Financial Reporting Semantics
Optimally, the semantic profile of a business report should be symmetrical with the reality we are seeking to understand via some set of agreed axioms. If those axioms are not well considered, then we may be securing a suboptimal picture of reality via the information encoded into the report. With the advent of machine reasoning, particularly in the financial space, lack of semantic hygiene could have dire consequences.
Report semantics appear to have a dependency on the axioms used to approach the underlying activities of an entity executing financial actions.
Example of trading activities and their accounting system interactions -
Nouns used to report trade information -
Verb actions used to describe and record trade transactions -
debit(+) inventory, credit(-) creditors to recognise the purchase of a good with payment terms i.e. pay at end of month.
debit (+) debtors, credit (-) revenue , to recognise sale with monies to be receivable at some future date i.e. after 15 days.
and
credit(-) inventory, debit COGS to recognise the action of moving the inventory from the balance sheet to the profitLoss so that the representation in the profitLoss provides for a representation of revenue less cost of goods sold to allow derivation of gross profit from trading activities.
Example of investment activities and their accounting system interactions -
Nouns used to report investment information -
Verb actions used to describe and record investment transactions -
debit(Dr/+) investment, credit(Cr/-) loan to recognise investment secured with a debt.
debit (Dr/+) bank ,credit (Cr/-) gain/(loss) to recognise collection of monies on disposal of investment.
and
debit (Dr/+) gain/(loss), credit (Cr/-) investment to recognise the disposal of the investment.
At the intersect of XBRL and machine reasoning, domain experts are increasingly interested in refining both the semantics and syntax used for financial reporting.
While XBRL is a great advance in providing a machine-readable syntax for financial reporting, new technologies are being developed that have the potential to better align human and machine understanding. Such a technology is discussed in this video by Dr Robert Kowalski — Logical English.
Today, the same team that’s working on Logical English has developed Pacioli for the AuditChain Project. AuditChain is developing a unique approach to deploying decentralised reasoning engines and logical syntax for the purpose of offering a superior approach to financial audit.