Digital Financial Reporting

People describing what a taxonomy is tend to say that a taxonomy is much like a dictionaries. This is a huge mistake and thinking that a taxonomy is like a dictionary will lead you to miss the real nature of and power of XBRL.

To understand this, it is helpful to look at the differences between a dictionary, a classification, a taxonomy, and an ontology.

• A dictionary is much like a list, a dictionary had no hierarchy.
• A classification system is a grouping of something based on some criteria. A classification tends to not have a hierarchy.
• A taxonomy is a classification system which does have a hierarchy, but the hierarchy tends to be less formal.
• An ontology is a set of well-defined concepts which describes a specific domain. Ontologies are generally defined using a class, subclass relations. Classes and subclasses have defined properties and relations. This works much like object oriented computer programming. The goal of an ontology is to provide a formal, referancable set of concepts which are used in communications within a domain. So, an ontology is also expressed as a hierarchy, but the hierarchy is more explicit and much richer in meaning than a taxonomy.

Why should you care about this? Well, today, most people who are building taxonomies are building what is described as "taxonomy" above. This is a great first step. But the real benefits of XBRL will be realized when taxonomies are constructed to be more like what is described as an "ontology" above.

No worries though. People can build extensions and turn an a taxonomy into an ontology. They probably already are. The idea that a taxonomy being an ontology is definitly not an origional thought which I came up with, it is more my listening to people over the past 10 years and learning what the heck a taxonomy is.

This gets even more interesting when you look into RDF, OWL, and the semantic web stuff which the W3C is doing. How exactly XBRL will fit into these things, I don't really understand. No worries. There are others who do. They will make this happen. What is important to understand is that this stuff will happen.

The US GAAP Taxonomy, for example, is just a first step in defining semantic meaning used in financial reporting. Way, way more richness will be provided for the information in that taxonomy.

It will be interesting to see what people come up with.