Theory of Fundamental Accounting Concepts and Reporting Styles

Years ago, I posed a hypothesis that financial statements contained as set of high-level financial accounting concepts and that those concepts were related to one another according to some reporting style being used by a reporting economic entity.  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 fundamental accounting concepts and reporting styles.

Here are many of the best details related to my testing, poking, and prodding related to the fundamental accounting concepts are reporting styles hypothesis:

  • Microsoft Fundamental Accounting Concepts Verification Report
  • Quarterly XBRL-based Public Company Financial Report Quality Measurement (March 2019)
  • Analysis of 6,751 XBRL-based Public Company 10-Ks Submitted to SEC
  • US GAAP Test Data - 2017 10-Ks
  • IFRS Test Data
  • Reporting Style Examples (Comparisons)
  • Fundamental Accounting Concepts for US GAAP and IFRS
  • US GAAP Consistency Rules
  • US GAAP Impute Rules (a.k.a. Derivation Rules)

    • Financial reports contain high level accounting concepts that are common across reporting economic entities.  For example: assets, current assets, liabilities, current liabilities, net cash flow, net cash flow from operating activities, net cash flow from investing activities, net cash flows from financing activities, net income, revenues, costs of revenues, income before taxes.

    Reporting entities can be grouped into sets by the reporting style they use.  For example, a software company like Microsoft uses a different reporting style than a bank like Wells Fargo.  Each of those reporting styles uses different sets of fundamental accounting concepts to report but there are about 1,400 companies that report similar to Microsoft's reporting style (the most common reporting style) and pretty much all banks (a.k.a. depository institutions) use the same reporting style as Wells Fargo primarily because banks are regulated and their reporting style is specified by the regulator.


    Basically, financial statements are not forms; however, there is a set of logical patterns that are permitted for reporting (i.e. financial reports are not random).  Effectively,  the FASB and IASB both allow different totals and subtotals to be used as well as different line items to be used.  The FASB refers to those subtotals "intermediate components" in Elements of Financial Statements which is part of the conceptual framework for US GAAP.

    Six years of testing of the fundamental accounting concepts reveals that the concepts and relations for these high level concepts in XBRL-based reports are 99.24% consistent with all these fundamental accounting concept relations rules that I have created and that 89.1% are consistent with all of these fundamental accounting concepts and relations.  Software vendors and filing agents that create XBRL-based reports achieve different levels of quality in the reports that they create.

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