Digital Financial Reports: PDFs for AI
The Role of IFRS Taxonomies in digital financial reports.
Digital Financial Reports (DFRs) are the next step in financial reporting efficiency and clarity.
“A digital financial report is a financial report in a computer-readable, structured data format”.
“The IFRS digital taxonomies facilitate the reporting of information prepared in accordance with IFRS Standards in a computer-readable format.”
IFRS Foundation
Unclear about what this means? Allow me to explain.
PDFs: The Traditional Digital Format
Portable Document Files (PDFs) have long been the standard for digital reports, offering a familiar medium for viewing financial documents on any computer. However, they pose a significant limitation: they're not machine-readable. This means that while humans can easily view and understand them, computers struggle to extract meaningful data from them.
DFRs: Bridging the Human-Machine Gap
DFRs bridge the gap between human and machine readability. Embedded within DFRs are labels referred to as ‘tags’ that allow computers to understand the content of the report. For instance, terms like "profit after tax," "profit," and "net earnings" would all be tagged as 'ProfitLoss', enabling computers to process and analyse them accurately.
XBRL: Standardising Financial Information Exchange
XBRL (eXtensible Business Reporting Language) is the mechanism used to create DFRs. It's a standardized language specifically designed for exchanging and analysing financial information. With XBRL, companies can easily tag their financial data using predefined elements, ensuring consistency and transparency in reporting.
Taxonomies: A Common Language for Reporting
A taxonomy simply organises information into categories. In the context of IFRS digital taxonomies, they're essentially categorized lists of accounting labels.
To ensure consistency and uniformity across DFRs, the International Financial Reporting Standards (IFRS) provides a standardized list of these tags, known as 'elements'. These elements are the building blocks of DFRs, enabling companies to use a uniform tagging system for their financial reports. This standardised list of tags, which are updated annually, can be found in the IFRS Accounting Taxonomy and the IFRS Sustainability Disclosure Taxonomy.
In the United States, the Generally Accepted Accounting Principles (GAAP) Financial Reporting Taxonomy is utilised, while the European Union employs the European Single Electronic Format (ESEF) taxonomy. The ESEF is an extension of the IFRS Taxonomy, ensuring alignment with international standards.
An Example: Tagging Profit
Companies often use different terms to describe 'profit or loss' in their financial statements, posing a challenge for computers to recognise if they're referring to the same accounting concept.
In figure 1, if each company labels its profit and loss disclosures with the 'ProfitLoss' element from the IFRS Accounting Taxonomy, computers can understand that Company A's 'Profit for the year,' Company B's 'Net Earnings,' and Company C's 'Loss for the period' are comparable disclosures, despite the varied descriptions. Likewise, computers can identify comparable tagged descriptions even if they are provided in different language. In this case company D’s accounts are in Chinese.
By using the IFRS Accounting Taxonomy tag ‘firs-full:Profit:Loss’, analysts can create tables or graphs of company profits, making financial analysis more efficient. Digital reporting also allows for easy comparison of financial data among companies, aiding investors, regulators, and analysts in identifying trends and areas of concern swiftly.