Understanding what Taxonomies Do and why you should Care
Monday, September 7, 2015 at 08:15AM
Charlie in Digital Financial Reporting

The FASB released a proposed 2016 US GAAP Financial Reporting Taxonomy in XBRL and is taking comments until October 31, 2015.  Taxonomies such as the US GAAP Financial Reporting XBRL Taxonomy are important tools in our digital age and as I mentioned in the document Knowledge Engineering Basics for Accounting Professionals, taxonomies overcome the four major obstacles of getting a computer system to perform work:

The US GAAP Financial Reporting XBRL Taxonomy is a formal specifications.  Formal specifications are precise, concise and unambiguous.  Formal specifications are communications tools.  Because taxonomies use machine-checkable notation, a wide variety of automated checks can be applied. The disciplined approach of using formal specifications means that subtle errors and oversights will be detected and corrected.

An example of these checks is the fundamental accounting concept relations that I test each month.

Taxonomies both describe the information being worked with and verify information consistency against that description to avoid information quality problems or inconsistencies.  When creating information it is important to verify that what has been created is consistent with the expected description.  When consuming information it is important to understand that the information being consumed is consistent with the expected description. Remember: nonsense-in-nonsense-out.

The first two obstacles which related to the problem of business professional idiosyncrasy and technical idiosyncrasy are overcome by using a taxonomy to standardize terminology.  Rather than using arbitrary  terminology to express information about some business domain, standard terminology is used.  This includes selecting the appropriate important terms and defining the terms in a deliberate, rigorous, clear, logically coherent, consistent, and unambiguous manner.  Care is taken to precisely and accurately reflect reality using standard terms.

The third obstacle of expressing the rich logical interconnectedness of facts within and across business systems can be overcome by using general ontological theories disciplined, methodical, and rigorous approach to structuring the relations between terms.  Meaning, expressed using machine-readable taxonomies, must be exchangeable between business systems not just used within your one system.
Beginning with a rigorous and logically coherent specification of the theoretical information to be implemented makes it possible to address the problems of human idiosyncrasy.

Given the idiosyncratic tendencies of business professionals; interpretations which reflect the arbitrary peculiarities of individuals can sometimes slip in or mistakes can be made when expressing such terminology.  Further, parts of our understanding of a business domain can be incorrect and even evolve, improve, or simply change over time.

If different groups of business professional use different terminology for the same concepts and ideas to express the exact same truths about a business domain; those business professionals should be able to inquire as to why these arbitrary terms are used, identify the specific reasoning for this, and specifically identify concepts and ideas which are exactly the same as other concepts and ideas but use different terminology or labels to describe what is in fact exactly the same thing.  But to also understand the subtleties and nuances of concepts and ideas which are truly different from other concepts and ideas.

If idiosyncrasies result only in different terms and labels which are used to express the exact same concepts and ideas; then mappings can be created to point out these different terms used to express those same concepts and ideas.  Such mappings make dialogue more intelligible and could get groups to accept a single standardized term or set of terminology for the purpose of interacting with common repositories of business information, such as the SEC's EDGAR repository of public company financial reports.

If the difference in terminology and expression are rooted in true and real theoretical differences between business professionals, and the different terms express and point out real and important subtleties and nuances between what seemed to be the same terms; then these differences can be made conscious, explicit, clear, and therefore they can discussed, in a rigorous and deliberate fashion because the differences are consciously recognized.

The best indicator of whether a taxonomy is working or not is whether it achieves the goal; whether the comunication between the creators of information and the consumers of information is successful.

Consider these ideas and consider commenting on the proposed US GAAP Financial Reporting XBRL Taxonomy.

Article originally appeared on Intelligent XBRL-based structured digital financial reporting using US GAAP and IFRS (http://xbrl.squarespace.com/).
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