Finance 2.0

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Finance 2.0

  1. 1. Finance 2.0 How XBRL Disrupts the Value Chain of Financial Reporting and Primes it for More to Come Rated PG
  2. 2. The Challenge To capture the benefits of moving finance from manufacturing mode to an integrated model
  3. 3. Overview What is XBRL? The Quest for Value Content of financial reporting Efficient format & delivery Semantic Finance - the way forward
  4. 4. It’s all about tagging! Q3 2008 Meta- Data EUR Mio Net (un)realised gains from -1424 financial instruments at fair value Data Information
  5. 5. An information pyramid Knowledge Information Data
  6. 6. XBRL in short eXtensible Business Reporting Language web standard derived of XML disaggregates unwieldy information packages into constituent semantic elements separates technical and business specifications open, royalty-free property of XBRL International
  7. 7. More XX‘s Taxonomies container of business logic comparable to chart of accounts, but more available for IFRS, US GAAP, many more Extensions
  8. 8. Global reach Central organisation XBRL International Many local jurisdictions local awareness locally relevant taxonomies quick adoption in many countries: USA, China, India, Japan, NL, Germany, France
  9. 9. XBRL in Belgium active jurisdiction since 2004 with 26 corporate members (CFA Belgium?) hosted by National Bank of Belgium working groups on BE GAAP annual accounts, permanent corporate data for CBE, communications Contacts: xbrl.be@nbb.be
  10. 10. The Quest for Value
  11. 11. ility l ua ab ain cr st Ac Su Drivers of Value on ion uti t trib ea Dis Cr
  12. 12. Required information Resources Obligations Ability to generate inflows of resources Ability to convert resources into cash Short- & long-term Risk
  13. 13. Expectations rule! Resources Obligations Ability to generate inflows of resources Ability to convert resources into cash Short- & long-term Risk
  14. 14. Measuring value The unit is currency - but with what attribute?
  15. 15. ? 1€ + 1€ = 2€
  16. 16. Some measurement “units” ... Equity method Cost with discount accretion, premium Consolidation – recognition of individual assets amortisation and accrued interest plus or minus and liabilities of the issuer of the equity some changes in fair value if some of the instruments changes in fair value of the instruments are Proportionate consolidation hedged under fair value hedge accounting Fair value with gains and losses in earnings Cost plus accreted discount or amortised Fair value with gains and losses in other premium with a separate line item for accrued comprehensive income until realised interest Fair value with gains and losses in other Lower of cost or market value comprehensive income until realised except Carrying value less allowances for uncollectible required impairment losses that are reported in amounts earnings immediately For loans and receivables subject to troubled Fair value with part of the gains and losses in debt restructuring, as specified in SFAS 15 earnings and part of the gains and losses in Accounting by Debtors and Creditors for other comprehensive income (cash flow hedge Troubled Debt Restructuring accounting) Carryover basis of the transferred assets Cost less required impairment losses that are allocated on the basis of relative fair values of reported in earnings the portions sold and retained Cost with discount accretion, premium Not recognised unless an amount is receivable amortisation, accrued interest and required impairment losses in earnings
  17. 17. Fair value - why? relevant for all economic decision making no viable alternatives most useful performance measurement “approximately right” far superior to “precisely wrong” transparency about sources & assumptions
  18. 18. Known unknowns, etc CPA’s CFA’s domain domain Cutoff date expected future expected future development of development of known business future business
  19. 19. Frequent objections “not our job” massive measurement errors Profitable Downgrade Conundrum abusing mixed attributes model Fair values are - hard to come by, too expensive ...
  20. 20. Instability Change REALITY Volatility Variance
  21. 21. Twelve Principles to allow financial reporting to more faithfully represent economic reality
  22. 22. Presentation Method Scope
  23. 23. Presentation Method Scope First The primary financial statements must provide the information needed by equity investors, creditors, and other suppliers of risk capital.
  24. 24. Presentation Method Scope Second The entity must be viewed from the perspective of an investor in the company’s common equity.
  25. 25. Presentation Method Scope Third Fair value information is the most relevant information for financial decision-making.
  26. 26. Presentation Method Scope Fourth Recognition and disclosure is based on the information’s relevance to investment decision- making, not on its measurement reliability alone.
  27. 27. Presentation Method Scope Fifth Complete recognition of all economic transactions and events.
  28. 28. Presentation Method Scope Sixth Investors’ information requirements must determine the materiality threshold.
  29. 29. Presentation Method Scope Seventh Financial reporting must be neutral.
  30. 30. Presentation Method Scope Eighth All changes in net assets must be recorded in the “Statement of Changes in Net Assets Available to Common Shareowners”.
  31. 31. Current Net Change Period Valuation Estimates In Net Accrual Adjustments Assets Transactions Operating Investing Financing Net Change in Net Assets before Transactions with Owners Net Change in Net Assets
  32. 32. Presentation Method Scope Ninth The cash flow statement provides information essential to the analysis of a company and must be prepared using the direct method only.
  33. 33. Presentation Method Scope Tenth Changes affecting each of the financial statements must be reported and explained on a disaggregated basis.
  34. 34. Reconciliation of Balance Sheet, Cash Flows, Accruals, and Valuation Adjustments Balance Balance Cash Flow Sheet: Valuation Sheet: Statement, December Accruals Adjustments December Direct 31, 31, Method 200X 200X + 1
  35. 35. ... t0 Asset 2 Asset 1 Liability 2 Liability 1 +/- effects of external transactions +/- effects of external fluctuations +/- effects of corporate decisions ... t1 Asset 2 Asset 1 Liability 2 Liability 1
  36. 36. Presentation Method Scope Eleventh Individual line items should be reported based upon the nature of the items, rather than by the function for which they are used.
  37. 37. Presentation Method Scope Twelfth Disclosures must give investors all of the information they need to understand the items recognised, their measurement properties and risk exposures.
  38. 38. Key principles of an XBRL framework CFA Institute supports XBRL from a user (of financial statements) perspective
  39. 39. User awareness lacking 9% high in EMEA at 66%! CFA Institute works 32% on raising awareness 59% Investors Conference with IASCF, EFFAS in September Up-to-date awareness Aware Not aware
  40. 40. First: Disclosure neutrality Core taxonomy should be predefined by current financial reporting standards, including GAAP and other regulatory disclosure and reporting requirements.
  41. 41. Second: Limited extensions Taxonomy extensibility should maintain the level of data comparability as defined by GAAP and other regulatory requirements.
  42. 42. Third: Going global Ultimately, companies should deliver required financial reports to regulators using the established XBRL framework
  43. 43. Fourth: Open Source The general public should have equal access to the XBRL tagged information
  44. 44. Fifth: Co-operation Regulators should develop the necessary infrastructure and protocol to ensure the timely updating of the established XBRL framework as outlined in the preceding four key principles
  45. 45. Semantic Finance? A Trojan rabbit about to invade finance
  46. 46. What is the Semantic Web? The Semantic Web is ... a vision for a future web of meaning not separate, but an extension of the current web a way for machines to better process & understand data a web on which machine reasoning can become ubiquitous and powerful describes a set of standards, ML & tools
  47. 47. Manual labour going strong 18% 37% Manual extraction high among specialist 34% analysts 11% Entirely manual Mostly manual Entirely 3rd party Mostly 3rd party
  48. 48. Disruptive innovation? worse performance near-term different value proposition cheaper, simpler, smaller, and more convenient launched in new or insignificant markets leading customers do not want it at first
  49. 49. Sustaining innovation? better performance of established products measured along historically established mainstream dimensions may be radical or discontinuous, but still sustains established firms
  50. 50. A matter of perspective I=mc2
  51. 51. Price discovery, ca. 1920 Valuation Expecta- Valuation Expecta- concepts tions concepts tions Bid Ask Fundamental Fundamental Information Information
  52. 52. Price discovery, ca. 2000 Valuation Expecta- Valuation Expecta- Bid Ask concepts tions concepts tions Fundamental information
  53. 53. Price discovery, ca. 2015 Bid Ask Expectations Expectations Valuation Fundamental concepts information
  54. 54. The Mosaic Theory Information Public Non-Public Status Material Non-material
  55. 55. Cognitive Surplus 1'000'000 Mio hours spent 100'000 10'000 Mio hours 1'000 100 10 1 creating Wikipedia watching TV USA p.a. watching TV global p.a.
  56. 56. Googol 10 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000

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