Blockchain has been dominating various discussions in conferences and board room meetings with industry leaders proposing to make it a part of compliance reporting. In 2017, the International Monetary Fund (IMF) published a paper describing how distributed ledgers can improve the global economy.
But what is blockchain?
Blockchain is a decentralized, digital ledger that distributes and manages information across many computers using cryptography. It makes the data easily accessible to all the stakeholders and promotes transparency and accountability among stakeholders.
Considering that blockchain uses cryptography to safeguard data, many companies are toying with the idea of using it for financial reporting.
However, can it replace XBRL – a framework widely accepted and used globally for preparing standardized financial reports?
Let’s dive into it to understand further.
XBRL, Blockchain, and their role in financial reporting
Every company has a unique way of reporting its financial data. The unstandardized format of financial reporting can be time-consuming for regulators as they end up spending more time understanding the data instead of analyzing the industry trends. To add to the woes, there are also chances of errors and frauds seeping in, which can escalate into bigger economic frauds if ignored. That’s why standardization and digitization of business reporting are so important. Since 2000, more than 60 countries have successfully adopted XBRL – an XML-based language to standardize financial reporting. XBRL provides machine-readable data that enable regulators to detect frauds at an early stage, reduce errors, and improve operational efficiency. The standardization simplifies the comparability of trends and data analysis for the regulators.
Blockchain, on the other hand, saves all the necessary data in shared ledgers that can be accessed in real-time by various stakeholders. It is a technology used to store data in a safe way.
What makes blockchain unique is its feature of immutability. The data is verified cryptographically. So, as soon as the data is grouped into blocks and added to the database, it is almost impossible to modify the data fraudulently. It cannot be changed or deleted. It creates an audit trail for regulators to verify the data.
Will blockchain replace or boost XBRL as a standard for financial reporting?
As XBRL has been in use since 2000, many companies consider it to be an old technology that can be replaced with new technology such as blockchain. However, Mohini Singh, Director, Financial Reporting Policy at CFA Institute; says it is unlikely that blockchain will replace XBRL.
Mohini explains that although both XBRL and Blockchain are used to communicate, they cannot be replaced with one another. XBRL is a data standard, while blockchain is a technology that requires a data standard to record information.
However, both can work together. Deloitte mentioned in its paper that XBRL could provide high-quality structured data to make blockchain more efficient. Using both together can boost real-time reporting and accounting as different stakeholders will be able to access blockchain for accounting purposes directly. Combining both technologies will not just accelerate the process of verifying and validating the data, but will also improve data security.
A use case of combining blockchain and XBRL
Reportix, a Germany-based Regtech company, demonstrated how they used iXBRL and Blockchain to automate the process of creating smart contracts to improve the insurance contract management system. They combined blockchain technology with iXBRL to automatically verify and validate machine-readable data and eliminate invalid data from the database to reduce errors.
Blockchain may have become a buzzword in the fintech and regtech ecosystem. However, it can be used only if the data collected is of good quality, consistent, and clean. This can be achieved only with the help of XBRL as it has the ability to streamline and convert a humungous amount of data into machine-readable, unambiguous data that can be easily processed by blockchain technology. So, if you are toying with the idea of replacing XBRL with blockchain, you have your answer in front of you!