AIS Scope Business Processes and Value Chains Commitments and Types

1. Bringing Accounting into the E-Commerce Age with REA-Based Collaboration Patterns and Monitored CommitmentsWilliam E. McCarthy – Michigan State University • AIS Scope • Business Processes and Value Chains • Commitments and Types • E-Commerce Collaboration Standards • ebXML • REA’s Importance in a Wider Accounting Context • Range of Accounting Systems electronic business XML

2. Bringing Accounting into the E-Commerce Age with REA-Based Collaboration Patterns and Monitored CommitmentsKeynote address given on 1 July 2002 to The Accounting Information Systems Educators Association Copper Mountain, ColoradoWilliam E. McCarthy – Michigan State University • Much of the content of these slides comes from co-authored papers and my own standards group work with the UN-CEFACT ebXML group and the ISO Open-edi groups, 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, Nenad Ivezic, Colin Clark, Katsuhiro Morita, Jake Knoppers, and many others too numerous to mention. • These slides may be reproduced, but please do not change the contents or attributions.

3. Management Science • Behavioral & Organizational Science • Supply Chain • Computer Science MANAGEMENT INFORMATION SYSTEMS Distinguishing Feature = Transaction Processing for Accountability Purposes (original REA) ACCOUNTING INFORMATION SYSTEMS • Financial Reporting • Managerial Decision Making • Auditing & Control • Taxation ACCOUNTING Extending the Scope of AIS Extend with Commitments and Types for Planning & Policy Purposes Source: JIS editorial, 1989

4. EXAMPLE BUSINESS PARTNERS • Company C is “Cookie Monster” or an instance of Customer at the end of a supply chain in the e-marketplace for cookies • Company E is “Elmo” or an instance of an Entrepreneur who acquires the factors of production (cookie dough, chocolate chips) in the e-marketplace, converts them internally to a final product of cookies, and then sells them in the e-marketplace • Company K is “Kermit” or an instance of a Komponent Supplier who takes agricultural essentials like wheat or cocoa beans, converts them into the components of cookies like cookie dough or chocolate chips, and then supplies those components to cookie manufacturing entrepreneurs in the e-marketplace Source: Muppet site

5. cookie Exchange or Transformation cash BUSINESS PROCESS DEFINITION: A business process is a set of activities that takes one or more types of inputs and turns them into an output of greater value to the customer (Hammer)

6. $$ $$ 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) _______ ______ ______ Source: ebXML BP Catalog

7. $$ $$ Cash receipt Cash paymnt $$ raw materials $$ payment purchase logistical operation shipment labor labor labor acquire payment $$ manufactured goods facilities, services & technology labor material issue manufacture job manufacture operation service acquire payment sale cash rec labor $$ service operation service contract product services financing procurement transportation human resources delivered raw materials $$ manufacturing delivered manufactured goods procurement EXPLODE marketing & sales customer service Example Value Chain (per Porter and SCOR) Source: ebXML BP Catalog

8. Economic Resource Economic Event Economic Agent duality Business Process Pattern R E A Source: W. E. McCarthy “The REA Accounting Model: A Generalized Framework for Accounting Systems in a Shared Data Environment,”The Accounting Review, July 1982, pp 554-78.

9. Economic Resource Economic Resource Economic Agent Economic Agent Economic Agent Economic Event Economic Event Economic Agent COOKIES ELMO SHIPMENT cookie monster INITIATING duality RESPONDING ELMO PAYMENT CASH cookie monster business process Source: G Geerts and W. McCarthy

10. Commitment & Type Extensions

11. Economic Contract commitment to ship commitment to pay cookie shipment cash payment Contract as a bundle of commitments reciprocal executes executes duality Source: G Geerts and W. McCarthy

12. cocoa beans to chocolate chips cookies Cash payment Cash payment Cash payment shipment shipment shipment Recipe step Batch run walnuts cookie dough labor Kermit Cookie Monster PULL PULL ELMO PULL-PULL PULL chocolate chips cookies Cookie Supply Chain Source: R. Haugen and W. McCarthy

13. Event Type Agent Type Resource Type Economic Resource Economic Event Economic Agent Types type connections = policy & planning Source: G Geerts and W. McCarthy

14. Examples of Type Images (typification) • Resources like cookies can be classified into different groups with varying shelf lives • Events like sales can be grouped into types like retail or wholesale with different price structures • Agents like customers can be typed into groups like intermediaries or end users with different certification requirements

15. Two Kinds of Business Modeling • Descriptive: This illustrates what is actually occurring (OLD ACCOUNTING) • Prescriptive: This illustrates what could be or should be occurring (NEW ACCOUNTING (some progress)) Names for e-commerce prescriptions: (1) Business scenarios (Open-edi) (2) Collaboration patterns (ebXML)

16. Some Proposed Collaboration Patterns • Negotiation • Order-Fulfillment-Settlement • E.G. 2/10 net 30, FOB source • Long Term Contract with Periodic Releases • Escalating Commitments • Supplier Cascade • Drop Shipment • International Payment and Shipment Source: ebXML BCP&MC

17. Extended BP model REA components Planning Types of Resources & Agents Identification typification Commitments for Types of Resources Negotiation fulfillment Actualization Economic Events with Resources & Agents Post-Actualization NEW ACCOUNTING OLD ACCOUNTING Source: ISO Open-edi

18. E-Commerce Collaboration Standards • ebXML (electronic business XML) – United Nations CEFACT and Oasis • eBTWG – UN CEFACT • UBL – OASIS (nee xCBL from CommerceOne) • ISO Open-edi • European Commission (ECIMF) • Others – BPML, RosettaNet etc. • Industry Specific (AIAG, Odette, etc.)

19. Electronic Collaboration – Old (bottom-up) and New (top-down) • OLD technology is EDI (electronic data interchange) • EDI has standard documents or transaction sets @ to X12 (American) or EDIFACT (everywhere else) • NEW technology is XML • Bottom-up xCBL or UBL (don’t throw away EDI legacy) • Top-down ebXML BCP&MC (let’s innovate with full support for business process semantics)

20. XML standards groups • XML is always the foundation technology • Establishes the rules & syntax • XML standards are essentially agreements among groups of people in a domain that define an XML tag set and a Schema for a particular purpose (a.k.a. “vocabularies”) • XBRL (eXtensible Business Reporting Language) • ebXML (electronic business XML) • Ontologies & Taxonomies are implemented as specific interpretations or classes of XML standards (e.g., REA accounting ontology or the US commercial-industrial taxonomy for financial reporting) • Instance documents are actual documents using a particular ontology or taxonomy

21. Ontology • “A specification of a conceptualization” Gruber • A listing of the categories or classes in a certain domain and the ways they relate to each other

22. follows scenario Business Event Economic Contract Economic Event Economic Resource Business Event Type Economic Agent Type Economic Resource Type Commitment reciprocity duality consumes scenario participates scenario association characterization typifies typifies typifies follows linkage characterization participates association consumes Economic Agent typifies Agreement Type (contract or schedule) stockflow forms involves consists of accountability Agreement(contract or schedule) governs materializes executes aggregate of settles Claim aggregate of initiator terminator initiator terminator REA ontology Business Process (exchange or conversion) aggregate of Business Process Type (exchange or conversion) reserves typifies Source: ISO Open-edi

23. ebXML -- 101

24. BP Business Collaboration Business Transactions Business Documents Business Messages Between company interoperability REA level Source: ebXML BPSS

25. C Customer E ProductSupplier X LogisticsVendor Y Bank PO RA AA AdvanceShipNotice RA AdvanceShipNotice AA FundTransferAdvice AA FundsTransferNotice RA FreightOrder AA ShippingDocument AdvanceShipNotice RA ReceivingAdvice RA FundTransferAdvice AA FundsTransferNotice RA Business Process: MultiParty Collaboration Source: ebXML BPSS

26. ebXML vision • A global electronic market place where enterprises of any size, anywhere can: • Find each other electronically • Conduct business through the exchange of XML based messages • Using standard message structures • According to standard business process sequences • With clear business semantics • According to standard or mutually agreed trading partner agreements • Using off the shelf purchased business applications • TEAMS: BP, CC, TP, security, messaging services, architecture, QC, etc. Source: ebXML

27. XML Business Scenarios Business Profiles ebXML Registry ebXML compliant system Collaborative Process – Interactions 1 Collaboration Protocol Profiles, Business Process Models (BPSS) XML XML Business Scenarios Business Scenarios 1 1 1 COMPANY E Business Profiles Business Profiles Request Business Details Request Business Details Request Business Details 2 2 2 Build Local System Build Local System Build Local System 3 Collaboration Protocol Profiles Implementation Implementation Implementation ebXML ebXML 3 3 3 Register Implementation Details Register Implementation Details Register Implementation Details Registry Registry Register COMPANY A Profile Register COMPANY A Profile Register COMPANY A Profile 4 Collaboration Protocol Profiles, Business Process Models (BPSS) Download Download Download 4 4 4 Query about COMPANY profile Query about COMPANY A profile Query about COMPANY A profile Agree on Business Arrangement Agree on Business Arrangement Agree on Business Arrangement Scenarios and Profiles Scenarios and Profiles Scenarios and Profiles 5 5 5 5 Collaboration Protocol Agreement DO BUSINESS TRANSACTIONS DO BUSINESS TRANSACTIONS DO BUSINESS TRANSACTIONS 6 6 6 COMPANY C ebXML ebXML compliant compliant system system Source: ebXML

28. Process Definition Business Process,Core Components Registry/Repository Process Evolution Partner Discovery ProcessReengineering Electronic Business Collaboration CollaborationProtocol Profile Process Management Partner Sign-Up BusinessProcess Management CollaborationProtocol Agreement Process Execution Electronic Plug-in Business ServiceInterface Transport/Routing/ Packaging, Collaboration Protocol AgreementBusiness Service Interface Vision of ebXML Collaboration Process Source: ebXML

29. ebXML Business Process & Information Meta-model (top-down controlled complexity) Business Operations Map (BOM) Porter Value Chain Business Area Process Area Business Process Business Requirements View (BRV) Agreement Business Collaboration (binary or multiparty) Partner Type REA ONTOLOGY 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

30. BRV Collaboration Semantics some simple examples ---> Business Object produce Business Collaboration Use Case e.g. Fowler consume <<pattern>> Business Collaboration Analysis Pattern realization realization BRV implements Monitored Commitment elaboration Economic Resource Business Collaboration elaboration <<pattern>> Business Collaboration Design Pattern BTV implements Economic Event Agreement Economic Commitment Economic Contract e.g. Gamma Monitored Commitment is visibility of events associated with a commitment Source: ebXML BCP&MC

31. Economic Contract commitment to ship commitment to pay goods shipment cash payment party E party C reciprocal fulfills fulfills duality • E & C agree to a contract where ship on Tuesday, pay on Wednesday • E ships on Tuesday (commitment to pay in force upon acceptable receipt, claim may be materialized). However, discount is taken, so commitment to pay is less than scheduled amount • C pays discounted amount on Wednesday Source: ebXML BCP&MC

32. Economic Contract commitment to ship commitment to pay goods shipment cash payment party E party C reciprocal fulfills fulfills duality • E & C agree to a contract where pay on Tuesday, ship on Wednesday • C pays on Tuesday (claim may be materialized) • E ships on Thursday thus invoking $20 penalty • C notifies E that commitment to ship not fulfilled in full as unacceptable timing (materialized claim is reduced to $20) • E now pays $20 Source: ebXML BCP&MC

33. Business Process Business Process Business Process Business Process Business Process Business Process Business Process Business Process Business Process Illustration of Perspective: Trading Partner vs. Independent Enterprise Independent view of Inter-enterprise events Enterprise Enterprise Trading Partner view of Inter-enterprise events (upstream vendors and downstream customers) Blue arrows represent flow of goods, services, and cash between different companies; green arrows represent flows within companies Source: ISO Open-edi

34. Business Objects are the “nouns” of business deals: Examples: Products, Orders, Shipments, etc. (REAs) Business States are named states of Business Objects which affect both trading partners to which both partners must agree which mean the whole business deal has changed in an important way. Examples: Order.accepted, Order.rejected, Order.fulfilled, Order.cancelled Business Objects and States (as embedded in COOL or the Commitment Oriented Orchestration Layer) Source: ebXML BCP&MC

35. BRV collaboration semantics of COOLare based on business concepts and practices: • Accounting “Events” per REA • Commercial law • Contract negotiation and execution • International Trade Source: ebXML BCP&MC

36. Business State Alignment • Means both trading partners must agree on the state of each Business Object at the end of each Business Transaction. • 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

37. ebXML Business Process & Information Meta-model (top-down controlled complexity) Business Operations Map (BOM) Business Area Process Area Business Process Business Requirements View (BRV) Agreement Business Collaboration (binary or multiparty) Partner Type 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

38. Business Process: Binary Collaboration Public Buyer Party Seller Party CatalogReq Business Transaction CatalogRsp QuoteReq Business Transaction QuoteRsp Business Collaboration Order Business Transaction OrderRsp ASN Business Transaction Invoice Business Transaction Payment Business Transaction Source: ebXML BPSS

39. Unit of Work Non-Repudiation Non-Repudiation Success Failure Business Transaction Requesting Activity Responding Activity Request Document SignedReceipt ReceiptAcknowledgment Signal AcceptanceAcknowledgment Signal Response Document Time-Outs Guards Legally Binding Source: ebXML BPSS

40. Business Transaction Execution Parameters Overview: ebXML SpecificationSchema Multi Party Collaboration Authorized Role Binary Collaboration Transition Guard Choreography Request Document Business Transaction Response Document Source: ebXML BPSS

41. ebXML Architecture BusinessDocuments Core/IndustryComponents BusinessProcess Design Time Business Libraries, Trading Partner Directories, etc… Registries/Repositories CollaborationProtocolProfile CollaborationProtocolProfile CP Agreement BusinessServiceInterface BusinessServiceInterface Transport Message Runtime BusinessServices/App’s BusinessServices/App’s Source: ebXML

42. Repository Order pending Business Process Catalog C O N T E X T Order Goods Business Entity Type Library Order expectingDelivery Business Information Entities Deliver Goods Source: ebXML BCP&MC

43. Why are leveled and semantically-precise value chain & supply chain models important ? (WHY are REA patterns important ?) • They provide automatically the detailed economic semantics of the common order-deliver-settlement patterns of e-commerce to the collaboration management software (as explained above); • They provide the basis for integrating the descriptive components of old accounting (expanded to commitments and multiple non-monetary dimensions) with the prescriptive components of new accounting; and • They provide the basis for representing the “economic events” of an enterprise with no double-entry (A= L + OE classification) spin to both upstream parties (capital, labor, and raw material suppliers) and downstream parties (customers) on a continuous reportingbasis (see next slide for architecture).

44. Accounting Knowledge Traditional Accounting System { Accounts Receivable Old Accounting EDGAR FILES Job Costing Inventory SEC Filing FSA General Ledger Order Entry Payroll Uses Present Use Path Systems Analysis & Design Real World Financial Decision Makers { New Accounting Knowledge-Based Decision Support System Uses Object-Object Connection Value-Added Processing Object Enterprise Model SOURCE: G. Geerts and W.E. McCarthy “An Accounting Object Infrastructure for Knowledge-Based Enterprise Models” IEEE Intelligent Systems, July/August 1999, p.92.

45. ebXML & XBRL

46. 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 without A=L+OE view AccPay – xx Cash -- xx 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

47. <----------- old accounting REA with value chain Evolutionary Tree – Enterprise Information Systems REA with BCP&MC = the entire range of systems Source: J. David, W. McCarthy & B. Sommer

48. QUESTIONS ??