Blockchain Ledgers are not Accounting Ledgers

There is some confusion in accounting circles about the use of blockchain in financial systems and particularly for financial reporting. While there is a role for blockchain, it is destined to be a defined and somewhat limited role. The reason for this confusion is that all the literature about blockchain refers to its central mechanism for recording transactions as a distributed ledger, which accountants think means that blockchain can somehow substitute for accounting ledgers. It's true, there are applications emerging where blockchains serve a lot of the functions of specific ledgers, such as those used for recording certain contracts or sales ledgers and other specific transaction types,  and these are very useful but they serve a different purpose than accounting ledgers. One of the difficulties lies in the fact that a central purposes of accounting ledgers is to record the transactions using accepted accounting principles. In a blockchain, it's unlikely that all participants in the blockchain are going to agree on accounting principles all the time.

This point is made in a an FEI article recently published. Some further research into the use of blockchains in the accounting cycle is being carried out by "The Financial Executives Research Foundation (FERF) in collaboration with Deloitte to explore how blockchain is currently being adopted in the financial reporting community, the potential for industry disruption and the realistic next steps for the technology to be embraced."

As this and other research moves ahead, we are likely to find that there is a distinct role for blockchain, but that it is not a substitute for accounting ledgers.

Blockchain Ledgers are not Accounting Ledgers

There is some confusion in accounting circles about the use of blockchain in financial systems and particularly for financial reporting. While there is a role for blockchain, it is destined to be a defined and somewhat limited role. The reason for this confusion is that all the literature about blockchain refers to its central mechanism for recording transactions as a distributed ledger, which accountants think means that blockchain can somehow substitute for accounting ledgers. It's true, there are applications emerging where blockchains serve a lot of the functions of specific ledgers, such as those used for recording certain contracts or sales ledgers and other specific transaction types,  and these are very useful but they serve a different purpose than accounting ledgers. One of the difficulties lies in the fact that a central purposes of accounting ledgers is to record the transactions using accepted accounting principles. In a blockchain, it's unlikely that all participants in the blockchain are going to agree on accounting principles all the time.
This point is made in a an FEI article recently published. Some further research into the use of blockchains in the accounting cycle is being carried out by "The Financial Executives Research Foundation (FERF) in collaboration with Deloitte to explore how blockchain is currently being adopted in the financial reporting community, the potential for industry disruption and the realistic next steps for the technology to be embraced."
As this and other research moves ahead, we are likely to find that there is a distinct role for blockchain, but that it is not a substitute for accounting ledgers.

Company Reporting in the UK – An XBRL Success Story

The use of eXtensible Business Reporting Language for company financial reporting in the UK has proved an outstanding success. Some 1.9 million UK companies file accounts and tax returns in XBRL each year.

The white paper Company reporting in the UK – an XBRL success story describes the UK XBRL programme and the factors behind its success. The publication explains the outstanding success of XBRL (eXtensible Business Reporting Language) for company financial reporting in the UK.

With some 1.9 million companies filing accounts and tax returns in XBRL each year, the UK XBRL programme is by some way the largest in the world in terms of numbers of reports. It is providing comprehensive company financial information in an “intelligent”, easily analysable electronic format to both the tax authority, HMRC, and the business register, Companies House. The latter is now publishing this company data in XBRL free-of-charge for investors and the public.

The use of XBRL in the UK has proved both efficient and cost-effective. The cost of filing in XBRL for individual companies is far less than in some similar projects elsewhere.

The UK approach enables comprehensive and efficient reporting in XBRL at low cost. It provides all the data required for analysis and comparison by regulators and other users without a need for companies to create their own effort-consuming XBRL 'extensions'. The UK success is founded on the use of the 'Inline XBRL' reporting format and advanced taxonomies which enable comprehensive identification of data in XBRL. An additional White Paper by XBRL UK outline the advantages of Inline XBRL.

XBRL Canada Webinar - February 7, 2018, 12:00 PM – 1:00 PM (Eastern)

Canadian 20-F/40-F IFRS Filers: Time’s Almost Up to Comply with XBRL

To register, please send an email to gtrites@xbrl.ca. Further details will be provided upon registration. There is no cost to attend, but pre-registration is required. Attendance may be limited.

Background - Canadian companies listed with the SEC who use IFRS for their 20-F and 40-F filings will be required to file in XBRL starting with fiscal year ends on or after December 15, 2017 and to post the files on their investor relations web site. Many filers need to file as early as March, 2018. With only a few months left to prepare and comply, companies need to consider how they are going to go about it.

Some companies have chosen to outsource the work to one of the many providers of XBRL services. Others plan to carry out the work in house, by purchasing the necessary software and training staff to prepare the filings, potentially using additional XBRL consulting services. Those that have not yet begun to plan may find the tasks of finding resources and preparing internally to be a challenge.

XBRL isn’t just a technology issue, and management cannot outsource their responsibilities; companies will need to engage their accounting/financial reporting personnel to the job, because XBRL preparation is an accounting-oriented task. Whether you choose to outsource or plan to do the work in-house, you need to spend time learning the requirements, the taxonomy and at least some of the technical details, and how they relate to your specific reporting requirement.

This Webinar will provide concrete guidance and references to help companies comply with the requirements for FPIs. After a 40 minute presentation, we hope you will join us on Telegram to continue the discussion.

Time to Establish Rules for Independent Assurance on XBRL Data

A recent survey by the CFA Institute reveals that 77% of investors want some form of independent assurance on XBRL Reports.  At present there is no requirement by the regulators for assurance on XBRL Reports.  The survey is even more important with the pending adoption of inline XBRL, which is going to be required by the SEC and ESMA in the not-too -distant future.

Inline XBRL is notable because of the fact that all XBRL data is included in the same document as the human readable version of the filings. At present the human readable version has assurance reports on it. So users will tend to assume that if there is an audit opinion on the readable part of the filing, then the opinion will apply to all the filing, including the XBRL part. At present, that wouldn't be the case, as auditors do not audit the XBRL.  Much confusion will be the result.

So, it is time to establish guidelines for the audit of XBRL data. XBRL International issued a report on this topic a few years ago, and dealt with the issues in some depth. That is a good starting point. And here's another article on this topic.

 

Improved Corporate Websites for Data Analysis

Filing requirements for Foreign Private Issuers to file using the IFRS XBRL Taxonomy are effective for fiscal year ends after December 15, 2017. The deadline for most of the filers is March 15, 2018.

Along with the information to be filed with the SEC, companies are required under the SEC rules to include the XBRL information on their websites. So we should see XBRL information appearing on the websites of some 300 Canadian companies by March.

This information will appear in the Investor Relations Section of the websites, thus raising the question - what are the users of these sites going to do with that information?

It depends on the user. XBRL data cannot be read by most human beings. It was never intended for that. It’s purpose is to automate the analytical process by being platform independent and easily transportable to various data analytical tools, thus reducing the need for human intervention. The hitch is that only the more sophisticated investors have access to such tools; the rest use Excel – if they do any serious analysis at all.

Many companies already have been disclosing Excel information on their websites for several years. This has taken two general forms. Some companies have been presenting their core financial statements in excel format, which can be downloaded into Excel spreadsheets. A lot of users are sufficiently proficient with Excel that they can do a lot of analysis with that information. Some companies have also been including in the IR sections of their websites a data tool. Usually these tools include a range of data from the financial disclosures along with common analytical ratios and benchmarks. This information can also be imported into spreadsheets and used for analysis. It has the advantage that it reduces the time required for the users to go through the statements and select the data elements they want to use in their analysis.

With the availability of Excel data, the XBRL data would seem to add little for investors who do not have access to the more sophisticated analytical tools. This, despite the fact that XBRL data include a lot of metadata that could be of use. Without the appropriate tools, this information is hard to get at.

The obvious solution is to use Inline XBRL which combines HTML and XBRL into a presentation that is both human readable and machine readable. The SEC and other regulators are moving towards inline XBRL and this is a good thing. Investors will be able to read the information and with a click or two gain access to the metadata for those items. This will give them context for those items – accounting principles used, relationship to other items, etc.

Inline XBRL could also be used as a tool for those website data tools on the websites, thus enhancing the usefulness of that information.

In time, as websites evolve, all the IR information on corporate websites could be available in iXBRL form. Now there’s a thought for another day.