Digital Financial Reporting

This article, CeFi vs. DeFi, Comparing Centralized to Decentralized Finance, helps you understand what decentralized finance actually means.

The article defines finance as the process that is involved in the creation, management, and investment of money. Finance basically links those that need money with those that have money.

The authors seem to believe that CeFi and DeFi will co-exist.  Here is the paper's conclusion:

DerFi vs. CeFi in Crypto

Arthur Levine and Scott van Pelt explain in their book The Great Upheaval that a "great upheaval" is taking place and the impact of that upheavel on higher education.  This great upheaval is also impacting accounting, reporting, auditing, and analysis. This book is useful in helping accountants get their heads around what is going on.

Levine and van Pelt point out that we are in a time of profound, unrelenting, and accelerating change of a magnitude and scope unequaled since the Industrial Revolution.  The United States is hurtling from a national, analog, industrial economy to a global, digital, knowledge economy. So is the rest of the world.

Accounting, reporting, auditing, and analysis are in the midst of a profound transformation the likes of which accounting has not seen in 500 years.

No one really knows where all this will end up.  But what is for certain is that we will not be where we are now much longer.  Will the institution of accountancy be renovated or replaced?  Will the institution of accountancy adapt or be disrupted?  So what, is this a guessing game?  Or, is it a matter of personal opinion as to where we will end up? Not really.

Change is not only inevitable; it is also imminent.  Place your bets. Personally, I am betting on Computational Professional Services. There is plenty of information for those who desire to understand what is going on. None of this is really rocket science.

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Accounting was the world's first communications technology; it pre-dated both writing and the use of numbers.  Accounting in Europe had no notion of the idea of ZERO until the middle ages. They learned about the concept of zero from Middle Eastern mathematicians and then incorporated that idea into accounting.  In 8500 BC merchants used bollae and tokens for accounting because numbers and writing had not been invented yet.  It was not until 3500 BC that clay tablets were used and writing and number systems started to emerge.  It would be another 500 years before writing and number systems were fully developed.  Double entry bookkeeping was not documented by Luca Pacioli until 1494 AD.  Luca Pacioli's double-entry bookkeeping industry standard pushed the transition from Roman numerals to Hindu-Arabic numerals. The dissemination of double-entry bookkeeping by Luca Pacioli might be deemed the most important event in accounting history.

Financial statements tell a story.  It is a milestone in an accountant's career when the accountant can weave together a logical, cogent, true and fair narrative from information provided and tell a story about an economic entity in the form of a financial statement.  With the ability to perform that task, an accountant has achieved accounting literacy.  How will telling that story change over the next 25 years as society evolves from analog to digital? Are you making the right choices?  Will blockchain have an impact on accounting?

What will the future of accounting look like? Will there be a demand for accountants; what skills will they need?

The following is a set of very basic XBRL-based financial report creation exercises.  The exercises start small and then grow in size.  Each exercise has been rigorously tested and are properly functioning Level 5 XBRL-based reports. Each exercises tests created report models and reports using the Seattle Method.

Each of these reports can be created using Luca which is a free cloud-based XBRL report creation tool, Pacioli import (see the link in the Pacioli documentation), or the XBRL creation software of your choice.  Each of these can be viewed and verified using Arelle which is free and open source but quite technical oriented

1. Accounting Equation: Luca | Pacioli | Base Taxonomy
2. SFAC 6: Luca | Pacioli | Base Taxonomy
3. Common Elements: Luca | Pacioli | Base Taxonomy
4. PROOF (partial): Luca | Pacioli | Base Taxonomy
5. MINI Financial Reporting Scheme: Luca | Pacioli | Base Taxonomy

After you have created each of the above reports, I would recommend that you read the document Essentials of XBRL-based Financial Reporting.

After that, have a look at this very basic report creation protototype. Then, extrapolate what you see to the creation of something like the Microsoft 10-K financial report.

After that, challenge yourself to create reports using one of the following base taxonomies below (which are on a different web site) by either editing the Excel import files above or creating new Excel import files:

• Very Basic Examples

More Advanced Challenge

Now, you should be ready to create your own XBRL-based financial report. You can edit the Excel import spreadsheets above, create new Excel import spreadsheets, enter information manually using Luca, import using Luca or Pacioli, or generate a report using the Luca API. 

You can use one of the Base Taxonomies above or the base taxonomy for the XASB financial reporting scheme below:

• XASB Financial Reporting Scheme (Auditchain): Base Taxonomy | All Resources
• XASB Financial Reporting Scheme (XBRL Site): Base Taxonomy | All Resources

There is a set of 10 XASB import Excel spreadsheets for different parts of the XASB report.

If you are even more ambitious, you might want to try creating an XBRL-based financial report using one of these financial reporting schemes (I would suggest staying away from the US GAAP and IFRS taxonomies at this point)

The article What is Normative Accounting? describes the problem and how normative accounting thus:

Normative accounting's premise is that value is subjective to the user. Having identified the user of the accounts and the decision that the user intends to make, the accounting treatment then follows. It means that there are many alternative fair views of an entity or a scenario each with different accounting treatments. 

Rethinking Capital is the home of normative accounting.

'NFT' is Collins Dictionary's word of the year for 2021.  If you don't understand what an NFT is, I explained that in a blog post.

Here is a list of the top NFTs today. Personally, I don't think that is a very inspired use of NFTs.  In my view Auditchain has a much better use case for NFTs.  In the blog post, Auditchain To Use NFTs for Accounting and Disclosure Controls, Auditchain "announced a new NFT creation platform that will allocate royalties between curators and validators of global standard logic-based accounting and disclosure control components".

I hope to get all these accounting rules converted into NFTs.

As was pointed out in the book, The Great Upheaval, by Arthur Levine and Scott J. Van Pelt; the United States is hurling from a national, analog, industrial economy to a global, digital, knowledge economy.

NFTs are a tool of the knowledge economy. Accountants work with knowledge.  They express financial information in the form of knowledge graphs. NFTs will help describe knowledge graphs, create those knowledge graphs, verifiy that the knowledge graphs have been created correctly, and extract information from those knowledge graphs.

Better improve your digital IQ if you don't see this.