Global, Practical Financial Reporting Conceptual Framework

Both the Financial Accounting Standards Board (FASB) for United States Generally Accepted Accounting Principles (US GAAP) and the International Accounting Standards Board (IASB) for International Financial Reporting Standards (IFRS) publish conceptual frameworks.

The FASB and IASB both say they publish the conceptual frameworks to help them write financial reporting and accounting standards and to help the public better understand the standards that are written.

But the thing is, the conceptual frameworks provided by the FASB and IASB are (a) not very practical or useful to everyday accountants, (b) not organized to be practical, (c) are not consistently described between US GAAP and IFRS, and (d) are not completely specified. Further, the conceptual frameworks are written in "books" effectively as contrast to being created in the form of a UML model or ontology or theory.

One example of something missing from both the US GAAP and IFRS conceptual frameworks is the "parts" of the "whole" notion of an economic entity.  Here on page 27 I point out that the Wiley GAAP Guide points out the inconsistencies related to the ASC use and definitions of the parts of an economic entity and goes as far as creating their own "taxonomy" to describe those parts.  Why would it not be a good thing that both the FASB and IASB (a) provide such breakdown of the part of an economic entity and (b) have consistent breakdowns of those parts given the global nature of many economic entities?

But pretty much the general ideas are the same and both US GAAP and IFRS follow the double-entry bookkeeping mathematical model and the accounting equation.

Here are some additional similarities:
  • Both US GAAP and IFRS have the notion of a "general purpose financial statement".
  • Both US GAAP and IFRS have the notion of a "fair" and "true" representation of reported financial information.
  • Both US GAAP and IFRS have the notion of a reporting "economic entity" that creates such general purpose financial statements.
  • Both US GAAP and IFRS have the notion of different categories of economic entities (a.k.a. industry sectors, sectors).
  • A general purpose financial statement is made up of the following financial statements:
    • Statement of financial position (a.k.a. balance sheet) describes the financial status or state of an economic entity.
    • Statement of financial performance (a.k.a. income statement, statement of profit and loss, statement of operations, statement of comprehensive income) describes the net income or comprehensive income of an economic entity.
    • Statement of changes in equity.
    • Statement of cash flows.
  • Both US GAAP and IFRS have the notion of "nature of business".
  • Both US GAAP and IFRS have the notion of "policies".
  • Both US GAAP and IFRS have the notion of "notes to the financial statements".
  • Both US GAAP and IFRS have the notion of "intermediate components" (a.k.a. the use of different totals and subtotals when aggregating reported information.
  • Both US GAAP and IFRS have the notion of "articulation" or the mathematical interrelationships between the different statement.
  • Both US GAAP and IFRS have the notion of fundamental "accounting principles" which they follow.
While neither US GAAP nor IFRS provide a complete, practical, unambiguous description of the general purpose financial report system in machine-readable form that is also readable by humans; that does not mean that such a description cannot be created.

The purpose of developing a machine-readable, global oriented, practical, financial reporting conceptual framework is to facilitate the development of computer systems that behave as if they "understand" the meaning of the language of business.  The framework provides what system developers need to provide what accountants, auditors, and analysts need from the software.

The objective is to remove brutal detailed work or "dirty-work" and other “friction” from accounting, reporting, auditing, and analysis enabling accountants to spend more time adding value and minimize the time doing what amounts to “grunt work”.  It is very possible to create a justifiable framework of financial reporting that is useful for constructing financial reports using artificial intelligence.

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