Theory of Disclosures and Disclosure Mechanics

Years ago I posed a hypothesis that financial statements contained disclosures.  After significant testing, between 2015 and about 2018, I have reached the conclusion that my hypothesis was correct and now I have my theory of disclosures and disclosure mechanics.

Here are many of the details related to my testing, poking, and prodding and prototypes that I constructed to test my hypothesis:

• Analysis of Disclosures (10-K financial filings as of March 31, 2016)
• Analysis of 6,751 XBRL-based Public Company 10-Ks Submitted to SEC
• Intermediate Accounting Resource
• Best Practice Examples of Disclosures
• Disclosure Viewer By Topic (Prototype)
• US GAAP Disclosures
• Disclosure Best Practices (US GAAP, Prototype)
• Microsoft 10-K Analysis of Disclosures
• Disclosure Mechanics Validation Result (Provided by XBRL Cloud)
• IFRS Disclosures
• Results from Analysis of 65 Common Financial Disclosures

An XBRL-based report contains facts.  Those facts are organized into what XBRL refers to as "networks".  Facts do not "float freely in space", rather they exist in a report model, within an XBRL network, and also within an explicitly provided or an implied hypercube.  While those XBRL technical artifacts (i.e. networks, hypercubes) can be represented inconsistently within an XBRL-based report; the information contained within those technical artifacts, which are LOGICAL artifacts are quite consistent.

I did not have a name to refer to those logical object containing information so I made up a term which I refer to as the INFORMATION BLOCK or simply "block". Here is a list of the BLOCKS of information in the actual Microsoft 10-K for 2017 submitted to the SEC.

Now, each of those BLOCKS can be identified as being a specific DISCLOSURE that is required to be provided by a reporting economic entity per the financial reporting rules or which the economic entity decided that it wanted to disclose to help investors understand the reporting economic entity.

The information blocks are discovered to be disclosures by a set of disclosure mechanics rules that are provided to help software identify each of the disclosures within an XBRL-based financial report.  Here is a listing of disclosure mechanics rules.  Here is a human readable rendering of the machine readable disclosure mechanics rules for one of those disclosures in that list as provided by software generated by reading those machine readable XBRL definition relations:

Here is information about the disclosure shown in the graphic above, which is a roll up of the components of inventory. On that page is a link to a tool that allows you to compare disclosure across reporting economic entities.  Here is that comparison for a roll up of the components of inventory. If you look at the comparison tool, you see 63 rows on the left with the same disclosure for different reporting economic entities.  You also see that you see each disclosure twice for most entities.  Once as what is called a "Level 3 Text Block" for  the disclosure and again as a "Level 4 Detail" for the same disclosure.

What you can see if you are an accountant and understand what you are looking at is that there are patterns of logic within each disclosure.  Those patterns of logic apply to each and every disclosure for each and every reporting economic entity.  Those patterns of logic were summarized into:

1. A machine readable list which has a name, a token, for each and every disclosure.
2. The rules, called the "disclosure mechanics" which describes the essence of each of those disclosures.

So, the accounting standards codification or ASC does not actually provide formal names for each and every financial disclosure. Some names are provided and skilled/experienced accountants have common names that they tend to use; but there is not actually a formal naming system.  So, I simply created one.  I identified about 1,000 disclosures from the XBRL taxonomy for US GAAP.  (Here is a prototype of that list)  But I figure there are very likely between 1,000 and maybe 3,000 actual disclosures which could be named.  Maybe even as high as 5,000 perhaps.  The point is there is a finite list that could be created by simply looking at each of the public companies that submit financial reports to the SEC using US GAAP.  Each of those can be differentiated in specific ways that can describe the essence of each disclosure to software.

To understand disclosures and disclosure mechanics more, have a look at the PROOF financial reporting scheme that I used for testing.

Additional Information:

• Financial Statement Mechanics and Dynamics
• Blocks
• Disclosures
• Disclosure Mechanics
• Campaign to Improve Disclosure Quality of XBRL-based Public Company Financial Reports Submitted to the SEC
• Knowledge Graph of Microsoft 10-K
• Microsoft Report Analysis
• Disclosure Design Patterns
• Logical Theory Describing Financial Report
• Seattle Method