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, K atsuhiro 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. The REA Accounting and Economic Ontology and Its Use in E-commerce Standards William E. McCarthy – Michigan State University PHONE:

Economic Event Economic Agent Economic Resource duality See Accounting Review article (July 1982) See Issues in Accounting Education article (NOV 2003)

INITIATING RESPONDING Economic Event Economic Agent Economic Resource Economic Event Economic Agent Economic Resource

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 ?

Evolutionary Tree – Enterprise Information Systems

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) 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 cookies Conversion Cycle labor cookie ingredients Acquisition Cycle Revenue Cycle cash business process value chain

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

BuyerSeller Third Party Collaboration Space Value Exchange Concept of a Business Collaboration Source: ISO Open-edi

event stream fail to pay pay deliver return fail to deliver pay SELLERBUYER

Type & Commitment Extensions

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

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

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

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

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

Business Object State Machine Example

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 electronic handshake. Source: ebXML BCP&MC

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 – Operational Aspects of Open-edi for implementation ISO Open-edi Phases of a Business Transaction

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

1.Seller sends Catalog to Prospective Buyer 2.Buyer sends AvailabilityandPriceRequest to Supplier 3.Supplier returns AvailabilityandPriceResult to Buyer 4.Supplier sends OrderRequest to Buyer 5.Buyer sends Offer to Supplier 6.Supplier sends CounterOffer to Buyer 7.Buyer sends an OrderAcceptance to Supplier for parts 8.Seller sends an AdvanceShippingNotice when goods are prepared for shipping 9.Buyer sends ReceivingReport to Seller when inspected goods are accepted 10.Seller sends an Invoice to Buyer after parts are shipped 11.Buyer sends RemittanceAdvice to Seller with information about payment of the Invoice 12.Buyer sends WarrantyInvocation to Seller Business Events in an Example Business Transaction

State Model of Business Collaboration: Economic Event Economic Resource Partner resourceflow site from to Economic Claim Economic Contract Economic Commitment settles fulfills establish Location duality Agreement Economic Resource Type Location Type typifies specifies Economic Event Type Partner Type specifies typifies Business Transaction governs regulate reciprocal Business Event Seller sends Catalog to Prospective Buyer Buyer sends AvailabilityandPriceRequest to Supplier Supplier returns AvailabilityandPriceResult to Buyer Buyer sends Offer to Supplier with proposed details of resource, location, event, & partner Supplier sends counter-offer, acccepting resource and location and countering on event and partner Buyer accepts details of counter-offer on shipment and proposes payment schedule 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 Seller accepts payment schedule, completing contract specification

Source: UN/CEFACT BETL

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

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

Mediated Collaborations IS THE ANSWER ALWAYS = 2 ?? - economically ? - accounting ? - legally ? - technically ?

Sample Business Object Example States for Business Object Business Transaction Waiting-Start In-Service Completed Aborted Suspended Economic Claim Materialized Settled Economic Resource Type Planned Identified Proposed Specified Substituted Business Transaction Phase Pending In-Service Complete Sample States for Business Objects

REA use in different standards

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. ??

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

COMPANY E Business Service Interface (BSI) COMPANY C Reporting Taxonomy: Purchases – xx AccPay- xx Reporting Taxonomy: AccRec – xx Saies -- xx COGS – zz FinGood– zz Company-neutral (but strictly-typed with REA) view of a business collaboration. For example: -Order -Fulfillment -Settlement XBRL ebXML XBRL ebXML Cash – xx AccRec -- xx AccPay – xx Cash -- xx REA contract/commitment (no account) REA initiator Economic Event REA responding Economic Event External Report Source: J. David, G. Geerts & W. McCarthy REA State Machine