Blockchains have come up a lot over the past few years. They have been incorporated in 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 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 are talking about them as distributed ledgers, to securely record the master record of transactions. This can be a more efficient mechanism than a centralized database, if there are multiple stakeholders involved in validating a transaction.
Using blockchains for procurement
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:
This contract is written into the blockchain - up to $100K of copper
The manufacturer issues a purchase order against the contract - $20K of copper ordered
The supplier ships some of the copper - $5K of copper shipped
The manufacturer confirms receipt, noting 20% is damaged - $4K of copper received
The supplier confirms they agree - $1K of damaged goods recorded
So right now, both the manufacturer and supplier know that there’s $16K remaining to be delivered under the current purchase order and another $80K remaining in the contract after that. There’s no reconciliation between their two 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 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, 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 where consensus is automated.
How does blockchain accounting and reporting work?
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 described above will certainly make this process easier, as data can be standardized and there can be a limited number of different transaction types. But no matter what, there’s going to be some variations how the associated financial data gets reported.
For instance, what if #3 above happens on 12/29/19 and #4 happens on 1/3/20. If the supplier uses a calendar year reporting period, this could impact their Balance Sheet, Income Statement, and Statement of Cash Flows. Maybe there was some recent accounting guidance issued that changes the way this is treated, 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 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.