Financial Statement is a Formal Semantic Structure

A general purpose (or special purpose) financial statement is a formal semantic structure.  That formal semantic structure can be explained.  A conceptualization can be created which explains that formal semantic structure. Further, a representation in software (i.e. implementation) can be created per that conceptualization. (See the Triangle of Meaning for more information.)

To be clear; by general purpose financial statement I mean the complete set of primary financial statements, the policies, the disclosure notes, and any supplementary information included. The general purpose financial statement might be compiled, reviewed, or audited.

I have used TurboTax as an example of how something like a financial statement creation tool could be implemented in software.  These papers explain how this is done via TurboTax:

I have explained the conceptualization of a financial statement in my Logical Theory Describing Financial Report. I created a framework and method, which I call the Seattle Method, which can be used to create an implementation.  The Seattle Method was created by reverse engineering thousands of XBRL-based financial statements submitted by public companies to the U.S. Securities and Exchange Commission (SEC).

I have provided several reference financial reporting frameworks and sample financial statements using my Seattle Method.

In fact, you can use the Seattle Method to create an entire "closing book" (a.k.a. closing bundle), audit bundle, or financial analysis models.

All these new accounting, reporting, audit, and analysis tools are based on global open industry standards.

Financial reporting frameworks like US GAAP, IFRS, and others are very similar to the tax code in many ways.  Sure, there are differences; but there are also a lot of similarities.

Software can be used to prove whether a financial statement has been created consistently with the expected formal semantic structure of a financial statement.  This "expected formal semantic structure" is defined by a financial reporting framework, such as US GAAP, IFRS or other such reporting framework.  Internal management reporting or internal cost reporting frameworks can also be used, such as Activity Based Costing (ABC).  This can be achieved simply by representing financial reporting framework rules using some knowledge organization system (KOS) that is interpretable not only by humans, but also interpretable by machines.

Software does not tell you if the financial statement is "likely correct" or is "probably correct" or other type of confidence score; software proves that the financial statement is correct per a complete set of rules which are governed and which are consciously designed to minimize epistemic risk. This software will be as reliable and trustworthy as a calculator.

Again, not "likely correct" or "plausibly correct"; provably correct. Not a prediction, resolvable proof with a trail you can follow to see, verify, and understand the proof. You will get a formal, documented record just like that "tape" from a calculator.

That software you will be using is a semantic parser that understands the formal semantic structure of a financial statement.  The tool you will use is not like Microsoft Word or Excel which do not understand anything about financial statements at all. The software literally resolves the logic of the financial statement to determine if it is, in fact, logically consistent with what is expected.  That proof is based on evidence.

Here is a very, very simple example.  Here is the report.  Here is the evidence. (Admittedly, the evidence needs to be better organized and better synchronized to the actual report. Also, that set of evidence is only scratching the surface of what is possible.)


What is even cooler is that the formal semantic structure can be proven to be correct; it can also be reliably queried. Oh, and it can also be dynamically pivoted. And, it is re-composable. More on these things later.

Additional Information:

Comments

Post a Comment

Popular posts from this blog

Professional Study Group for Digital Financial Reporting

Image
Digital financial reporting is a thing.  The IFRS Foundation explains digital financial reporting  in an article, Digital Financial Reporting - Facilitating digital comparability and analysis of financial reports . OFFICIAL VERSION : The IFRS Foundation publishes an XBRL taxonomy for IFRS for SMEs (2024).  You can find official information about that XBRL taxonomy here on this web page, IFRS for SMEs as Published by IFRS Foundation (2024) . (Also see this PDF, IFRS Taxonomy Illustrated .) Since that official XBRL taxonomy is effectively a "pick list" created from the perspective of standards setters (i.e. not very practical, easy to use, and intended for ease of use by reporting economic entities);  ENHANCED VERSION : I have created an enhanced version of that same XBRL taxonomy, see  IFRS for SMEs 2024) - ENHANCED (Work in Progress) . The enhancements make the IFRS for SMEs XBRL taxonomy more useful in many different ways.  The enhancements are driven...
Read more

Big Idea for 2025: Semantic Accounting and Audit Working Papers

Image
I began my career in accounting in 1982 as an auditor with Price Waterhouse when accounting and audit working papers and schedules were 100% paper.  But within three months, I was creating many of those same working papers and schedules first in VisiCalc and then Lotus 1-2-3.  I would create those schedules and working papers electronically, then print them out, and tape them into the bundle of paper that supported our audits. The Compaq luggable computer was invented and electronic spreadsheets where even more compelling. Today, accounting and audit working papers tend to be 100% electronic proxies for those paper documents created in Excel or some other electronic spreadsheet, Word or some other word processing document, PDF generated from some word processing document, and maybe HTML.  All of these are presentation oriented proxies for documents and none of them is truly understandable by a computer based process. The next step in the evolution of accounting and audi...
Read more

Rethinking Financial Reporting: the Model-driven Financial Statement

Image
It is time to rethink the design of financial statements. Clay tablets worked well and they had a good run which ended many years ago when the clay tablets were replaced by papyrus and then ultimately paper.  Paper had a good run also but paper financial statements were ultimately replaced by what amounted to an electronic version of that paper; PDF, HTML, and such. We can do better.  Today's demands call for more modern accounting tools . Idealized design  (a.k.a. greenfield project ) is the notion of designing a system without imposing constraints of prior work.  This technique may, or may not, work for rethinking the financial statement. Idealized design might be a harder path in the short term, but taking this approach has very positive long term ramifications. Here are a number of ideas that I would throw at the wall if I were in charge of rethinking the financial statement to make such tools modern: Digital first : The first thing that I would do is abandon the...
Read more