BLOG: Digital Financial Reporting
This is a blog for information relating to digital financial reporting. This blog is basically my "lab notebook" for experimenting and learning about XBRL-based digital financial reporting. This is my brain storming platform. This is where I think out loud (i.e. publicly) about digital financial reporting. This information is for innovators and early adopters who are ushering in a new era of accounting, reporting, auditing, and analysis in a digital environment.
Much of the information contained in this blog is synthasized, summarized, condensed, better organized and articulated in my book XBRL for Dummies and in the chapters of Intelligent XBRL-based Digital Financial Reporting. If you have any questions, feel free to contact me.
Token Economics
International Banker published an article, Token Economics: An Emerging Field, which does a pretty good job of highlighting some issues related to the utility of tokens. The article is worth a read.
In particular, note the discussion about decentralised autonomous organisations (DAOs) and decentralised applications (DApps). This article explains nine different token models. This article, Understanding Token Economics (Tokenomics 101), introduces the term tokenomics. This article discusses sidechains.
This Forbes article, Triple-Entry Accounting and Blockchain: a Common Misconception, makes the following statement:
"blockchain will entirely disrupt accounting processes as we know them -- it’s only a matter of time"
The article also points out that "triple-entry accounting" and "accounting using a blockchain" are different things. I personally have made the mistake of thinking that triple-entry accounting and accounting using a blockchain were the same thing. Apparently they are not.
There are numerous blockchains this Medium article, Unhyped Comparison of Blockchain Platforms, provides a lot of good information that helps you understand how stuff on the blockchain works.
Blockchain is not the only way to create a digital distributed ledger. Another is hashgraph. Who will win? Blockchain or hashgraph. If blockchain, WHICH blockchain? This comparison of Hedera Hashgraph and Ethereum provides some good information. Then you have Skynet! (I cannot tell if Skynet is real.)
All this can be confusing. But, here is one thing that is not confusing at all: accounting processes will be disrupted. That is for certain. Personally, I don't know exactly how. But the disruption is inevitable.
Overview of XBRL
This blog post provides a quick overview of XBRL. (This set of slides and this seven minute video provide the same information.)
XBRL, the Extensible Business Reporting Language, is a global industry standard format that can be used to create machine-readable business reports that are also readable by humans. The global XBRL industry standard was created by XBRL International which is an consortium of approximately 600 members in around 19 jurisdictions around the globe.
XBRL was originally started by the American Institute of Certified Public Accountants (AICPA) for the purposes of financial reporting. From the outset, the financial reporting focus was expanded to business reporting in general.
Today, there are approximately 180 different XBRL related projects in 50 different countries. Many of the projects are used for financial reporting and tax reporting to regulators. But, ultimately, XBRL will likely become an approach to creating general purpose financial reports that are machine-readable and also still readable by humans. Today, general purpose financial reports are only readable by humans. Soon, general purpose financial reports will be readable by artificial intelligence software applications which will enable both automated financial report creation and automated financial report analysis.
Fundamentally, XBRL is an information exchange medium. One key aspect of XBRL is that it enables the exchange of complex information where different information models can be used. XBRL was designed to meet the needs of complex financial reporting such as US GAAP and IFRS.
While you might want to understand what XBRL is; what is more important is what the existence of XBRL means. Artificial intelligence, digital distributed ledgers, and structured information such as XBRL offer a completely new platform for financial accounting, reporting, auditing, and analysis. The old platform is based on physical, the new will be grounded in digital.
To understand how XBRL works, watch this video. To get an understanding the technical details, work through this very basic XBRL primer. If you want to master XBRL, here is that information.
Punctuated Equilibrium
Punctuated equilibrium provides a clues as to how XBRL-based digital financial reporting will unfold.
Punctuated equilibrium predicts that a lot of evolutionary change takes place in short periods of time tied to speciation events. According to punctuated equilibrium, evolution occurs in short bursts. Species go through long periods of stability the rest of the time.
Basically, everything has to be in place for a change to occur. It takes time to put all the pieces in place that will enable the change TO occur.
Does XBRL-based financial reporting have all the necessary pieces put together yet?
Machine-readable rules are hard to understand without a rules engine to process the rules. If a rules engine does exist but you have no rules to process, it is hard to understand the value of the rules engine. If no one cares if the machine-readable facts in a report are correct; then it is hard to understand the value of machine-readable rules and a rules engine which can process the rules.
But, what if:
- Machine readable rules exist.
- A rules engine exists. (i.e. Pesseract; Pacioli; XBRL Cloud)
- Machine-readable reports which contain reported facts exist.
- The machine-readable reports are REQUIRED to be audited to be sure that the information contained in the report are properly stated and machine-readable by financial analysts?
Well, there are still a few things missing. First, you need WAY more rules than the fundamental set that I provide. Second, to create those rules you need software. Third, to create the reports you need easy enough to use report creation software.
Excellent Introductions to HTML, HTML5, CSS and XML
The U.S. Chamber of Commerse has created excellent introductions to HTML, HTML5, CSS, and XML. You can find those here:
I am trying to get them to add an introduction to XBRL. Also, an introduction to artificial intelligence and digital distributed ledgers would be nice.
COSO Enterprise Risk Management Framework
The COSO Enterprise Risk Management Framework is an approach to thinking about enterprise risk and internal controls. Enterprise Risk Management (ERM) requires an entity to take a “portfolio” view of risk that examines the entire organization, from the enterprise level, to a division or subsidiary, to the level of a single business unit’s processes. (Here is the actual COSO version.)
This video does a good job of explaining the objectives of the COSO framework.