Blockchains have come up a lot over the past few years. They are beginning to incorporate into marketing materials for many companies, whether or not there is a tangible use case. In the height of the insanity in 2017, a company even changed its name to include blockchain.
There is a lot to the blockchain. When you strip out the hype, there are a lot of real use cases that seem very promising. Generally, when somebody refers to blockchains, they're talking about them as distributed ledgers. Ones that securely record the master record of transactions. This can be a more efficient mechanism than centralized databases if there are multiple stakeholders a part of validating a transaction.
For example, let’s say a copper pipe manufacturer has an agreement with a copper supplier. Here’s how some transactions occurring between the two parties might look:
So right now, both the manufacturer and supplier know that there’s $16K remaining under the current purchase order and another $80K remaining in the contract after that. There’s no reconciliation between their accounting systems because the pertinent details of their agreement are recorded in their shared ledger. They also aren’t concerned about the validity of the data. This is because the blockchain has been audited by an independent firm, and verified as an approved blockchain by the relevant industry association. These two companies and other copper manufacturers, copper suppliers, and industry associations all run nodes on this permissioned network. This is to ensure no single entity or small group can change the network.
This is a relatively simple example, but this concept could have applications in a number of different industries. Instead of dealing with a lot of data transfer and reconciliation between entities, there can be a single source of truth with consensus automation.
While this is great for efficiency, there’s still the final step of getting this data off the blockchain and into a company’s financials. A system like the one above will certainly make this process easier, considering the standardization of data is possible, and there can be limitations to the number of different transaction types. But no matter what, there are going to be some variations in reporting the associated financial data.
For instance, what if #3 above happens on 12/29/19 and #4 happens on 1/3/20? If suppliers use calendar year reporting periods, this could impact their Balance Sheet, Income Statement, and Statement of Cash Flows. Maybe there was some recent accounting guidance update that changes the way one would treat this, so there needs to be a reversing entry booked on 12/31 to reclass for balance sheet purposes.
Whatever the industry and whatever the particular use case for blockchains as distributed ledgers, there’s always going to be this additional step of getting data into a company’s financial statements. This will be a critical step to ensure the entire blockchain accounting and reporting process is as efficient as possible. Companies should ensure they take the time to think through this while considering adding blockchains into their technology setup.
How Do You Account For Your NFTs
A CPA with more than 10 years of varied public and private accounting experience, Ben has led many complex financial projects to successful outcomes.
He began his career at Ernst & Young, followed by in-house management roles at Fannie Mae and other public companies.
Ben holds a B.S. in Accounting from the University of Maryland.
