The advent of digitization and importance of green practices have single-handedly changed the way every business functions today. This digital revolution has also enveloped the sphere of accounting and financials to completely alter the face of financial reporting methods. The International Financial Reporting Standards (IFRS) stipulated by the regulatory body International Accounting Standards Board (IASB) comprise five essential components that together complete the entire set of financial reports which best describe the financial standing and performance of an organization. These five financial reports, namely, balance sheet, income statement, cash flows statement, statement of changes in equity or total recognized gains and losses (STRGL), notes to financial statements – are all closely linked with each other. While traditional financial reporting methods are meant for human discretion, digital financial reporting aims at completely automating the financial analysis and reporting process.
Global trend in Digital Financial Reporting
The current trend in financial reporting that has the potential to greatly diminish human interaction and streamline the financial reporting process is XBRL. The eXtensible Business Reporting Language or XBRL is the new XML based technology synonymous with Digital Financial Reporting. It promotes advanced level seamless data exchange, analysis and integration while ensuring transparency and credibility of company financial data. XBRL was specifically designed to foster BI (Business Intelligence) automation with a view to reduce costs and time by minimizing error prone human intervention. Filing of financial statements in XBRL format has been mandated by Securities and Exchange Commission U.S. and other regulatory bodies around the world, in order to bring uniformity and standardize the financial reporting system.
XBRL has added various useful competencies and mechanisms to validate semantics, construe business rules, and build complex associations within documents. The trend is steadily gaining momentum as more and more countries including Europe, South America, India, China, Japan, Canada and many others are following suit and adopting XBRL as a common standard for financial reporting.
Advantages of Digital Financial Reporting
With XBRL as the backbone of financial reporting structure, organizations can realize unprecedented benefits from its use. For CFOs, CEOs, investors or any key decision makers who are contemplating whether to deploy XBRL or not, this might prove helpful in arriving at a conclusion:
1. A model based and semantic digital financial reporting system such as XBRL helps business users design, build, analyze and reuse key financial data of the organization.
2. It exhibits marked improvement in quality and credibility of financial statements, generating highly advanced and intelligent reports for business users.
3. Significant cost reductions are experienced since human effort and errors are minimized.
4. Homogenizing financial reporting allows for a standardized approach that is common across continents around the globe.
Benefits to End Users
Some benefits of the XBRL based model and its working is explained below:
1. Taxonomy of Financial Reporting: XBRL incorporates taxonomies as stated by industries or national jurisdictions so that the financial statements generated by your company are compliant with prevalent standards.
2. Validation of Business Rules: Digital financial reporting also takes into account various underlying formulae or business rules on which the semantic data model is built. This ensures accuracy and efficiency of reports.
3. Semantic Expression: The ability to semantically express the true latent meaning of your financial information by leveraging concrete associations between items and concepts validates the legitimacy of reported data.
4. Data representation: Visually represented multi-dimensional reports aid in better inference and decision making.
5. Normalization: Normalization or uniformity is one of the biggest benefits that eliminate unnecessary human involvement in what could be easily accomplished by the system alone. It provides a standardized format for data transmission that is reusable across platforms.
The concept of Digital Financial Reporting is based on strong logical knowledge that uses inferential processes to extract implicit knowledge from financial statements. Such a system facilitates simplified management of reporting financials, while congruently keeping pace with evolution of IT with the financial services sector.