XBRL accounting taxonomy design and categorisation

1. The future of taxonomy design

This is the first in a series of articles in which I propose a novel categorisation of accounting taxonomies based on three aspects of taxonomy design: Architecture, Coherence and Extensibility.

In this first overview article I will introduce the three design aspects. In future articles I will cover these aspects in more detail and examine how they apply to the US GAAP, IFRS and UK FRS taxonomies. The series will conclude with a discussion of how I’ve categorised these taxonomies and how this categorisation might inform the current direction of taxonomy design.

2. Why are taxonomies so important?

XBRL taxonomies are the key components of any electronic financial or business reporting system. An XBRL taxonomy is the formal definition of a financial or business reporting vocabulary for a given jurisdiction or reporting domain, imparting meaning to the concepts which describe the facts being reported and providing a framework within which reports are structured. It defines, the “contract” between reporter and regulator.
Just as importantly, it defines what is not permitted, except insofar as “locally negotiated” extensions allow. A taxonomy also defines relationships between reporting concepts, meaning that the “contract” not only defines the reporting vocabulary (the “what”) but also the grammar (the “how”) – how reported concepts can legitimately be combined and related to each other.
It is for these reasons that taxonomies matter in an electronic world. They are fundamental to any financial or business reporting regime and their design exerts a direct influence on the capabilities and expressive power of reporting and analysis tools.
XBRL tools and technologies are still evolving to suit the market’s needs. Experience has shown that deploying XBRL solutions takes a considerable amount of time and effort, and a large portion of this is invested in taxonomy design and development. Taxonomy authors are continually developing new ways to address the complex challenges of financial and business reporting.
It’s clear that XBRL taxonomies are currently undergoing a period of rapid evolution as they colonise a number of new financial niches, with new taxonomies building on the successes – and avoiding the perceived failures – of previous generations. I’m proposing the establishment of a new classification system for taxonomy evolution, with the hope of illuminating the future of taxonomy design.

3. Taxonomy evolution

In the family tree of taxonomies, those concerned with company financial statements can be broadly classified according to three key aspects. This has resulted in taxonomies that can be classified as belonging to one of three generations.

3.1 Aspects of taxonomy design

3.1.1 Architecture

Some taxonomies model the applicable accounting or financial standards; some model the required reporting documents; and some model the underlying data.

3.1.2 Coherence

‘Coherence’ is the degree to which a taxonomy “hangs together” and permits the creation of a body of instance documents that are consistent and comparable. At one extreme some taxonomies give the freedom to combine reportable concepts with any dimensions and to combine dimensions freely. At the other extreme such combinations are carefully controlled by the taxonomy.

3.1.3 Extensibility

Some taxonomies are very permissive when it comes to extension, to the point that “anything goes”; some taxonomies provide specific extension points so that extension can be controlled, if not actually defined; and some taxonomies provide specific mechanisms to support extension.

3.2 Taxonomy classification

3.2.1 First generation

First generation taxonomies are literal interpretations of accounting or financial standards, where the filer can do pretty much whatever they please with the base taxonomy, and any additional structured information can be captured as a privately-defined but uncontrolled extension.

3.2.2 Second generation

Second generation taxonomies model not the accounting or financial standards themselves but the regime’s required document structures derived from the applicable accounting or financial standards. Additional structured information can be captured in a private extension that should follow certain rules or guidelines laid down by the taxonomy author.

3.2.3 Third generation

Third generation taxonomies move away from an architecture derived from the accounting/financial standards or reporting document structures and instead simply model the data within the taxonomy. Additional structured data can be captured by ‘extension’ mechanisms built in to the data model of the base taxonomy itself.

All three generations exhibit convergent evolution in that they all provide a document-oriented browsing and presentation view that will be familiar to preparers and accountants, but each is derived in a fundamentally different way.

4. A new taxonomy classification system

The key taxonomy design aspects that categorise taxonomy evolution are summarised as follows:

Taxonomy Classification

5. Next article

In the next article in this series I will discuss the Architecture aspect of taxonomy design in depth, with reference to the US GAAP, IFRS and UK FRS taxonomies.

I would like to also thank Andy Greener for his contributions.