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Financial Report Semantics and Dynamics Theory

Rene van Egmond and I created the first version of the Financial Report Semantics and Dynamics Theory back in 2012.  This theory explains the mechanical, logical, structural, and mathematical dynamics of a financial report in terms that are understandable by business professionals.

A theory is a tool for understanding, explaining, and making predictions about a given subject matter. A theory describes absolutes. A theory describes the world and tries to describe the principles by which the world operates. A theory can be right or a theory can be wrong; but it has one intent: to discover the essence of some subject matter.  A theory provides a framework and principles for thinking about or explaining something deeply, thoroughly, and rigorously.

For the past 5 or so years I have been working to better prove this theory in order to tune the theory.  That proof is documented within the theory.  I am still collecting empirical evidence from XBRL-based financial reports of public companies that are submitted to the U.S. SEC.  The proof is getting so good that I am now finding accounting errors in the financial reports of public companies and flaws in the underlying US GAAP.  (I mean US GAAP, not the US GAAP XBRL Taxonomy.)  This is all explained in this document, Making the Case for Reporting Styles.

All this information is documented in the conceptual model that I have created for a digital financial report.  In addition, the conceptual model is being represented in the W3C stack of technologies(RDF/RDFS/OWL/SHACL).

The conceptual model is not for US GAAP.  The conceptual model is independent of any financial reporting scheme and I have created three separate "profiles": one for US GAAP, one for IFRS, and one for an imaginary reporting scheme that I call XASB.  The XASB reporting scheme is for testing independent of the existing XBRL taxonomies for IFRS and US GAAP.  Another profile exists for business reporting.

There are two software implementations that leverage this conceptual model.  One is commercially available via XBRL Cloud.  The other is a successful working proof of concept that was constructed by a software engineer and I to test the feasibility of creating an expert system for creating financial reports and tune the conceptual model even further to support that endeavor.

All this information was obtained by literally reverse-engineering the complete set of XBRL-based financial reports that are submitted to the U.S. SEC by public companies (not including funds or trusts, but everything else).

If you are wondering WHY I have been focused on this for the past 10 years or so, I would encourage you to read the document Getting Ready for the Digital Age of Accounting, Reporting and Auditing: a Guide for Professional Accountants.

In my view, digital financial reporting will be one of the early applications of artificial intelligence, just like accounting systems were one of the early uses of computers.  You can already see signs of the sorts of things computers will be able to achieve.  In is my observation that the "financial reporting" use case and in particular the US GAAP financial reporting use case is one of the more complex business use cases for XBRL.  If you want to truly understand XBRL-based digital business reporting, XBRL-based financial reports submitted by public companies to the SEC is something worth studying.  This in no way takes away from other alternatives to implementing XBRL-based digital business reporting such as the "Data Point Model" approach or the "Standardized Business Reporting" approach.  I am simply documenting another approach which has a certain basket of "pros" and "cons" that are worth looking into.

If anyone wants additional information or has any feedback, please feel free to contact me.  I am not an academic or an information technology professional, but I have done the best that I am capable of currently.  If you know of someone who has done better, please make me aware of that.  I can imagine that there are likely lots of ways to expand on this foundation.

Posted on Monday, December 11, 2017 at 04:35PM by Registered CommenterCharlie in , | CommentsPost a Comment

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