Financial Statement Mechanics and Dynamics

A general purpose financial statement is a logic system designed by humans. As far as I know, there has been no theory, formal or informal, published that describes the mechanical aspects and dynamics of a general purpose financial report.

But in order to digitize a general purpose financial statement effectively, one does need a theory or theories to describe such mechanics and dynamics.

Here are a series of what I would call a necessary set of "micro-theories" that describe the important mechanics and dynamics of a financial statement.  Note that this set of micro-theories relates to the statement itself, not the financial reporting rules of the financial reporting scheme that describes the specific information contained in that such financial statements.  These micro-theories help one understand my Seattle Method for creating XBRL-based financial statements. This set of eight micro-theories is a minimum bar for any general purpose financial statement.

  • Theory of Physical Format Independence: A general purpose financial statement system is the same regardless of the physical format or medium used to instantiate that financial statement be it clay tablets, papyrus, paper, "e-paper", or semantic formats such as XBRL or RDF.
  • Theory of Mathematical Integrity: As accountants say, financial statements need to "foot" and "crosscast" and things need to "tick" and "tie". Always.
  • Theory of Model Structure: A financial statement has a describable model and that model is consistent for every financial statement.
  • Theory of Blocks: A financial statement can be viewed as a set of useful "information blocks" or simply blocks that contain the information within that financial statement.
  • Theory of Fundamental Accounting Concepts and Reporting Styles: A financial statement has a set of fundamental accounting concepts which act as "corner stones" or "key stones" of that financial statement.  While different reporting economic entities can have different sets of such corner stones or key stones; those different reporting economic entities can be grouped into reporting styles that use similar corner stones/key stones.
  • Theory of Types and Parts: Financial statement pieces are identifiable and can be categorized in to distinguishable types and parts.  There are known relationships between those types and parts.  Extension of those types and parts must be done to tie the new types and parts to existing types and parts.
  • Theory of Disclosures and Disclosure Mechanics: The information blocks contained within a financial statement can be identified as being a specific financial disclosure.  Each specific financial disclosure can be described by a set of disclosure mechanics rules that explains the essence of that disclosure.  If not specifically named and identified by some unique token, every disclosure can be identified using that disclosure mechanics information.
  • Theory of Reportability: There are known rules for when something needs to be included within a financial statement.  Not including something that should have been included is noncompliance.

Each of these theories has been proved between 2015 and 2018.  Today, there are multiple implementations of financial statements within software applications that operate per the above theories. A PROOF has been created and each of those software applications implement these theories consistently, interoperate with one another effectively, and provide what is expected in terms of a properly functioning financial statement. (Wachovia National Bank Example of XBRL-based Financial Report)


Charles Hoffman, CPA

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