of world class accounting standards.
FASB and IASB have been working on improvements
to standards since 2002.
The SEC is now accepting IFRS accounting statements
from foreign filers.
The SEC has also indicated a willingness to consider
allowing US companies to file in IFRS
But When
And some think IFRS will be
the World’s standard within
the next 5 years
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All US GAAP accessible in an understandable
format
US GAAP modeled in a comprehensive and
robust interactive data format, complete with
references and definitions
Complexity in accounting under siege
◦ SEC committee
◦ FASB conceptual framework and financial statement
presentation projects
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Sarbanes/Oxley
PCAOB
Emergence of IFRS in the global economy
European Union influence
XBRL world wide
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Know your taxonomy
◦ Get familiar with the major components that will
effect your reporting entity
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Participate in the public testing period
◦ Visit XBRL US’s website and take a good look
◦ Propose changes and improvements
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Create instance documents
◦ test the veracity of the taxonomy
Neal J. Hannon
Director, Financial Reporting Technologies
Financial Accounting Foundation
FASB/GASB
njhannon@f-a-f. org
203-956-5219