Interactive and tagged data has the potential to revolutionize financial reporting for state and local governments. The interactive electronic Comprehensive Annual Financial Report (CAFR) is expected to enhance understandability, comparability, and usability of government financial statements among both regular and sophisticated users of financial information.
These financial statements are no longer treated as blocks of static text. Instead, each individual item in the financial statement is assigned a unique computer-readable eXtensible Business Reporting Language (XBRL) tag, which enables financial information to be treated “intelligently.”
This column discusses the use of XBRL and tagged data for financial reporting, as well as what needs to be done to develop a governmental accounting taxonomy and interactive electronic CAFR for state and local governments.
SEC and IFRS Guidelines
In 2005, the Securities and Exchange Commission (SEC) started a voluntary filing program that allowed companies to submit their financial statements on a supplemental basis in interactive format as exhibits to specified filings under the Securities and Exchange Act. In 2006, the SEC contracted with XBRL U.S. to develop a taxonomy – a standard list of tags – necessary for financial reporting in an interactive format that is consistent with U.S. generally accepted accounting principles (GAAP). In January 2009, the SEC issued Rule No. 33-9002, Interactive Data to Improve Financial Reporting
. This rule requires companies to provide their financial statements to the SEC, and post them on their corporate websites, in an interactive data format using XBRL.
The International Financial Reporting Standards (IFRS) taxonomy contains concepts for all IFRS disclosure requirements, application and implementation guidance, illustrative examples, and concepts relating to IFRS common reporting practice. The taxonomy includes other IFRS-related information, such as IFRS documentation (terminology) and XBRL references to corresponding standards.
The International Accounting Standards Board (IASB) used the “standards-based” modeling approach to develop the IFRS taxonomy. This effectively means that the taxonomy is developed on a standard-by-standard basis.
IFRS disclosure requirements, guidance, and examples in each standard are analyzed, modelled into an appropriate hierarchy, and eventually constructed into XBRL files. The benefit of following this standard-based modeling approach is that it aligns the development of the taxonomy with the development of standards, according to IASB’s agenda. Standards-based modeling also results in the taxonomy being organized and structured in a way that is familiar to preparers, which facilitates readability and usability.
State Governments and XBRL
The first state government XBRL pilot project was initiated in 2007 by the state of Oregon. That project, with outside funding assistance, involved creating XBRL financial statements for a statement of net position and statement of activities using Oregon’s CAFR. A multidisciplinary team, including Government Accounting Standards Board (GASB) staff members, was assembled to build a limited taxonomy for these two financial statements as a demonstration.
A 2010 publication by the National Association of State Chief Information Officers (NASCIO), A Call to Action for State Government: Guidance for Opening the Doors to State Data
, addresses the data transparency trend at the state government level. One of the anticipated outcomes of the NASCIO initiative was greater government accountability, credibility, and integrity because the public will have easier access to government reports and the underlying data.
In July 2012, the Association of Government Accountants (AGA) published a report focusing on electronic reporting (Report No. 32 in the AGA research series). Included in the report are references to the GASB and the Federal Accounting Standards Advisory Board, their financial reporting objectives, and the roles that standards setters have played and can play in the advancement of electronic financial reporting.
The GASB Technical Plan for 2014 reported that a team of academics is conducting research and experimentation on electronic financial reporting. GASB staff has facilitated a coordination of efforts among the research teams and provided feedback and guidance.
What Needs to Be Done
GASB can use the IFRS standards-based modeling approach to develop a governmental accounting taxonomy. This is a huge step, and it will require commitment from GASB staff to actively participate in developing the taxonomy, to sufficiently fund resources, and to support professional and academic teams. Once the governmental accounting taxonomy is developed, the GASB should introduce a volunteer program for reporting tagged and interactive CAFR, then progressively require use of the interactive CAFR based on a government’s general fund balance or the amount of net position in a particular fiscal year.
State and local governments should select software to create instance documents. Some software can be all-inclusive of the required functionality for taxonomy extension, instance document creation, and validation; while other software may offer this functionality separately or as part of a suite of tools.
When preparing financial statements and mapping the information to XBRL in an integrated way, governments will incorporate XBRL into their internal financial systems. Thus, financial reports can be created from XBRL-tagged financial systems without the statements first being prepared in a human-readable format.
Next, the government identifies the financial information to tag, chooses the governmental accounting taxonomy, and downloads it into the XBRL software product.
Each individual account value must be separately mapped to (or tagged with) a specific XBRL element (such as an account identifier) from the governmental accounting taxonomy. Each summary value, such as net position or total assets, is also mapped to a separate XBRL tag. The “tagging” process is then validated to identify any errors in the XBRL specification. Once errors are corrected, the software generates the financial statements.
After the final step of reviewing the instance document for reasonableness and obvious errors, the financial statements can be issued for use in analyzing government financial performance.
XBRL represents a global agreement of the semantics of financial reporting concepts and business rules. These semantics have already been created for IFRS and U.S. GAAP. These two taxonomies provide agreed-upon semantics aligned with respective accounting standards.
The benefits of the tagged data include enhancing transparency, comparability, and accessibility of financial information. The benefits for state and local governments and the users of CAFR are expected to exceed the benefits thus realized in the private sector, considering the special nature of government operations and the uniqueness of information needed for CAFR users.
There have been significant efforts and initiatives by GASB, universities, and governments to develop a taxonomy for governmental accounting for use in financial reporting. Unfortunately, there is no tangible outcome to date. The GASB needs to take the lead in these efforts, beyond the role of facilitator or adviser. The GASB should introduce a plan for specific actions to develop a taxonomy for governmental accounting, perhaps adopting the standards-based approach used by IFRS. Once the taxonomy is completed, the GASB can follow the steps the SEC used: start with a volunteer program, then increasingly require interactive electronic CAFR over time, based on the size of a government’s net position or general fund balance.
When complete, the informational value of the CAFR will be maximized when all state and local governments are able to report tagged and interactive CAFR.
Khaled Abdel Ghany, CPA, PhD, is an executive accounting adviser, office of the chief financial officer, D.C. Government. He can be reached at email@example.com.