2. 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 Bringing Accounting into the E-Commerce Age with REA-Based Collaboration Patterns and Monitored Commitments William E. McCarthy – Michigan State University electronic business XML

3. 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. Bringing Accounting into the E-Commerce Age with REA-Based Collaboration Patterns and Monitored Commitments Keynote address given on 1 July 2002 to The Accounting Information Systems Educators Association Copper Mountain, Colorado William E. McCarthy – Michigan State University

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

5. 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

6. cookie cashExchange or Transformation 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)

7. 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) ______ _______ Source: ebXML BP Catalog

8. delivered raw materials delivered manufactured goods $$ manufactured goods cash recsale Cash receipt Cash paymnt logistical operation shipment labor payment labor acquire labor facilities, services & technology payment service acquire manufacture job material issue manufacture operation $$ service contract service operation product services labor raw materials purchase payment $$ Example Value Chain (per Porter and SCOR) Source: ebXML BP Catalog

9. Economic Event Economic Agent Economic Resource duality 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.

10. INITIATING RESPONDING Economic Event Economic Agent Economic Resource Economic Event Economic Agent Economic Resource Source: G Geerts and W. McCarthy

11. Commitment & Type Extensions

12. cookie shipment commitment to ship Economic Contract cash payment executes commitment to pay Source: G Geerts and W. McCarthy

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

14. Types Economic Resource Economic Event Economic Agent Resource Type Event Type Agent Type Source: G Geerts and W. McCarthy

15. 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

16. 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))

17. 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

18. Negotiation Identification Planning Post-Actualization Actualization typification fulfillment Types of Resources & Agents Commitments for Types of Resources Economic Events with Resources & Agents Extended BP modelREA components Source: ISO Open-edi

19. 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.)

20. 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)

21. 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

22. 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

23. Business Event Type Business Event Economic Contract Commitment Economic Event reciprocityduality Claim Economic Agent Economic Resource Type Economic Resource typifies association characterization aggregate of executes terminatorinitiator governs formsstockflow reserves Agreement (contract or schedule) consists of typifies Business Process (exchange or conversion) materializes settles initiatorterminator involves accountability aggregate of Economic Agent Type typifies consumes scenario follows scenario participates scenario linkage characterization participates consumes Agreement Type (contract or schedule) typifies Business Process Type (exchange or conversion) typifies follows association Source: ISO Open-edi

24. ebXML -- 101

25. Between company interoperability Business Collaboration Business Transactions Business Documents Business Messages BP Source: ebXML BPSS

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

27. 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

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

29. Vision of ebXML Collaboration Process ElectronicBusinessCollaboration Process Definition Partner Discovery Partner Sign-Up Electronic Plug-in Process Execution Process Management Process Evolution Business Process, Core Components Collaboration Protocol Profile Collaboration Protocol Agreement Business Service Interface Transport/Routing/ Packaging, Collaboration Protocol Agreement Business Service Interface Business Process Management Process Reengineering Registry/ Repository Source: ebXML

30. Business Operations Map (BOM) Business Requirements View (BRV) Business Transaction View (BTV) Business Service View (BSV) ebXML Business Process & Information Meta-model (top-down controlled complexity) 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 Type Economic Resources Business Documents Business Area Source: ebXML TMWG

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

32. goods shipment commitment to ship Economic Contract cash payment fulfills duality commitment to pay reciprocal fulfills 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

33. goods shipment commitment to ship Economic Contract cash payment fulfills duality commitment to pay reciprocal fulfills 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

34. Business Process Business Process Business Process Business Process Business Process Business Process Independent view of Inter-enterprise events Enterprise Business Process Business Process Business Process Illustration of Perspective: Trading Partner vs. Independent 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

35. Business Objects and States (as embedded in COOL or the Commitment Oriented Orchestration Layer) 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 Source: ebXML BCP&MC

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

37. 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 “electronic handshake”. Source: ebXML BCP&MC

38. Business Operations Map (BOM) Business Requirements View (BRV) Business Transaction View (BTV) Business Service View (BSV) ebXML Business Process & Information Meta-model (top-down controlled complexity) 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 Type Economic Resources Business Documents Business Area Source: ebXML TMWG

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

40. Business Transaction Requesting Activity Responding Activity Request Document Response Document ReceiptAcknowledgment Signal AcceptanceAcknowledgment Signal SuccessFailure Unit of Work Non- Repudi ation Time-Outs Guards Legally Binding SignedReceipt Source: ebXML BPSS

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

42. ebXML Architecture Registries/ Repositories Core/Industry Components Business Documents CP Agreement Design Time Business Process Collaboration Protocol Profile Transport Message Business Service Interface Business Services/App’s Runtime Business Service Interface Business Services/App’s Business Libraries, Trading Partner Directories, etc… Source: ebXML

43. Repository Order pending Order Goods Order expectingDelivery Deliver Goods Business Process Catalog Business Entity Type Library CONTEXTCONTEXT Business Information Entities Source: ebXML BCP&MC

44. 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 reporting basis (see next slide for architecture).

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

46. ebXML & XBRL

47. 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  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

48. Evolutionary Tree – Enterprise Information Systems Source: J. David, W. McCarthy & B. Sommer