Economic Event

1. The REA Accounting and Economic Ontology and Its Use in E-commerce StandardsWilliam E. McCarthy – Michigan State UniversityPHONE: 517-432-2913 EMAIL: mccarth4@msu.edu • Much of the content of these slides comes from co-authored papers and my own standards group work with ebXML, the UN-CEFACT BP group, and the ISO Open-edi group, so the ideas are due to many people besides myself. These include Guido Geerts, Julie David, Bob Haugen, John Yunker, Jim Clark, Brian Hayes, Paul Levine, Jamie Clark, Dave Welsh, Karsten Riemer, Nita Sharma, Colin Clark, Nenad Ivezic, Katsuhiro Morita, Jake Knoppers, David Clemis, Hannu Pelkonen, Steve Mathews, and many others too numerous to mention. • These slides may be reproduced, but please do not change the contents or attributions.

2. Economic Resource Economic Event Economic Agent duality E A R • See Accounting Review article (July 1982) • See Issues in Accounting Education article (NOV 2003)

3. Economic Resource Economic Resource Economic Event Economic Agent Economic Agent Economic Event Economic Agent Economic Agent COOKIES ELMO SHIPMENT cookie monster INITIATING duality RESPONDING ELMO PAYMENT CASH cookie monster business process

4. Pattern: A prototypical constellation of objects • REA is an business process pattern • Can we standardize the world of ERP business objects and business object connections with a library of BP patterns ? • Can we standardize collaboration space with collaboration patterns ?

5. Evolutionary Tree – Enterprise Information Systems

6. business process business process A business process is a set of activities that takes one or more kinds of input and creates an output that is of greater value to the customer (Hammer) business process labor cash cash cookies Acquisition Cycle Conversion Cycle Revenue Cycle cookie ingredients value chain A value chain is a purposeful network of business processes aimed at assembling the individual components of a final product (i.e., its portfolio of attributes) of value to the customer (Porter) Definitions of Business Process and Value Chain

7. $$ $$ Cash payment Cash payment $$ raw materials $$ payment purchase logistical operation shipment labor labor labor acquire payment $$ manufactured goods facilities, services & technology labor material issue manufacture job manufacture operation service acquire payment sale payment labor $$ service operation service contract product services delivered raw materials $$ delivered manufactured goods Example Value Chain (source, make, deliver) _______ ______ ______

8. Collaboration Space Value Exchange Buyer Seller Third Party Concept of a Business Collaboration Source: ISO Open-edi

9. SELLER BUYER event stream pay deliver n-to-1 pay deliver 1-to-n pay deliver 1-to-1 pay deliver deliver return return fail to deliver delivery penalty pay fail to pay payment penalty pay

10. Type & Commitment Extensions

11. Named Set of Groups Abstraction Economic Agent Type Cashiers Salespeople Typification Tom Tom Dick Dick Ashley Ashley Salespeople Harry Harry Jane Jane Cashiers Group & Name Clusters Named Set of Objects Named Set of Objects with Labeled Clusters Knowledge Level Operational Level Economic Agents Source: Geerts and McCarthy, type paper

12. Economic Contract commitment to deliver reciprocal commitment to pay fulfills fulfills delivery duality payment Contract as a Bundle of Commitments Source: Geerts and McCarthy, ontology paper

13. Resource Type specifies Economic Commitment specifies Event Type specifies Business Role Source: Geerts and McCarthy, ontology paper

14. fulfills reciprocal Economic Resource Type Economic Event Type Economic Commitment specifies specifies specifies Role typifies typifies typifies Economic Resource Economic Event stockflow Economic Agent from to duality Exchange with Commitments and Types Source: Geerts and McCarthy, ontology paper

15. Business Transaction Economic Event Type Economic Resource Type reciprocal Economic Contract Partner governs Agreement typifies establish specifies specifies Business Role involves Economic Commitment specifies qualifies fulfills reserves typifies Regulator Economic Resource Economic Event stockflow Economic Agent from to constrains duality Third Party requires Bilateral Collaboration Mediated Collaboration participates ISO Open-edi Ontology Collaboration Model

16. Business Object State Machine Example skip

17. Business State Alignment • Means both trading partners must agree on the state of each Business Object at the end of each Business Event. • For example, the Order is not accepted until both partners agree explicitly that it is accepted. • The Business Transaction protocol must insure that both partners transition to the new Business State - or neither does. • Think “electronichandshake”. Source: ebXML BCP&MC

18. Planning: In the Planning Phase, both the buyer and seller are engaged in activities to decide what action to take for acquiring or selling a good, service, and/or right. • Identification: The Identification Phase pertains to all those actions or events whereby data is interchanged among potential buyers and sellers in order to establish a one-to-one linkage. • Negotiation: The Negotiation Phase pertains to all those actions and events involving the exchange of information following the Identification Phase where a potential buyer and seller have (1) identified the nature of good(s) and/or service(s) to be provided; and, (2) identified each other at a level of certainty. The process of negotiation is directed at achieving an explicit, mutually understood, and agreed upon goal of a business collaboration and associated terms and conditions. This may include such things as the detailed specification of the good, service, and/or right, quantity, pricing, after sales servicing, delivery requirements, financing, use of agents and/or third parties, etc. • Actualization: The Actualization Phase pertains to all activities or events necessary for the execution of the results of the negotiation for an actual business transaction. Normally the seller produces or assembles the goods, starts providing the services, prepares and completes the delivery of good, service, and/or right, etc., to the buyer as agreed according to the terms and conditions agreed upon at the termination of the Negotiation Phase. Likewise, the buyer begins the transfer of acceptable equivalent value, usually in money, to the seller providing the good, service, and/or right. • Post-Actualization: The Post-Actualization Phase includes all of the activities or events and associated exchanges of information that occur between the buyer and the seller after the agreed upon good, service, and/or right is deemed to have been delivered. These can be activities pertaining to warranty coverage, service after sales, post-sales financing such as monthly payments or other financial arrangements, consumer complaint handling and redress or some general post-actualization relationships between buyer and seller. • SOURCE: ISO FDIS 15944-1 – Operational Aspects of Open-edi for implementation ISO Open-edi Phases of a Business Transaction

19. Business Transaction Post Actualization Planning Negotiation Actualization Identification Corresponding Partners Identified Requiting Economic Event Complete Invoked Warranty Component Complete Economic Resource Type Identified Economic Contract Complete Phases of a Business Transaction and Object States for Completion

20. Planning Identification • Seller sends Catalog to Prospective Buyer • Buyer sends AvailabilityandPriceRequest to Supplier • Supplier returns AvailabilityandPriceResult to Buyer • Supplier sends OrderRequest to Buyer • Buyer sends Offer to Supplier • Supplier sends CounterOffer to Buyer • Buyer sends an OrderAcceptance to Supplier for parts • Seller sends an AdvanceShippingNotice when goods are prepared for shipping • Buyer sends ReceivingReport to Seller when inspected goods are accepted • Seller sends an Invoice to Buyer after parts are shipped • Buyer sends RemittanceAdvice to Seller with information about payment of the Invoice • Buyer sends WarrantyInvocation to Seller Negotiation Actualization Post-Actualization Business Events in an Example Business Transaction

21. Location Partner Business Event specifies In-Service regulate proposed in-force COMPLETED planned specified Economic Resource Type Economic Contract Business Transaction Agreement governs identified suspended aborted establish typifies specifies specified specified in-force specifies Location Type Economic Commitment Partner Type specifies reciprocal fully-specified specified fulfilled Economic Event Type typifies typifies fulfills typifies warranty used started identified Economic Resource resourceflow from Economic Event complete transferred started to complete Buyer sends AvailabilityandPriceRequest to Supplier Supplier returns AvailabilityandPriceResult to Buyer Buyer sends Offer to Supplier with proposed details of resource, location, event, & partner Seller accepts payment schedule, completing contract specification Buyer sends ReceivingReport to Seller when inspected goods are accepted Supplier sends counter-offer, acccepting resource and location and countering on event and partner Seller sends an Invoice to Buyer after parts are shipped Buyer sends WarrantyInvocation to Seller Buyer sends RemittanceAdvice to Seller with information about payment of the Invoice Buyer accepts details of counter-offer on shipment and proposes payment schedule Seller sends an AdvanceShippingNotice when goods are prepared for shipping Seller sends Catalog to Prospective Buyer site duality settles designated materialized Economic Claim realized settled State Model of Business Collaboration: post-actualization complete identification pending identification complete negotiation complete actualization complete actualization pending negotiation pending planning complete

22. Source: UN/CEFACT BETL

23. Issues & Problems • Formalization • Domain specific paper • Enterprise ontology • Collaboration space ontology • Extensions • Mediated collaborations ( = 2 ?) • Workflow & business events • States of objects • Controls & policies • Aggregate accounting and economic objects

24. A Customer B ProductSupplier C LogisticsVendor D Bank PO RA AA AdvanceShipNotice RA AdvanceShipNotice AA FundTransferAdvice AA FundsTransferNotice RA FreightOrder AA ShippingDocument AdvanceShipNotice RA ReceivingAdvice RA FundTransferAdvice AA FundsTransferNotice RA Source: David, Geerts and McCarthy

25. Mediated CollaborationsIS THE ANSWER ALWAYS = 2 ??- economically ?- accounting ?- legally ?- technically ?

26. Sample States for Business Objects

27. QUESTIONS ??

28. REA use in different standards

29. E-Commerce Collaboration Standards • ebXML– United Nations CEFACT (BP, catalog) • UN CEFACT (UMM), BOTL, BCP&MC, UBAC • ISO Open-edi • European Commission (ECIMF) • OAG ?? • Others – OMG, etc. ??

30. UMM metamodel Business Domain View (BDV) Business Area Process Area Business Process Business Requirements View (BRV) REA ONTOLOGY Agreement Business Collaboration (binary or multiparty) Partner Economic Resources Economic Event Business Transaction View (BTV) Requesting Business Activity Authorizing Roles Business Transaction Responding Business Activity Business Documents Business Service View (BSV) Requesting Service Transaction Business Messages Network Component Responding Service Transaction Source: ebXML TMWG

31. XBRL ebXML  XBRL COMPANY E COMPANY C Business Service Interface (BSI) Business Service Interface (BSI) XBRL G/L G/L External Report External Report External Report • Reporting Taxonomy: • Purchases – xx AccPay- xx • Reporting Taxonomy: • AccRec – xx Saies -- xx • COGS – zz FinGood– zz continuous without A=L+OE AccPay – xx Cash -- xx REA State Machine Cash – xx AccRec -- xx G/L G/L Company-neutral (but strictly-typed with REA) view of a business collaboration. For example: -ERP -SCM -etc. -Order -Fulfillment -Settlement REA contract/commitment (no account) REA initiator Economic Event REA responding Economic Event Source: J. David, G. Geerts & W. McCarthy