Theory of the Financial Reporting Framework

This article describes the Theory of the Financial Reporting Framework.  A general purpose financial statement is a formal semantic structure.  That formal semantic structure of such a general purpose financial statement is described by the accounting equation and double entry bookkeeping model and a reporting framework.  It is that double entry bookkeeping model which differentiates "bookkeeping" from  general "recordkeeping".  This is part of the essence of accounting.

To the untrained eye, it might not look like it; but a financial reporting framework fundamentally prescribes where information from a set of business events must be reported within a financial statement. Both the Theory of Accounting and Control, Resources, Events, Agents (REA), and ISO/IEC Accounting and Economic Ontology point this out.

In order to achieve comparability across many different reporting economic entities with consistency in terms of applying a reporting framework; a financial reporting framework describes, currently in the form of a written text document of some sort, the predefined standard basic line items, the predefined standard superordinate categories, and the permitted styles of organizing those superordinate categories. Per the rules of classification; the pattern of classification is made known and for such financial reporting frameworks; because they are "financial" they must comply with the double entry bookkeeping mathematical model and some version of the fundamental accounting equation; everything must fit into that well understood model.  A reporting economic entity effectively maps its chart of accounts and the results of its business events into this scheme. A set of journals and ledgers are used to record transactions to facilitate this process.

A financial statement is a navigable graph of meaning once you have the structural insight.  The double entry bookkeeping model, the accounting equation, and the financial reporting framework used to create the financial statement provides the details that make up that structural insight.

Saying this another way; a financial statement has regularity which can be exploited.

Specifically, a general purpose financial statement explains the state (i.e. balance sheet) and changes in state (i.e. income statement, cash flow statement, statement of changes in equity) of the reporting economic entity.  That is the summary of information that resulted from business events.

The detailed information about business events is standardized into an organized set of financial statement line items that resolve to the accounting equation: "Assets = Liabilities + Equity" a.k.a. "Resources = Obligations to Third Parties + Obligations to Owners". Those Assets, Liabilities, and Equity are decomposable into standardized subordinate and superordinate subcategories and standardized basic line items to enable cross economic entity comparison of those business events with consistency.

Financial statement classification follows a pattern of classification: superordinate, basic, subordinate. Classifications for both state and changes in state work this way.  Information about business events is provided via financial statements created using standard reporting frameworks such as US GAAP or IFRS. 

Information is traceable and trackable from source/origin to destination; or destination back to source/origin. Information forms a chain.  From journal to ledger to trial balance to report writer to financial statement to financial analysis model.  Techniques (i.e. Lean, Agile, Six Sigma) can be used to mistake proof the chain. Industrial processes can be created.

Rather than articulating a financial reporting framework as a book, a financial reporting framework can be articulated as a model.  That model has a controlled vocabulary of elements, connections between the elements, structures, conditions, and facts.

So, something that used to look like this: (here are more examples)

Would now look more like this: (this shows only a portion of the reporting framework model)

And so, creating models for a reporting framework allow for more unprecedented clarity. In fact, a virtuous cycle is possible. There are many different approaches to creating a model such as the competency question approach.

What will happen to the financial statement and other accounting, reporting, audit, and analysis artifacts is similar to what happened to blueprints in the 1980s with CAD/CAM and again in the 1990s with BIM.

The Theory of the Financial Reporting Framework is part of the Metatheory which describes Financial Statement Mechanics and Dynamics.

With this Theory of the Financial Reporting Framework, financial reporting frameworks can be created to enable the creation of digital financial statements.

Additional Information:


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