Conceptual 2015

The Conceptual Framework for Financial
Reporting Represented in a Formal

Language
by
Marthinus Cornelius Gerber
Dissertation presented in fulfilment of the requirements for the degree
Doctor of Philosophy (Ph.D.): Accounting Sciences
in the
FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES
at the
UNIVERSITY OF PRETORIA
Supervisor:
Prof A.J. van der Merwe
Department of Informatics, University of Pretoria
Co-supervisor:
Prof N. Stegmann
Accountancy Department, University of Johannesburg
Date of submission
15 September 2015
DECLARATION
By submitting this dissertation, I Marthinus Cornelius Gerber declare that the entirety of the
work contained therein is my own, original work, that I am the sole author thereof (save to
the extent explicitly otherwise stated), that reproduction and publication thereof by the
University of Pretoria will not infringe any third party rights and that I have not previously in
its entirety or in part submitted it for obtaining any qualification.
Date: .15 September 2015
ii
ACKNOWLEDGEMENTS
I would like to express my sincere gratitude and appreciation to the following people whose
support, assistance and contributions made this study possible:
• To Prof Alta van der Merwe, for your supervision, guidance, inputs, collaborative spirit
and support throughout this research project. Your inputs in the research project are
highly appreciated;
• To Prof Nerine Stegmann, for all your time and expertise to guide and advise me to
ensure a better product;
• To Prof Aurona Gerber, as technical advisor in your role as ontology engineer. The
numerous discussions and your inputs during the research process made this study a
very enriching and informative journey. Your alternative perspectives made an
indispensable contribution to the end result;
• To Prof Jean Myburgh and Prof Stella Nkomo for your assistance and support to make
the time and funds available to conduct this study;
• To Berdine Smit for the highly professional editing of the final document under immense
time pressure.
Dan ook:
• Aan my vrou vir haar geduld, bystand en opoffering in die tye wat die moedeloosheid my
beetgepak het. Niemand anders verstaan hierdie paadjie beter as jy nie;
• Aan my twee dogters Aurona en Ané vir die tyd wat julle bereid was om af te staan dat
ek aan hierdie papier kan werk;
• Aan my ouers wat nooit die finale produk sal beleef nie. Julle onwrikbare vertroue in my
en voorbeeld deur die jare het veroorsaak dat tou opgooi nooit ‘n opsie was nie.
iii
TABLE OF CONTENTS
DECLARATION ..................................................................................................................... ii
ACKNOWLEDGEMENTS ..................................................................................................... iii
TABLE OF CONTENTS ....................................................................................................... iv
ABBREVIATIONS ................................................................................................................. x
DEFINITION OF TERMS ..................................................................................................... xii
LIST OF FIGURES ............................................................................................................. xiii
LIST OF TABLES ............................................................................................................... xvi
ABSTRACT ....................................................................................................................... xvii
SAMEVATTING ................................................................................................................ xviii
1 INTRODUCTION ........................................................................................................ 2
1.1 Introduction ................................................................................................................. 3
1.2 Background ................................................................................................................ 4
1.3 Research Problem ...................................................................................................... 6
1.4 Research Objective and Research Questions............................................................. 6
1.5 Research Design ........................................................................................................ 7
1.6 Assumptions ............................................................................................................... 9
1.7 Scope, Delineation and Limitation............................................................................. 10
1.8 Contributions ............................................................................................................ 10
1.9 Publications from this study ...................................................................................... 11
1.10 The Structure of the Research Project ...................................................................... 11
2 HISTORY OF THE DEVELOPMENT OF THE CONCEPTUAL FRAMEWORK

FOR FINANCIAL REPORTING (CFfFR) .................................................................. 17
2.1 Introduction ............................................................................................................... 17
2.2 Pre-capitalist Period, 4000 B.C. to 1000 A.D. ........................................................... 17
2.2.1 Public Economy, 4000 B.C. to 700 B.C..................................................................... 17
2.2.2 Feudal System, 700 B.C. to 1000 A.D. ..................................................................... 23
2.3 Commercial Capitalism, 1000 to 1760 ...................................................................... 26
2.3.1 Exchange Economy, 1000 to 1500 ........................................................................... 26
2.3.2 Entrepreneur and Continuity of Business, 1500 to 1760 ........................................... 30
2.4 Industrial Capitalism, 1760 to 1830 ........................................................................... 33
2.4.1 Demand for Capital and Capital Maintenance ........................................................... 33
2.4.2 Demand for Accountability and the Double-entry System ......................................... 34
2.4.3 Demand for Financial Reports .................................................................................. 34
2.5 Financial Capitalism: Return on Capital Invested 1830 to 1900 ................................ 35
2.5.1 Unregulated Financial Reporting............................................................................... 35
2.5.2 Demand for Regulation ............................................................................................. 36
2.6 Financial Capitalism: Corporate Capitalism and Verifiability, 1901 to 1938 ............... 39
2.6.1 Financial Reporting Unregulated............................................................................... 39
2.6.2 Development of the Accounting Profession .............................................................. 41
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2.7 Financial Capitalism: Professional Bodies’ Search for Principles, 1938 to 1973........ 44
2.7.1 Pressure from the SEC ............................................................................................. 44
2.7.2 Formation of the FASB ............................................................................................. 47
2.8 Financial Capitalism: Global Capital Markets: 1973 to the Present ........................... 53
2.8.1 Financial Capitalism: The Conceptual Framework (FASB), 1973 to 1999 ................. 54
2.8.2 Financial Capitalism: The Conceptual Framework in Europe, 1973 to 2002 ............. 56
2.8.3 Financial Capitalism: The Joint FASB and IASB Conceptual Framework Project,
2002 to 2010............................................................................................................. 60
2.9 Summary of the Historical Development of the IASB’s CFfFR .................................. 65
2.10 A Global CFfFR: A Wicket Problem .......................................................................... 76
2.11 Conclusion ................................................................................................................ 77
3 RESEARCH METHODOLOGY AND RESEARCH PLAN ........................................ 82

3.1 Introduction ............................................................................................................... 82
3.2 Research Problem and Research Questions ............................................................ 83
3.3 Philosophy: Ontological View of Reality and Axiological Implication ......................... 84
3.3.1 Pragmatism .............................................................................................................. 84
3.3.2 Positivism ................................................................................................................. 84
3.3.3 Realism .................................................................................................................... 85
3.3.4 Interpretivism ............................................................................................................ 85
3.3.5 Philosophy Used in This Study ................................................................................. 86
3.4 Research Approaches .............................................................................................. 87
3.4.1 Deductive ................................................................................................................. 87
3.4.2 Inductive ................................................................................................................... 87
3.4.3 Abductive .................................................................................................................. 88
3.4.4 Research Approaches Used in This Study................................................................ 88
3.5 Methodological Choice ............................................................................................. 90
3.6 Research Strategy .................................................................................................... 90
3.6.1 DSR as Research Strategy: The Main DSR Cycle .................................................... 93
3.6.2 DSR Cycle 1: Requirements of a Global CFfFR........................................................ 95
3.6.3 DSR Cycle 2: The Role of a Global CFfFR as a Model ............................................. 96
3.6.4 DSR Cycle 3: Ontologies and Financial Reporting .................................................... 97
3.6.5 DSR Cycle 4: A Formal Domain Ontology of the CFfFR ........................................... 98
3.7 Time Horizon .......................................................................................................... 101
3.8 Research Techniques and Procedures ................................................................... 101
3.8.1 Systematic Review ................................................................................................. 102
3.8.2 Interdisciplinary Research....................................................................................... 106
3.8.3 Ontology Technologies: The OLC Model ................................................................ 108
3.9 Knowledge Contribution and Verification ................................................................ 114
3.10 Limitations .............................................................................................................. 120
3.11 Conclusion .............................................................................................................. 120
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4 REQUIREMENTS OF A GLOBAL CFfFR .............................................................. 127
4.1 Introduction ............................................................................................................. 128
4.2 Data Collection Method: Systematic Review Protocol ............................................. 130
PART A: DATA COLLECTION PROCESS

4.3 The Need for a Conceptual Framework in a Global Economy................................. 135
4.3.1 Foundation for the Development of the CFfFR – 1960s .......................................... 136
4.3.2 Practical and Political Reasons ............................................................................... 136
4.3.3 Functional and Technical Reasons ......................................................................... 142
4.3.4 Teleological Principle .............................................................................................. 144
4.3.5 Pedagogic, Information and Justification Functions ................................................ 145
4.3.6 Need According to FASB ........................................................................................ 146
4.4 The Purpose of a Conceptual Framework for Financial Reporting .......................... 147
4.4.1 The Purpose According to the FASB Conceptual Framework ................................. 147
4.4.2 The Purpose of the CFfFR According to IASB ........................................................ 147
4.5 The Objective of a Conceptual Framework in Accounting ....................................... 148
4.5.1 Objective Approaches............................................................................................. 149
PART B: DATA COLLECTED - ABSTRACTION OF REQUIREMENTS AND DEFINITION

4.6 Characteristics and Requirements of a Global CFfFR............................................. 152
4.6.1 Category 1: Characteristics and Perceptions .......................................................... 152
4.6.2 Category 2: Content Requirements of a Global CFfFR ........................................... 153
4.7 A Proposed Definition for a Global CFfFR .............................................................. 156
4.8 Evaluation of the CFfFR Against the Requirements of a Global CFfFR................... 158
4.8.1 Complete and Comprehensive ............................................................................... 159
4.8.2 Internally Coherent ................................................................................................. 159
4.8.3 Clear and Unambiguous Formulation ..................................................................... 160
4.8.4 Logically Consistent ................................................................................................ 160
4.9 Conclusion .............................................................................................................. 161
5 THE ROLE OF A GLOBAL CFfFR AS A MODEL ................................................. 163

5.1 Introduction ............................................................................................................. 164
5.2 Models in Philosophy of Science ............................................................................ 166
5.2.1 Models as Isolations by Idealisation ........................................................................ 168
5.2.2 Models as Representations by Surrogate Systems ................................................. 169
5.2.3 Models as Truth Containers .................................................................................... 173
5.2.4 The Model Formula Applied to the CFfFR............................................................... 174
5.3 Models in Computing .............................................................................................. 176
5.3.1 Definitions and Characteristics of Models in Computing ......................................... 177
5.3.2 The Value of Models in Computing ......................................................................... 179
5.3.3 Computing Models Applied to Accounting............................................................... 180
5.3.4 Financial Reporting as Type and Token Models ..................................................... 181
5.3.5 Metamodels and Meta-metamodels Applied to the CFfFR ...................................... 185
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5.4 Idealised Assumptions ............................................................................................ 190
5.4.1 Idealised Assumptions Identified in Chapter 2 ........................................................ 190
5.4.3 Idealised Assumptions Summarised from Models and Financial Reporting in
Chapter 5................................................................................................................ 191
5.5 Knowledge Contribution .......................................................................................... 192
5.6 Conclusion .............................................................................................................. 192
6 ONTOLOGIES AND FINANCIAL REPORTING ..................................................... 195

6.1 Introduction ............................................................................................................. 196
6.2 Ontology in Philosophy ........................................................................................... 198
6.2.1 Background on Ontology in Philosophy .................................................................. 198
6.2.2 Formal Language and Ontology ............................................................................. 205
6.2.3 Logical Consistency as Pre-requisite for Cross-cultural Acceptance of Theories .... 207
6.3 Ontologies: Computing and Financial Reporting ..................................................... 208
6.3.1 Background on Ontologies in Computing ................................................................ 209
6.3.2 Ontologies, Models and Metamodels ...................................................................... 212
6.4 Formal Domain Ontologies and Financial Reporting ............................................... 217
6.4.1 Related Work on Ontologies in Financial Reporting ................................................ 218
6.4.2 Model and Ontology Hierarchy of the CFfFR .......................................................... 222
6.4.3 How Ontologies in Computing Help to Answer the Research Questions ................. 223
6.7 Conclusion .............................................................................................................. 228
7 A FORMAL DOMAIN ONTOLOGY OF THE CFfFR............................................... 231

7.1 Introduction ............................................................................................................. 232
7.2 Guidelines to Build an Ontology .............................................................................. 234
7.2.1 OLC Phase 1: Requirements of the CFfFR Ontology .............................................. 235
7.2.2 Ontological Analysis, Design and Development and Basic Assumptions to Build a
Formal Ontology of the CFfFR ................................................................................ 236
7.2.3 Knowledge Contribution: Basic Assumptions and Ontology Life Cycle Model ......... 241
7.3 Building the CFfFR Ontology: Version 1 - Iteration 1............................................... 242
7.3.1 Modeling of Time: Past, Present and Future ........................................................... 242
7.3.2 Modeling the Definition for Asset ............................................................................ 244
7.3.3 Modeling the Definition for Liability ......................................................................... 246
7.3.4 Modeling the Definition for Equity ........................................................................... 248
7.3.5 Knowledge Contribution: Iteration 1 ........................................................................ 250
7.4 Building the Ontology: Version 1 - Iteration 2 .......................................................... 251
7.4.1 Identification of Basic Classes and Relationships ................................................... 251
7.4.2 Modeling the Definition for Asset ............................................................................ 253
7.4.3 Modeling the Definition for Liability ......................................................................... 255
7.4.4 Modeling the Definition for Equity ........................................................................... 256
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7.5.1 Identifying Key Classes and Relationships for the CFfFR Ontology ........................ 258
7.5.2 Process to Determine Decision-useful Financial Information .................................. 263
7.6.1 Reconsidering Previously Identified Classes and Relationships ............................. 266
7.6.2 Considering the Competency Questions ................................................................. 268
7.6.3 Building CFfFR Ontology Version 2 ........................................................................ 271
7.7 Verification .............................................................................................................. 284
7.8 Conclusion .............................................................................................................. 284
8 FINDINGS AND EVALUATION .............................................................................. 290

8.1 The Research Problem and Research Questions Answered .................................. 291
8.2 Sub-Research Question 1 (SRQ 1)......................................................................... 295
8.2.1 SRQ 1: Findings ..................................................................................................... 295
8.2.2 SRQ 1: Evaluation .................................................................................................. 297
8.3 Sub-Research Question 2 (SRQ 2)......................................................................... 298
8.3.1 SRQ 2: Findings ..................................................................................................... 298
8.3.2 SRQ 2: Evaluation .................................................................................................. 299
8.4 Sub-Research Question 3 (SRQ 3) and the Main RQ ............................................. 300
8.4.1 SRQ 3 and Main RQ: Findings ............................................................................... 300
8.4.2 SRQ 3: Evaluation .................................................................................................. 303
9 CONTRIBUTION .................................................................................................... 306

9.1 Introduction ............................................................................................................. 307
9.2 Methodological Perspective .................................................................................... 312
9.2.1 Design Science Research....................................................................................... 312
9.2.2 Ontology Life Cycle Model Applied to Accounting ................................................... 312
9.2.3 Method to Test Concepts / (Classes) and Relationships in a Natural Text .............. 313
9.3 Technological Perspective ...................................................................................... 313
9.4 Interdisciplinary Perspective ................................................................................... 313
9.4.1 Models as Isolation by Idealisation and Truth Containers ....................................... 314
9.4.2 Models in Computing .............................................................................................. 314
9.4.3 Ontology in Philosophy: Formal Language and Logical Consistency ...................... 315
9.4.4 Ontologies in Computing ........................................................................................ 316
9.5 Accounting Perspective .......................................................................................... 316
9.5.1 Requirements and Definition for a Global CFfFR .................................................... 316
9.5.2 The Ideal Meta-metamodel Role of a Global CFfFR ............................................... 317
9.5.3 The CFfFR Ontology............................................................................................... 317
9.5.4 Identification of Logical Inconsistencies, Unintended Meanings, Implied Domain
Knowledge and Incompleteness of the CFfFR ........................................................ 317
9.6 Conclusion .............................................................................................................. 318
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10 CONCLUSION ....................................................................................................... 320
10.1 Introduction ............................................................................................................. 321
10.2 Problem Identification, Motivation and Scope ......................................................... 321
10.3 Summary of Findings .............................................................................................. 324
10.3.1 Research Design .................................................................................................... 324
10.3.2 The Requirements and Definition of a Global CFfFR .............................................. 324
10.3.3 The CFfFR Viewed from a Model Perspective ........................................................ 325
10.3.4 Applicability of Ontologies ....................................................................................... 325
10.3.5 Evaluating the CFfFR by Building a CFfFR Ontology .............................................. 327
10.3.6 Answering the Main Research Question ................................................................. 330
10.4 Reflection ............................................................................................................... 330
10.4.1 Methodological Reflection ....................................................................................... 330
10.4.2 Substantive Reflection ............................................................................................ 331
10.4.3 Scientific Reflection ................................................................................................ 332
10.5 Limitations of the Research .................................................................................... 333
10.6 Areas for Further Research .................................................................................... 334
10.7 Conclusion .............................................................................................................. 334
11 REFERENCES ....................................................................................................... 335
12 APPENDICES ........................................................................................................ 355

12.1 Appendix A – Some Major World Crises in the Twentieth and Twenty-first
Centuries ................................................................................................................ 355
12.2 Appendix B – Major Corporate Collapses ............................................................... 355
12.3 Appendix C – List of Stock Market Crashes and Bear Markets ............................... 355
12.4 Appendix D – CFfFR Working Document................................................................ 355
12.5 Appendix E – Ontology Engineering Decisions ....................................................... 356
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ABBREVIATIONS
ABBREVIATION DESCRIPTION
AAA American Accounting Association
AAPA American Association of Public Accountants
AIA American Institute of Accountants
AICPA American Institute of Certified Public Accountants
AISG Accountants International Study Group
APB Accounting Principles Board (United States Of America)
ASCPA American Society of Certified Public Accountants
ASB Accounting Standards Board (United Kingdom)
ASC Accounting Standards Committee (United Kingdom), from 1976 onwards
ASSC Accounting Standards Steering Committee (United Kingdom), until 1976
CAP Committee on Accounting Procedure (United States of America)
The Conceptual Framework for Financial Reporting (Published by the IASB in
THE CFfFR
September 2010)
CICA Canadian Institute of Chartered Accountants
DL Description Logics
DSR Design Science Research
ED Exposure Draft, of the ASC or IASB
EU European Union
FCAG Financial Crisis Advisory Group
FAF Financial Accounting Foundation (Overseeing the FASB)
FAS Financial Accounting Standards
FASAC Financial Accounting Standards Advisory Council
FASB Financial Accounting Standards Board (United States)
FCAG Financial Crisis Advisory Group
FEDS Framework for Evaluation in Design Science
FIFO First-In, First-Out (Inventory Flow)
FRS Financial Reporting Standard (of the ASB)
GAAP Generally Accepted Accounting Principles
GLOBAL CFFFR A Globally Acceptable Conceptual Framework for Financial Reporting
GO Gene Ontology
IAS International Accounting Standard(S)
IASB International Accounting Standards Board (Successor to the IASC)
IASC International Accounting Standards Committee
IBA The Institute of Bookkeepers and Accountants
ICAEW Institute of Chartered Accountants in England and Wales
IDEAL CFFFR An imagined ideal Conceptual Framework for Financial Reporting
IFRS International Financial Reporting Standard
IS Information Systems
NYSE New York Stock Exchange
OBO Open Biomedical Ontologies
OLC Ontology Life Cycle
x
ABBREVIATION DESCRIPTION
OMG Object Management Group
OWL Web Ontology Language
SAICA South African Institute of Chartered Accountants
SATTA A Statement on Accounting Theory and Theory Acceptance
SEC Securities and Exchange Commission (United States Of America)
SNOMED CT Systematised Nomenclature of Medicine -- Clinical Terms
SUS System Under Study
W3C World Wide Web Consortium
WWW World Wide Web
XBRL PROJECT Extensible Business Reporting Language Project
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DEFINITION OF TERMS
TERM DEFINITION
Constructs (vocabulary and symbols), models (abstractions and
representations), methods (algorithms and practices), and instantiations
Artefact
(implemented and prototype systems) (Hevner, March, Park, & Ram,
2004:77).
Class Collection of instances.
Formal ontology (in AI) An explicit specification of a conceptualisation (Gruber, 1993).
A language designed for use in situations in which natural language is
Formal language
unsuitable, as for example in mathematics, logic or computer programming.
The word ontology is used to refer to philosophical investigation of existence,
or being. Such investigation may be directed towards the concept of ‘being’,
Ontology (in philosophy) asking ‘what being means’, or what it is for ‘something to exist’; it may also (or
instead) be concerned with the question ‘what exists?’, or ‘what general sorts
of thing are there?’ (Craig, 1998)
A theory of the most general structure in the form of a systematic account of
Ontology of financial the nature of being, kinds of things and structures of objects, properties,
reporting events, processes and relationships in every area that have existence in
financial reporting.
Is a mechanism for writing ontologies in a canonical format, such that they can
be easily translated into a variety of representation and reasoning systems?
Ontolingua This allows one to maintain the ontology in a single, machine-readable form
while using it in systems with different syntax and reasoning capabilities
(Gruber, 1992:1).
Phenomenology is the study of structures of consciousness as experienced
Phenomenology
from the first-person point of view.
The way in which two or more classes, concepts, objects or people are
Relationship
connected, or the state of being connected.
An area of human knowledge exhibiting specific terminology and lexical
coherence, a cognitive category. A specific area that shares a set of
Semantic domain
meanings, or a language that holds its meaning, within the given context of the
area.
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LIST OF FIGURES
Figure 1.1: Chapter map – Chapter 1 2

Figure 1.2: DSR as research strategy 8
Figure 1.3: Chapter map 13
Figure 1.4: Chapter map - Chapter 2 14
Figure 2.1: Cuneiform symbols 20
Figure 2.2: Sumerian syllabic glyphs 21
Figure 2.3: Medieval Trade Routes 27
Figure 2.4: Chapter map - Section B, Chapter 3 80
Figure 3.1: The research “onion” 82
Figure 3.2: Design Science Research Process Model 91
Figure 3.4: DSR Cycle 1 95
Figure 3.8: An OLC Model from Neuhaus et al. (2013) 109
Figure 3.9: FEDS with evaluation strategies 117
Figure 3.10: FEDS double evaluation strategy 118
Figure 3.11: FEDS double evaluation strategy for the CFfFR ontology 119
Figure 3.12: Chapter map - Section C 122
Figure 3.13: DSR strategy implemented in Section C 124
Figure 4.3: Structure of Chapter 4 128
Figure 4.4: FEDS Strategy - DSR Cycle 1 130
Figure 4.5: IASB Due process to develop IFRS’s (Copied from the IASB document: “How we
consult: Encouraging broad participation in the development of IFRS”) 141
Figure 4.6: Requirements of a conceptual framework 151
Figure 5.4: Model formulation (Mäki, 2011) 167
Figure 5.5: Model formula of the CFfFR 175
Figure 5.6: Model formula of the formal domain ontology 176
Figure 5.7: Financial reporting basic token, type model relationship 182
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Figure 5.8: Financial reporting token, type model relationship including financial accounting
standards 184
Figure 5.9: OMG four level hierarchy adjusted 185
Figure 5.10: OMG four level hierarchy combined with financial reporting token and type
model relationships 187
Figure 5.11: CFfFR as meta-metamodel in the four level hierarchy 188
Figure 5.12: OMG four level hierarchy applied to financial reporting models 189
Figure 6.4: Interdisciplinary nature of the formal ontology of financial reporting 199
Figure 6.5: Types of languages, sorted from informal to formal 206
Figure 6.6: Gene Ontology CytoScape EM (Source: (Gene Ontology Consortium, 2015)) 209
Figure 6.7: Gene Ontology S Aureus Term Enrichment (Source: (Gene Ontology
Consortium, 2015)) 210
Figure 6.8: Ontology, OMG and model hierarchy of the financial reporting domain 222
Figure 7.4: FEDS Strategy - DSR Cycle 4, Construct artefact. 242
Figure 7.5: Presentation as an Instant (13TConsiderationDate13T), with Past and Future as
related Intervals. 244
Figure 7.6: 13TTemporalClass13T 13Tis_a13T relationships 244
Figure 7.7: Formal representation of Asset 246
Figure 7.8: Relationship between 13TResource13T and 13TAsset 247
Figure 7.9: Formal representation of liability 248
Figure 7.10: Inconsistency in equity definition 249
Figure 7.11: Formal representation of equity 250
Figure 7.12: FEDS Strategy - DSR Cycle 4, Iteration 1 250
Figure 7.13: Basic classes and relationships of the SFP elements 252
Figure 7.14: Proposed asset definition 254
Figure 7.15: Proposed liability definition 256
Figure 7.16: Proposed equity definition 256
Figure 7.17: FEDS Strategy - DSR Cycle 4, Iteration 2. 258
Figure 7.18: CFfFR ontology first version: 13Tis_a13T relationships 261
Figure 7.19: Decision process to report decision-useful information 264
xiv
Figure 7.20: FEDS Strategy - DSR Cycle 4, Iteration 3. 265
Figure 7.21: CFfFR ontology 267
Figure 7.22: Economic Measurement Class: 13Tis_a13T relationships 272
Figure 7.23: Economic Measurement Class – Usage 273
Figure 7.24: Economic Measurement Class: Object Property relationships 274
Figure 7.25: Reality Class: 13Tis_a13T relationships 277
Figure 7.26: Reporting Class: 13Tis_a13T relationships 279
Figure 7.27: Temporal Class: 13Tis_a13T relationships 280
Figure 7.28: CFfFR ontology – Version 2 13Tis_a13T relationships 281
Figure 7.29: CFfFR Version 2 - Object Properties 282
Figure 7.30: CFfFR Version 2 – all relationships 283
Figure 7.31: FEDS Evaluation Strategy 284
Figure 7.32: Chapter map: Section D 287
Figure 8.1: Chapter map: Chapter 8 290
Figure 8.3: CFfFR ontology artefacts 1-3 298
Figure 8.4: CFfFR ontology artefacts 1-4 300
Figure 8.5: CFfFR ontology Technical Risk & Efficacy artefacts 303
Figure 10.2: CFfFR ontology 329
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LIST OF TABLES
Table 1.1: Matrix of research questions and DSR strategy .................................................... 9
Table 2.1: Historical documents contributing to the FASB conceptual frameworkP38F ....... 50
Table 2.2: Comparison of qualitative characteristics between the 1989 CFfFR and the 2010
CFfFR ............................................................................................................... 64
Table 2.3: Summary of stimuli and response in the development of the CFfFR .................. 66
Table 3.1: Summary of artefacts contributing towards answering the research questions in
the DSR Cycles .............................................................................................. 100
Table 3.2: Matrix of research questions and DSR strategy ................................................ 101
Table 3.3: Systematic review protocol ............................................................................... 103
Table 3.4: Interdisciplinary research steps ........................................................................ 107
Table 3.5: Circumstances for selecting a DSR evaluation strategy (Venable et al., 2014) . 115
Table 4.1: Systematic review protocol ............................................................................... 130
Table 5.1: Modeling as representation .............................................................................. 170
Table 5.2: Modeling as representation - Representative quality ........................................ 172
Table 5.3: Modeling as representation - Resemblance quality .......................................... 172
Table 5.4: Modeling as representation .............................................................................. 173
Table 6.1: Wilmont et al. (2013) model definition applied to financial reporting domain ..... 213
Table 7.1: Description Logic symbols ................................................................................ 246
Table 7.2: Summary of SFP definitions ............................................................................. 257
Table 7.3: Non-physical endurant classes ......................................................................... 259
Table 7.4: Physical endurant classes ................................................................................ 260
Table 7.5: Perdurant, event, accomplishment ................................................................... 260
Table 7.6: Classes excluded from CFfFR ontology version two ......................................... 267
the DSR Cycles .............................................................................................. 294
the DSR Cycles .............................................................................................. 308
Table 9.2: Summary of contributions ................................................................................. 310
Table 10.1 Summary of artefacts contributing towards answering the research questions in
the DSR Cycles .............................................................................................. 323
xvi
ABSTRACT
The objective of this thesis is to investigate how the use of ontology technologies, as
utilised in computing, can contribute towards formulating a globally acceptable
Conceptual Framework for Financial Reporting (global CFfFR).
The ideal being pursued in the financial reporting domain is a single set of high
quality, principle-based accounting standards which are globally recognised (Barth,
2013b; Bullen & Crook, 2005; Stein, 2015) guiding the provision of decision-useful
information to the users of financial reports (IASB, 2010a). The CFfFR, published by
the International Accounting Standards Board (IASB) (IASB, 2010a), was developed
with the intention to provide guidance to users and preparers of financial reports and
standard setters regarding the provision of decision-useful financial information
(IASB, 2010a). Unfortunately, a clear, consistent and unambiguous world is not the
reality, which preparers of financial reports and investors encounter when they
compile and interpret financial reports governed by financial accounting standards
(Bhimani, 2008; Schipper, 2003; Tweedie, 2007; Wüstemann & Wüstemann, 2010).
This is a multi-disciplinary study, involving mainly the disciplines of accounting and

computing, but also touching on philosophy and the philosophy of science. The multi-
method qualitative study was performed adopting a research strategy utilised in the
Information Systems (IS) discipline known as Design Science Research (DSR)
(Vaishnavi & Kuechler, 2013).
Three research techniques were used during the performance of the DSR Cycles.
The research techniques were used to answer the three sub-research questions and
finally the main research question. A systematic review was performed during DSR
Cycle 1. DSR Cycles 2 and 3 involved interdisciplinary investigations, combining
knowledge from philosophy, philosophy of science and computing to enhance
knowledge in the main discipline i.e. accounting.
The main research question was answered during DSR Cycle 4, when a domain
ontology of the CFfFR was modelled. The CFfFR was modelled using the Ontology
Life Cycle (OLC) (Neuhaus, Vizedom, Baclawski, Bennett, Dean, et al., 2013)
developed in the knowledge representation (computing) discipline.
Part of the findings was that it is possible to build a formal domain ontology of the
CFfFR. The main contributions were made during the performance of DSR Cycle 4
(Chapter 7). A formal domain ontology of the CFfFR as artefact provided the most
basic classes and relationships to facilitate decision-useful information. During the
formalisation process, inconsistencies and unintended meanings within the CFfFR
were identified. In conclusion, some areas for further research were identified.
xvii
SAMEVATTING
Die doel van hierdie tesis is om die daarstelling van 'n ideale en wêreldwyd-
aanvaarbare Konseptuele Raamwerk vir finansiële verslaggewing (globale CFfFR) te
ondersoek, en meer spesifiek, hoe die gebruik van ontologie tegnologie, soos
toegepas in die rekenaarwese, tot die formulering van so ‘n CFfFR kan bydra.
Die ideaal wat in die finansiële verslaggewing domein nagestreef word, is 'n enkele
stel hoë gehalte, – beginsel gebaseerde rekeningkundige standaarde wat wêreldwyd
erken word (Barth, 2013b; Bullen & Crook, 2005; Stein, 2015) en wat as ‘n gids kan
dien vir die voorsiening van inligting wat nuttig is vir besluitneming deur die
gebruikers van finansiële verslae (IASB, 2010a)). Die huidige CFfFR, gepubliseer
deur die International Accounting Standards Board (IASB) (IASB, 2010a), is
ontwikkel met die doel om leiding te gee aan die gebruikers en formuleerders van
finansiële verslae en standaardstellers, spesifiek rakende die voorsiening van
finansiële inligting (IASB, 2010a) wat nuttig tydens besluitneming is. Tans vind
opstellers van finansiële verslae en beleggers nie hierdie duidelike, konsekwente en
ondubbelsinnige werklikheid wanneer hulle finansiële verslae volgens die bepalings
van finansiële rekeningkundige standaarde opstel en interpreteer nie (Bhimani, 2008;
Schipper, 2003; Tweedie, 2007; Wüstemann & Wüstemann, 2010).
Hierdie is 'n multi-dissiplinêre studie wat hoofsaaklik die dissiplines van

rekeningkunde en rekenaarwese betrek, maar wat ook filosofie en die filosofie van
die wetenskap betrek. Die multi-metode kwalitatiewe studie is uitgevoer deur middel
van die aanneming van 'n navorsingstrategie wat gebruik word in die Inligtingstelsels
(IS) dissipline en wat bekend staan as Ontwerpswetenskap Navorsing (OWN)
(Vaishnavi & Kuechler, 2013).
Drie navorsingstegnieke is tydens die uitvoer van die OWN Siklusse gebruik. Die
navorsingstegnieke is gebruik om die drie sub-navorsingsvrae en uiteindelik die hoof
navorsingsvraag te beantwoord. 'n Sistematiese oorsig is uitgevoer tydens OWN
Siklus 1, OWN Siklus 2 en 3 het interdissiplinêre ondersoeke en 'n kombinasie van
kennis soos afgelei van filosofie, filosofie van die wetenskap en rekenaarwese met
die doel om kennis te verbreed by die hoof dissipline, m.a.w. rekeningkunde, betrek.
Die hoofnavorsingsvraag is tydens OWN Siklus 4 beantwoord. In OWN Siklus 4 is 'n

domein ontologie van die CFfFR ontwikkel. Die CFfFR-ontologie is met behulp van
die Ontologie Lewensiklus (OLS) (Neuhaus, Vizedom, Baclawski, Bennett, Dean, et
al., 2013) ontwikkel.
Deel van die bevindinge is dat dit moontlik is om ‘n formele domein ontologie van die
CFfFR te bou. Die hoofbydraes is tydens die uitvoering van OWR Siklus 4 (Hoofstuk
7) gemaak. ‘n Formele domein ontologie van die CFfFR as artefak verskaf die mees
basies klasse en verhoudings om inligting nuttig vir besluitneming te fasiliteer.
Gedurende die formaliseringsproses is teenstrydighede en onbedoelde betekenisse
binne die CFfFR geïdentifiseer. Ten slotte, is gebiede vir verdere navorsing
geïdentifiseer.
xviii
CHAPTER 1
TABLE OF CONTENT
1 INTRODUCTION ........................................................................................................ 2
1.1 Introduction ................................................................................................................. 3
1.2 Background ................................................................................................................ 4
1.3 Research Problem ...................................................................................................... 6
1.4 Research Objective and Research Questions............................................................. 6
1.5 Research Design ........................................................................................................ 7
1.6 Assumptions ............................................................................................................... 9
1.7 Scope, Delineation and Limitation............................................................................. 10
1.8 Contributions ............................................................................................................ 10
1.9 Publications from this study ...................................................................................... 11
1.10 The Structure of the Research Project ...................................................................... 11
1
1 INTRODUCTION
Figure 1.1: Chapter map – Chapter 1
2
1.1 Introduction
The objective of this thesis is to investigate how the use of ontology technologies, as
utilised in computing, 1 can contribute towards formulating a globally acceptable
Conceptual Framework for Financial Reporting (global CFfFR). The ideal being
pursued in the financial reporting domain is a single set of high quality, principle-
based accounting standards which are globally recognised (Barth, 2013b; Bullen &
Crook, 2005; Stein, 2015) guiding the provision of decision-useful information to the
users of financial reports (IASB, 2010a). The CFfFR, published by the International
Accounting Standards Board (IASB) (IASB, 2010a), was developed with the intention
to provide guidance to users and preparers of financial reports and standard setters
regarding the provision of decision-useful financial information (IASB, 2010a).
Unfortunately, a clear, consistent and unambiguous world is not the reality, which
preparers of financial reports and investors encounter when they compile and
interpret financial reports governed by financial accounting standards (Bhimani, 2008;
Schipper, 2003; Tweedie, 2007; Wüstemann & Wüstemann, 2010).
Since the CFfFR was developed with the purpose to provide guidance with setting
accounting standards that are globally recognised, it is evident that the CFfFR itself
should be accepted globally to fulfil its intended purpose. Such a global CFfFR does
not exist, as the Financial Accounting Standards Board (FASB) in the U.S. and the
IASB use different conceptual frameworks for guidance to set accounting standards.
The predicament on how to develop a global CFfFR can be described as a wicked

problem because it involve unstable requirements and constraints within a complex
interaction (Hevner et al., 2004) not only between different stake holders such as
legislators, domain experts, practitioners and academics, but also between different
disciplines (section 3.6). Design Science Research (DSR) in computing addresses
research problems that are considered to be wicked problems (Hevner et al., 2004).
In order to determine how the use of ontology technologies can contribute towards
formulating a global CFfFR, a DSR strategy is followed combining knowledge from
different disciplines. From philosophy, knowledge regarding ontology is acquired to
understand the importance of logic and formal languages as utilised in ontology
technologies and its contribution towards formulating a possible global CFfFR. From
philosophy of science, a model theory proposed by Mäki (2009) is adopted and
adapted to explain the value of an ideal CFfFR that is based on idealised
assumptions. The utilisation of the idea of an ideal CFfFR demonstrates how a
CFfFR ontology can serve as a truth bearing model in the quest for a global CFfFR.
Knowledge regarding the use of conceptual models, metamodels and meta-
metamodels in computing (Henderson-Sellers, 2011b; Kühne, 2005; Kühne, 2006a),
the Object Management Group (OMG) model hierarchy (OMG, 2014), and ontologies
in computing (McGuinness, 2003; Guizzardi, 2006; Guarino, 1997) are applied to the
financial reporting domain during the investigation. The knowledge obtained from
1
Computer Sciences and Information Systems are disciplines within computing. Computing is used to refer to both.
3
these disciplines are combined to investigate how the use of ontology technologies
(Neuhaus et al., 2013; Smith, 1998), can contribute towards formulating a global
CFfFR.
1.2 Background
The history and some of the mechanisms used to develop the CFfFR and accounting
standards (as indicated in Chapter 2), often resulted in vagueness, inconsistencies
and ambiguities (unintended meanings) in the CFfFR and financial accounting
standards (FASB and IASB, 2002; IASB, 2013a; Wüstemann & Wüstemann, 2010).
Incompleteness, inconsistencies, unintended meanings and outdated principles and
postulates in the CFfFR are presented as some of the reasons to revise the CFfFR
(FASB and IASB, 2002; IASB, 2013a; IASB, 2014a).
The need for globally accepted financial accounting standards is widely recognised
(Tweedie, 2007; Camfferman & Zeff, 2009; Hail, Leuz, & Wysocki, 2010). The need
arose because of the integrated nature of the global economy, which has its roots in
the time after World War II with the formation of multinational corporations (FASB,
2014a; Camfferman & Zeff, 2009).
The accounting world officially reacted to the increasingly integrated World economy
more or less a decade after World War II when Jacob Kraayenhof, as president of
The Seventh International Congress of Accountants in 1957, issued a challenge to
the American Institute of Certified Public Accountants (AICPA) in his closing speech
of the Congress. His challenge was “to invite other countries to set up standing
committees for the research and study of accounting principles with a view towards
achieving greater international uniformity” (Camfferman & Zeff, 2009).
Many research studies were conducted during the 1960s to search for and formulate
accounting postulates and principles (Zeff, 1982). In 1963, Moonitz (1963:46)
formulated the need for accounting postulates and principles as follows:
“The formulation of postulates and principles will give accounting the
frame of reference, the integrating structure it needs to give more than
passing meaning to its specific procedures. It will provide ‘experience’
with the aid it needs from ‘logic’ to explain why it is that some procedures
are appropriate and others are not. It will also provide the basis for
extensions into new and untried areas with some assurance (at least in
logic) that the extensions are sensible and in harmony with the larger
framework of accounting.”
However the search for accounting postulates and principles lost some urgency at
the end of the 1960s with the idea that it is not possible to have a single set of
accounting postulates (Zeff, 1982). The growing international capital market after
World War II resulted in some urgency to harmonise accounting practices across the
globe. In reaction to the increase of multi-national enterprises, the International
Accounting Standards Committee (IASC) was initiated in 1973 to set international
acceptable accounting standards (Camfferman & Zeff, 2009).
4
Due to previous failures to create a single accounting theory, there was some
pessimism in 1979 after the publication of SATTA amongst accountants whether it
would be possible to create a single accounting theory (Gaffikin, 2008). Despite the
pessimism, the IASC recognised in 1979 that a conceptual framework is needed to
guide its standard setting process. After an evolutionary development process, the
IASC published a conceptual framework (IASB, 1989) that was for the most part
based on the SFACs of the FASB.
After the Norwalk Agreement in 2002 (FASB and IASB, 2002) the FASB and IASB
initiated the joint conceptual framework project to set a joint conceptual framework
that “is sound, comprehensive, and internally consistent” (Bullen & Crook, 2005:1).
The commitment made by the FASB and the IASB with the Norwalk Agreement was
to develop “high-quality, compatible accounting standards that could be used for both
domestic and cross-border financial reporting” (FASB and IASB, 2002:1)
The first phase of the joint conceptual framework project was concluded with the
publication of the Conceptual Framework for Financial Reporting (the CFfFR) (IASB,
2010a) on 28 September 2010.
Due to a difference in approach between the FASB and the IASB to complete the
CFfFR, the joint conceptual framework project was suspended on 17 November 2010
(FASB and IASB, 2010). The IASB decided during September 2012 to continue with
the conceptual framework project without the FASB. Currently the FASB is also
continuing with the conceptual framework project according to the phases as
identified when the joint project started. Despite the different approaches to the
conceptual framework project, both the FASB and the IASB have the same overall
objective with the project, “to create a sound foundation for future accounting
standards that are principles-based, internally consistent and internationally
converged” (FASB, 2014b; IASB, 2014b).
If it is the ideal that the accounting standards, based on the conceptual framework,
should be principles-based, internally consistent and internationally converged, then
the CFfFR should also be principles-based, internally consistent and internationally
converged.
However, despite previous attempts by both the FASB and the IASB (and other
standard setting bodies), there is to date no conceptual framework for financial
reporting that is completely principles-based, internally consistent and internationally
converged. The fact that there are two different conceptual frameworks for financial
reporting as well as that the FASB and IASB are no longer working together on the
joint conceptual framework project, is an indication that the respective conceptual
frameworks are not internationally converged. Examples of inconsistencies and
unintended meanings in the CFfFR are reported in Chapters 7 and 8. During the
analysis and formalisation of especially the definitions of asset, liability and equity as
well as the rest of the CFfFR, such inconsistencies and unintended meanings are
indicated. Although, based on the work done in the 1960s, it can be accepted that the
CFfFR is principle-based, it is not complete regarding all the concepts (principles)
5
required to provide decision-useful information to the users of financial reports (see
Chapters 7 and 8) .
1.3 Research Problem
The discussion in Chapter 2, follows a stimulus/response framework (Salvary, 1979)

regarding an overview of the historical development of the CFfFR. During the
discussion it is indicated how it happened that the CFfFR is not globally accepted
although the accounting community is in need of a globally acceptable CFfFR. In
Table 2.3 a summary of a stimuli / response pattern of the historical development of
the CFfFR is provided. The various stimuli can broadly be summarised under the
following classes: political developments, social developments, economic
developments, business / reporting requirements and technological developments.
Responses from the accounting community related to financial reporting to these
stimuli are indicated. It is also indicated how some of the responses contributed to
the postulates and principles of financial reporting and were included in the CFfFR.
Some technological developments related to computer technologies such as

mainframes, desktop computers, laptops and lately even tablets and cell phones
combined with the development of the internet and the world wide web (www)
(Berners-Lee, Hendler, & Lassila, 2001; Berners-Lee, 1996) have been prominent
since the early 1980s. These developments stimulated responses in accounting such
as the eXtensible Business Reporting Language (XBRL) project (Hoffman, 2015;
Bonsón, Escobar, & Flores, 2008; Stone, 2005) numerous accounting software
packages and business to business transactions over the internet. The internet, via
the www, is extensively used to make information regarding standard setting
available via the web sites of standard setting bodies. Technological developments
related to standard setting are mostly limited to the use of word processing and
spread sheet packages. The influence of technological developments in knowledge
representation (Brewster & O’Hara, 2007) and artificial intelligence (Garnsey,
Nicolaou, & Ponte, 2008; Guizzardi, 2007) on accounting standard setting is limited
to a few studies (section 6.4).
In order to help with the improvement of the CFfFR, the research problem addressed
in this study is to investigate how it is possible to use recent technological
developments in computing, i.e. ontology technologies. A CFfFR ontology was
developed using ontology technologies to indicating how the CFfFR can be improved
to be closer to the ideal CFfFR. Due to the non-existence of a global CFfFR the
research problem identified is how the use of ontology technologies can contribute
towards formulating a global CFfFR.
1.4 Research Objective and Research Questions
The research objective, to investigate how the use of ontology technologies can
contribute towards a global CFfFR by creating a formal representation of the CFfFR,
serves as the overall suggestion according to the DSR strategy. The awareness of
the need for a global CFfFR was determined during the discussion on the history of
the evolutionary development of the CFfFR in Chapter 2. This serves, in accordance
6
with the DSR strategy followed in this study, as the main Awareness Step of the
study (section 3.6).
The main output of the research project is the development of an artefact in the form
of formal representation of the fundamental concepts (classes) and relationships of
the financial reporting domain assisting in the provision of decision-useful information
to the users of financial reports. The artefact is a formal domain CFfFR ontology (a
CFfFR ontology). Formal domain ontologies are used in computing and several other
fields to formalise the classes and relationships of a specified domain in an internally
coherent and logically consistent manner (McGuinness 2003). During the building
process of the CFfFR ontology as well as the evaluation of the CFfFR against the
CFfFR ontology it was established how ontology technologies can contribute towards
a global CFfFR.
In order to achieve the research objective, the main research question to be

answered in this study is formulated as follows:
How can a CFfFR consisting of logically formalised fundamental concepts be

developed, which could function as a sound foundation for accounting standards
that are principle-based, internally consistent and internationally converged?
The main research question is answered by posing three sub-research questions.

The three sub-research questions are:
• Sub-research question 1 (SRQ1): What are the role, definition and

requirements of a global CFfFR consisting of fundamental concepts, which could
function as a sound foundation for accounting standards that are principle-based,
internally consistent and internationally converged?
• Sub-research question 2 (SRQ 2): How can model building assist to construct
a global CFfFR consisting of fundamental concepts, which could function as a
sound foundation for accounting standards that are principle-based, internally
consistent and internationally converged?
• Sub-research question 3 (SRQ 3): How can the formalisation of the CFfFR
using ontologies assist to construct a CFfFR consisting of logically formalised
fundamental concepts, which could function as a sound foundation for
accounting standards that are principle-based, internally consistent and
internationally converged?
The main research question and sub-research questions are designed to address
some of the issues that currently prevent the CFfFR from being globally accepted.
1.5 Research Design
This interdisciplinary, interpretative, qualitative study has an abductive approach

following a Design Science Research (DSR) strategy using various research
7
techniques to answer the research questions. The research design, summarised in
this section, is discussed in detail in Chapter 3.
The DSR strategy followed in this study was developed for research projects with
wicked problem characteristics (Hevner et al., 2004; Hevner & Chatterjee, 2010). A
DSR strategy moves through several cycles in order to address a research problem.
The DSR strategy in this study follows a main cycle and four sub-DSR cycles (Figure
1.2).
Figure 1.2: DSR as research strategy
During the execution of the four sub-DSR cycles, the three sub-research questions
are answered. During the Development Step and Evaluation Step of a cycle, a
knowledge contribution is made. This knowledge contribution feeds into the
Awareness Step of the next sub-DSR cycle. During the Evaluation Step of the last
sub-DSR Cycle the knowledge contributions made during the previous sub-DSR
Cycles accumulate to feed into the Development Step, evaluation and findings of the
main DSR Cycle. Flowing from the Evaluation Step of the main DSR Cycle the main
knowledge contribution of the study is derived.
Benefits of the DSR strategy are that it allows the researcher to build on knowledge
obtained during a previous cycle and allows for adjustments during the research
process based on new knowledge obtained and additional requirements discovered
during the research process. The DSR strategy followed is illustrated in Figure 1.2.
Another benefit is that the researcher can utilise different research techniques within
8
sub-DSR Cycles without contaminating the main research objective and deviating
from answering the main research question (Figure 1.2).
Table 1.1 indicates during which cycle of the DSR strategy the research questions
were answered.
Table 1.1: Matrix of research questions and DSR strategy

RESEARCH MAIN DSR DSR CYCLE 1 DSR CYCLE 2 DSR CYCLE 3 DSR CYCLE 4
QUESTION CYCLE Chapter 4 Chapter 5 Chapter 6 Chapter 7
MAIN RQ √ √
SRQ 1 √ √
SRQ 2 √
SRQ 3 √ √
As indicated, the main research question is answered by answering SRQ 1 (Chapter

4 and 5), SRQ 2 (Chapter 5), and SRQ 3 in Chapter 6 and Chapter 7.
1.6 Assumptions
An assumption adopted in this study is that the CFfFR contains the fundamental
postulates and principles to provide decision-useful information to the users of
financial reports. This assumption implies that the knowledge contained in the CFfFR
should be sufficient to model the classes and relationships informing the process to
publish decision-useful information.
Based on a model theory of Mäki (2009) the assumption is adopted that an ideal
CFfFR isolated by untrue but idealised assumptions serves as a truth container. The
assumption is that this ideal CFfFR could assist in identifying some truths regarding a
global CFfFR (section 5.2) and would contribute towards the extension of knowledge
on how to build a global CFfFR.
Certain modeling assumptions were made in order to build a formal domain ontology
of the CFfFR. The ontological modeling assumptions are provided in section 7.2.2.
The success of the artefact to answer the main research question is based on the
assumption that if the CFfFR ontology (the artefact) complies with more requirements
of the ideal CFfFR than the CFfFR, the study indicates how the CFfFR can be
improved to be closer to the ideal CFfFR. If the artefact (the CFfFR ontology)
complies with more requirements than the CFfFR, it can be accepted that, based on
the theory of Mäki (2009), the artefact is a truth container. It can then be concluded
that the CFfFR ontology and the procedure to build the CFfFR ontology demonstrate
how and where the CFfFR can be improved to function as a sound foundation for
internationally converged.
9
1.7 Scope, Delineation and Limitation
This study is mainly concerned with the basic postulates and principles of the
financial reporting domain. The assumption that the basic postulates and principles
are contained in the CFfFR limits the scope to the CFfFR document. The implication
of this assumption and limitation is that if a concept or relationship in the CFfFR is not
clear from the CFfFR document, it is an indication of an ambiguity (unintended
meaning) and is reported as such. An exception to this limitation was necessary with
the formalisation of the definitions of asset, liability and equity as it was not possible
to avoid inconsistencies without obtaining information from outside the CFfFR. In this
case, information was gathered from the discussion paper published by the IASB on
the CFfFR (IASB, 2013a).
If essential information is not present in the CFfFR it is viewed as an indication of an

incompleteness of the CFfFR. Various cases of incompletenesses were identified.
Although the output of the research project is a formal domain ontology of the CFfFR,
it does not propose or attempt to provide an alternative CFfFR. Some suggestions
are made that could improve the natural text of the CFfFR that may contribute
towards the CFfFR being globally more acceptable.
The study also does not claim or pretend to provide a new or alternative accounting
theory. The study utilise theories from other disciplines in order to expand knowledge
in the financial reporting domain.
1.8 Contributions
The main contribution of the study is the CFfFR ontology (Chapter 7) providing
suggestions that could contribute towards formulating a CFfFR that should be more
globally acceptable. Other contributions include the identification of requirements
(section 4.6) and a definition for a global CFfFR (section 4.7), the role of the CFfFR
as a meta-metamodel in the financial reporting domain (section 5.3.5) and the role of
the CFfFR ontology within the financial reporting ontology domain (section 6.4). The
DSR strategy (Figure 3.3) and the method to develop the CFfFR ontology (OLC
Figure 3.8) are reported as contributions to the body of accounting knowledge.
Contributions related to the CFfFR ontology are the decision process filter (Figure
7.19), and the ontology analysis (Figure 7.21) as well as the various findings made
during the ontology development process. The research strategy followed and
research techniques utilised also contribute towards the body of accounting
knowledge as alternative ways to conduct accounting research. The contributions of
this study are summarised in Table 9.2 and discussed in Chapter 9.
10
1.9 Publications from this study
The following publications have already resulted from this study:

Gerber, M. C., and A. J. Gerber. 2011. Towards the development of consistent and
unambiguous ﬁnancial accounting standards using ontology technologies. In
Proceedings of the International Conference on Accounting 2011. Venice:
IAAER.
Gerber, M. C., A. J. Gerber, and A. J. Van der Merwe. 2014. An Analysis of

Fundamental Concepts in the Conceptual Framework Using ontology
Technologies. South African Journal of Economic & Management Sciences 17
(4): 396–411.
Gerber, M. C., A. J. Gerber, and A. J. Van der Merwe. 2015. The Conceptual
Framework for Financial Reporting as a Domain ontology. In Americas
Conference on Information Systems - AMCIS 2015 (accepted for publication).
Puerto Rico: AMCIS.
Gerber, M. C., A. J. Gerber, A. J. Van der Merwe, and N. Stegmann. 2015.

Formalising the Definitions of the Elements of the Statement of Financial
Position. In SAAA & IAAER Conference - 2015 (Accepted for publication). East
London, South Africa: SAAA.
1.10 The Structure of the Research Project
The research report is structured in four sections and consists of ten chapters. The
four sections are encircled with an introduction to the study (Chapter 1) and a
conclusion (Chapter 10), summarising and reflecting on the knowledge gained in the
study.
In Section A consisting of Chapter 2, the literature review is structured around the

historical development of the CFfFR. The historical development of the CFfFR is
presented according to a stimulus/response system (Salvary, 1979) illustrating an
evolutionary development process starting in the pre-capitalist period (4000 B.C to
1000 A.D) and concludes with the current need for a global CFfFR.
Section B consists of Chapter 3 and contains the design of the research project. The
research project was designed to answer the research questions formulated to
address the research problem identified during the literature review (Section A,
Chapter 2). In order to address the research problem a qualitative, multi-disciplinary
study was performed. The research design is based on the research onion as
explained by Saunders et al. (2012).
The implementation of the research design is reported on in Section C. The four

chapters in Section C report on the execution of four design cycles performed
according to the Design Science Research (DSR) strategy (Figure 3.2) (Vaishnavi &
Kuechler, 2013). In Chapter 4 the requirements of a global CFfFR was determined.
The role of a global CFfFR as a model is explained in Chapter 5. The knowledge
obtained in Chapters 4 and 5 feeds into Chapter 6 and Chapter 7. In Chapter 6, the
applicability of ontologies for financial reporting was determined. Based on the results
11
of Chapter 6, the artefact, a formal domain ontology for the CFfFR, was developed
and reported on in Chapter 7.
Section D reports on the findings, evaluation and contribution of the study. Chapter 8
provides the findings made and an evaluation of the CFfFR ontology. In Chapter 9,
the contribution to the body of knowledge gained during the study is presented.
Finally, the study concludes with Chapter 10.
A schematic presentation of the research structure is provided in Figure 1.3.
12
Figure 1.3: Chapter map
13
SECTION A – BACKGROUND AND PROBLEM IDENTIFICATION
Figure 1.4: Chapter map - Chapter 2
14
CHAPTER 2
TABLE OF CONTENT
2 HISTORY OF THE DEVELOPMENT OF THE CONCEPTUAL FRAMEWORK

FOR FINANCIAL REPORTING (CFfFR)................................................................... 17
2.1 Introduction ............................................................................................................... 17
2.2 Pre-capitalist Period, 4000 B.C. to 1000 A.D. ........................................................... 17
2.2.1 Public Economy, 4000 B.C. to 700 B.C..................................................................... 17
a) Sumerian temples and the development of writing ............................................. 17
b) Development during the Minoan period and Greek Dynasty .............................. 21
2.2.2 Feudal System, 700 B.C. to 1000 A.D. ..................................................................... 23
a) Money: moveable wealth ................................................................................... 23
b) Birth of the banking-system and commercial legislation ..................................... 24
c) Accounting records and corporate governance .................................................. 24
d) Sophistication under the Roman Empire ............................................................ 24
e) Greek and Roman influence on legislation ......................................................... 25
f) Move towards a feudal system ........................................................................... 25
2.3 Commercial Capitalism, 1000 to 1760 ...................................................................... 26
2.3.1 Exchange Economy, 1000 to 1500 ........................................................................... 26
a) Medieval trading: Genoa and Venice ................................................................. 26
b) Partnerships as business vehicle ....................................................................... 27
c) Method of Venice – double-entry bookkeeping .................................................. 28
d) Useful financial information ................................................................................ 29
e) Acceptance of the Arabic numeric system ......................................................... 29
2.3.2 Entrepreneur and Continuity of Business, 1500 to 1760 ........................................... 30
a) The accounting equation – Hugh Oldcastle 1543 ............................................... 30
b) The trial balance – Ympyn 1543......................................................................... 31
c) The origin of the securities market ..................................................................... 31
d) De Wisselbank van Amsterdam ......................................................................... 31
e) The era of mercantilism – Shipbuilding and productive efficiency....................... 32
2.4 Industrial Capitalism, 1760 to 1830 ........................................................................... 33
2.4.1 Demand for Capital and Capital Maintenance ........................................................... 33
2.4.2 Demand for Accountability and the Double-entry System ......................................... 34
2.4.3 Demand for Financial Reports .................................................................................. 34
2.5 Financial Capitalism: Return on Capital Invested 1830 to 1900 ................................ 35
2.5.1 Unregulated Financial Reporting............................................................................... 35
a) Capital expenditure and depreciation ................................................................. 35
b) Separation between management and ownership ............................................. 35
c) The Railway Mania ............................................................................................ 36
2.5.2 Demand for Regulation ............................................................................................. 36
a) Regulation in the UK .......................................................................................... 36
b) Regulation in Spain ............................................................................................ 37
c) Response by business in the UK ....................................................................... 37
d) Request for a standardised system of accounts after financial crisis .................. 37
15
e) Fundamental accounting concepts emerge........................................................ 37
f) Response: Increase in financial disclosure and establishment of fundamental
concepts ............................................................................................................ 38
2.6 Financial Capitalism: Corporate Capitalism and Verifiability, 1901 to 1938 ............... 39
2.6.1 Financial Reporting Unregulated............................................................................... 39
a) Need: disclosure of reliable financial data .......................................................... 39
b) Reasons for and reaction to the stock market crash of 1929 .............................. 40
c) Reaction: financial reporting improved beyond legislation .................................. 40
2.6.2 Development of the Accounting Profession .............................................................. 41
a) Establishment of the accounting profession in the U.S....................................... 41
b) Impact of the Great Depression on the accounting profession ........................... 42
c) Academic work on accounting theory ................................................................. 43
2.7 Financial Capitalism: Professional Bodies' Search for Principles, 1938 to 1973 ........ 44
2.7.1 Pressure from the SEC ............................................................................................. 44
a) AIA and CAP issue ARB's .................................................................................. 44
b) The APB replaces the CAP - publication of ARS1 and ARS3............................. 45
c) ARS1 and ARS3 rejected................................................................................... 45
d) Reaction to the rejection of ARS1 and ARS3 – ARS5 and ASOBAT .................. 46
e) Seidman Committee .......................................................................................... 46
2.7.2 Formation of the FASB ............................................................................................. 47
a) The Wheat Committee ....................................................................................... 47
b) The Trueblood Report ........................................................................................ 47
2.8 Financial Capitalism: Global Capital Markets: 1973 to the Present ........................... 53
2.8.1 Financial Capitalism: The Conceptual Framework (FASB), 1973 to 1999 ................. 54
a) Statement of Financial Accounting Concepts (SFACs) ...................................... 54
b) The Stamp Report ............................................................................................. 54
c) Opinions of the SFAC’s ...................................................................................... 55
2.8.2 Financial Capitalism: The Conceptual Framework in Europe, 1973 to 2002 ............. 56
a) Stimulus: Global capital market .......................................................................... 56
b) Different stimuli between Europe and the U.S. ................................................... 57
c) Pressure to develop a conceptual framework..................................................... 58
d) Evolution of the IASC conceptual framework ..................................................... 58
e) Single conceptual framework project ................................................................. 59
2002 to 2010............................................................................................................. 60
a) In the beginning ................................................................................................. 60
b) The Norwalk Agreement .................................................................................... 60
c) The September 28, 2010 Conceptual Framework for Financial Reporting
(CFfFR).............................................................................................................. 61
2.9 Summary of the Historical Development of the IASB's CFfFR .................................. 65
2.10 A Global CFfFR: A Wicket Problem .......................................................................... 76
2.11 Conclusion ................................................................................................................ 77
16
2 HISTORY OF THE DEVELOPMENT OF THE CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING (CFfFR)
2.1 Introduction
The importance of economic progress for the development of accounting is

emphasised by Edwards and Walker (2009:1) when they state that “accounting has
been implicated in key transitional events such as the emergence of capitalism and
the Industrial Revolution.” 2 As the CFfFR can be viewed as the culmination of
accounting principles and practices into one document, the development of the
CFfFR is the result of external influences on and changing conditions of the world
economy (Salvary, 1979). The purpose of the discussion on the historical
development of The Conceptual Framework for Financial Reporting published by the
IASB in 2010 (the CFfFR) (IASB, 2010a) is to indicate how and why the CFfFR
developed over the ages.
According to Salvary (1979:2): “The accounting conceptual framework is

characterized by a stimulus/response network in which a stimulus evokes a
response.” Edwards (1989:14) is of the opinion that: accounting “...is adaptive in the
sense that it is able to change, and it is persistent because it does not change without
cause.” According to Gaffikin (2008:29) “accounting is very much a social
construction. It has responded to a demand created by dominant economic and
social forces”.
Chapter 2 broadly follows the four stages in accounting development as presented by

Edwards (1989): the pre-capitalist period, 4000 B.C.-1000 A.D. (section 2.2);
commercial capitalism, 1000-1760 (section 2.3); industrial capitalism, 1760-1830
(section 2.4); and financial capitalism, 1830 to date (section 2.5, 2.6, 2.7, and 2.8).
Subsections within the broad stages are based on the discussion of the development
of accounting principles, according to the stimulus/response pattern of Salvary
(1979). The discussion according to Salvatory’s (1979) stimulus/response network
starts at 4 000 B.C. and concludes with the CFfFR as published by the IASB (2010a).
2.2 Pre-capitalist Period, 4000 B.C. to 1000 A.D.
The main feature of the pre-capitalist period is that wealth accrued to political,
religious and military powers and is therefore called the non-economic period
(Edwards, 1989).
2.2.1 Public Economy, 4000 B.C. to 700 B.C.
a) Sumerian temples and the development of writing
Although the earliest precursor of writing depicted as pictographs in caves dates back
to the Upper Palaeolithic period (3500 – 1500 B.C.) (Senner, 1989), the earliest
2
The link between economic progress and accounting change is discussed in Edwards (1989:8–19).
17
evidence of commercial financial record-keeping can be dated back to the early
Mesopotamian period when the Sumerian, Babylonian and Assyrian Empires
flourished (Keister, 1970). According to Senner (1989) the development of writing
had a greater impact on the human race than the discovery of fire or the wheel.
Writing can be seen as the foundation for the development of man’s consciousness,
intellect, comprehension of himself and the world around him (Senner, 1989).
Writing as a system of complex tokens, was developed and practiced in ancient

Sumerian temple communities between 3350 and 3100 B.C. to manage, amongst
others, the organising of production, concentration, management and redistribution of
a surplus produced by the community (Salvary, 1979; Schmandt-Besserat, 1989).
State formation originated in the Sumerian temples and the first occurrence of
complex tokens was documented in Uruk 3 (Schmandt-Besserat, 1989). The rate of
change in societal complexity accelerated and the first state-level societies appeared
in the Late Chalcolithic period (4000 to 3100 B.C.) (also termed as Hammam V) in
Uruk (Rothman, 2004). The development of state-level societies is directly linked to
technological inventions.
The invention of the cuneiform script was closely linked to social, economic and
technological development in the Sumerian period (Green, 1989). The cuneiform
script was used for recording contracts, receipts and expenditures. A sign list and
word list served to familiarise temple scribes with the words they needed for daily
record-keeping (Biggs, 2009). The use of writing for record-keeping and the invention
of the counting device coincide with the transition from hunting and gathering to the
cultivation of grain in fields around the village and the construction of rectangular
silos in a village economy (Green, 1989; Schmandt-Besserat, 1989).
The records (about 4000-year-old tablets) found in Mesopotamian ruins consist of

tablets of receipts, disbursements, partnership formations and dissolutions,
inventories, leases, purchases, sales, rentals, loans etc. (Keister, 1970) These
records from Mesopotamia constitute the first developments of commercial record-
keeping (Keister, 1970). Transactions were recorded in specific columns on a clay
tablet in pictorial representations. The columns were summarized to provide totals
and subtotals to present account balances (Kee, 1993). Some authors even referred
to this system as the “Sumerian form of double-entry bookkeeping” (Kee, 1993:190).
Although the system cannot be seen as double-entry bookkeeping, the Sumerian
tablets had the function of “explicit and easily understood accounting” (Kee,
1993:190).
The changing economy resulted in a substantial increase in the population and a

more advanced new social structure (Schmandt-Besserat, 1989). With the increase
in population the economy progressed to planning for subsistence over seasons and
that required record-keeping over time (Schmandt-Besserat, 1989). The response to
the development of a complex token system of record keeping was the formation of
3
The city of Uruk was founded around 5000 B.C. and the Stone-Cone Temple was built between 3800 – 3400 B.C.
18
urban civilisations with better control over resources produced by the new agricultural
driven economy. The technology developed in the Sumerian temples to exercise
control over resources improved into proper writing records, which served as the
stimulus to the rise of the Sumerian, Babylonian and Assyrian Empires.
Since the Sumerian period (3500 B.C. to about 1940 B.C.), social, economic and
technological development have been linked. The development of state-level
societies can thus be seen as a direct link, or response to the written control of
agricultural resources.
It can be concluded that the change in the economy from hunting and gathering to
the cultivation of grain and the urban phenomenon was the stimulus to develop a
complex token system of record-keeping, which in the end resulted in the
development of state-level societies. The need for control over resources in a
primarily state owned economy in the Sumerian, Babylonian and Assyrian Empires
was also the primary stimulus to develop written records of resources (Salvary,
1979). According to Green (1986) the Chaldean-Babylonian Empire was a highly
developed government as early as 4 500 B.C.
19
An example of Cuneiform symbols:
Figure 2.1: Cuneiform symbols
Source: Western Washington University – Pandora Web Space

http://pandora.cii.wwu.edu/vajda/ling201/writingsystems/sumeriancuneiform.htm
20
An example of the Sumerian syllabic glyphs used by the scribes:
Figure 2.2: Sumerian syllabic glyphs
Source: Ager (2013) Omniglot: The online encyclopaedia of writing systems &
languages.
b) Development during the Minoan period and Greek Dynasty
During the Minoan period another civilisation started in the south of Europe when
palaces were built in Crete between 1900 - 1400 B.C. Tablets were used in the
palaces to keep record of transactions, people, animals, commodities, food,
21
implements, and weapons. The purpose of these records was to “record the
incomings into the palace of these items and the sending out or distribution of goods
into the surrounding countryside” (Stroud, 1989:109).
The Greek Dynasty that started in Crete expanded during the Mycenaean age (1600
– 1100 B.C., the last phase of the Bronze Age in Ancient Greece) and continued until
the end of the seventh century. With the expansion of the Greek Dynasty, the Greeks
spread over the Mediterranean from the eleventh century B.C. to the end of the
seventh century B.C. During this time, a number of colonies were founded in the
Eastern and Central Mediterranean. The expansion of the Greek Dynasty had a great
economic, political, social and cultural impact on Greece and the Mediterranean
(Stroud, 1989).
According to ancient authors like Thucydides and Plato, the lack of land was the
cause of Greek migration to other regions. 4 A policy prohibiting the dividing up of a
father’s estate among legatees (Toutain, 1930) caused the lack of land. This policy is
described in ancient writings like the Iliad, Odyssey, and Works and Days. The initial
stimulus for Greek migrations settled in a government policy prohibiting the division of
land.
Link between Mesopotamian, Egyptian and Greek record keeping
The Greeks implemented record-keeping practices to keep track of their resources

during the colonisation process in the Mediterranean. In these record-keeping
practices, the link between Greece and Mesopotamia can be found. The commercial
record-keeping practices developed in Mesopotamia spread to the successive
empires of Egypt and Ancient Greece. Keister (1970) demonstrates the connections
and similarities between Mesopotamian, Egyptian and Ancient Greek records. The
Mesopotamian influence in the accounting practices on both the Egyptian and Greek
administrations is evident from the Zenon Papyri (Hain, 1966). The similarity between
the Mesopotamian and Greek systems is so strong that it is suggested that the Greek
administration was a direct descendant of the Mesopotamian system (Keister, 1970).
Initially Greece used the same record-keeping pattern as the Babylonian Empire to
manage resources. “The money wealth was lodged in the temples but under the
control of the state. The Parthenon was the treasury of sacred valuables” (Green,
1986:38). Record keepers (clerks) annually reported to the state on the property in
the temples by means of financial statements indicating income from rentals, interest
on loans and expenditures used for sacrifices, wages and entertainments (Green,
1986).
4
The economic causes and consequences of the Greek migrations and their importance is discussed in detail in
Toutain (1930).
22
Purpose: control over resources
The Greek administration was mainly concerned with securing imports of materials
and commodities essential for life in the city and to manage the collection of taxes
(Austin & Vidal-Naquet, 1980). With the expansion of the Grecian Empire during the
Greek Dynasty, the need for centralised government caused the scope of writing to
expand. Written records served to help the administration to manage resources
across distances and over long periods of time (Salvary, 1979).
By 700 B.C., the objective of command over resources by means of written records
was well established across the Grecian Empire. The administration was in the hands
of the assembly with numerous boards and officials reporting to the assembly
regarding the funds to the government. Clerks kept record of the public funds and
were in turn controlled by checking clerks. The most important financial officer was
the Treasurer or Manager of Public Revenue (Edwards, 1960).
The main stimulus during the period 4 000 B.C. to 700 B.C. was the need for control
over resources. The need to control resources during the Greek Dynasty was caused
by a government policy not to divide land resulting in the colonisation of neighbouring
countries. This policy served as a stimulus to search for control mechanisms of state
resources. The response was the development of written documents managing state
resources. The response created a stable state ownership economy, which then
paved the way for the development of new empires and a new type of economy, i.e.
the feudal system.
2.2.2 Feudal System, 700 B.C. to 1000 A.D.
As the Greeks moved out of Greece to settle in the colonies and started working the
land with their agricultural technologies, the value of the land increased. The Greek
settlements also started trading with the neighbouring states and tribes (Toutain,
1930). During this process, the Greeks mastered the sea-routes and for example
started importing metals from Caucasus and Armenia, and food, raw materials and
manufactured goods from Cyprus, Syria and Egypt (Toutain, 1930).
a) Money: moveable wealth
During the expansion period, the Greeks discovered a new form of wealth; money.
This movable form of wealth “then took its place by the side of landed wealth in the
economy of the Greek world” (Toutain, 1930:31). The earliest examples of coins date
from the seventh century B.C. Coins were made of precious metal; gold, silver or
electrum (Toutain, 1930). The use of money made it possible to trade across borders
and to accumulate wealth not linked to land. Money became an instrument to finance
economic activities by lending it out to manufacturers and merchants. Money lent out
at interest was known by the Athenians as active capital or working capital (Toutain,
1930).
23
b) Birth of the banking-system and commercial legislation
The new economic system of trading with and the lending out of money gave birth to
a new profession, the banking-system. The bankers or money-changers (trapezitai)
provided a variety of financial and commercial services to their clients as described in
Toutain (1930:75–76). With the expansion of business, commercial legislation was
introduced by the state to ensure honest dealings and transactions and with that,
commercial law came into being. The impact of the use of money on the economy is
summarised by Toutain (1930:79) as follows: “The economic development had a
decisive influence on the character of property, the organisation of labour, and the
nature of commercial operations. Movable wealth assumed an important position by
the side of landed wealth. Then what is known as capitalism made its appearance.”
The expansion of the Greek Empire and availability of capital stimulated some private
initiatives and according to Green (1986:39) “companies and partnerships existed in
Greece as early as 400 B.C.”.
c) Accounting records and corporate governance
Due to the expansion of the Greek Empire, the administration had to develop to keep
track of state resources and taxes. The state also included some corporate
governance in their administration as the accounts of the financial administration
were published by engraving it on stone and placing it outside the temples for public
inspection (Green, 1986). The operations of the state banks were managed in the
larger temples. In order to manage the finances of the state, the Council created the
position of a treasurer around 300 B.C. Accounting records consisted of contracts,
letters of credit, daybooks and ledgers. During the Hellenistic Age under Alexander
the Great (323 – 31 B.C.) the Greek culture and civilization spread throughout the
world. The well-established Greek administration and culture were transferred to the
countries concurred under the Hellenistic Age. During the Pax Romana (31 B.C. –
180 A.D.), a period of peace between Greece and Rome, the Romans welcomed the
Greek culture and the two empires influenced each other.
d) Sophistication under the Roman Empire
According to Green (1986:39), “accounting under the Roman Republic reached a

high degree of perfection.” The accounting method involved daily entries of receipts
and disbursements in a daybook. Transactions were recorded in the tabulœ publicœ.
On a monthly basis, the transactions were posted to a ledger resembling the codex
accepti et depensi. A register of debts or calendarium was kept (Brown, 1905). Julius
Caesar made some improvements and introduced personal supervision over financial
matters. During the reign of Augustus, the Roman Emperor used the imperial
financial information to help with planning and budgeting (Oldroyd, 1995). The
financial system improved over the years until Diocletian had, at the end of the third
century, divided the Roman Empire into twelve dioceses
24
e) Greek and Roman influence on legislation
The main purpose of the accounting practices during the Greek and Roman Empires
was to manage state resources and ensure that all taxes were collected. The link
between legislation and accounting practices can be traced back to the following two
examples of legislation to manage state resources. Charlemagne issued his
capitulore de Villis in 812 A.D. This ordinance contained instructions for the
administration of imperial estates. According to the ordinance, every steward on the
Emperor’s estates had to provide annual reports containing an inventory of land and
of income and expenditures (Edwards, 1960).
The same happened in England when William I invaded England in 1066. He took
control over all property in England and ordered a survey of the crown lands. The
survey was documented and compiled into what is known as the Domesday Book 5
(Green, 1986). The English Pipe Roll of 1130-1131 is the best-preserved accounting
record indicating royal control over revenue and property. The Pipe Roll is based on
the Domesday Book. In England and Scotland, the Exchequer was established
during the reign of Henry II. The upper Exchequer had control over collection and
disbursement of royal revenues and the lower Exchequer managed the receipt and
issue of public money (Green, 1986). The accounting system used by the manor and
exchequers is called charge and discharge accounting (Edwards, 1989). 6
f) Move towards a feudal system
During the period 700 B.C. to 1204 A.D. the state ownership economy, as indicated
above, moved to a feudal system 7 (Salvary, 1979). The change in the political system
to the feudal system during the Byzantine Empire was the stimulus to loosen the
ownership of property out of the hands of the state. Whittow (2010) argues that the
economic growth in some parts of Europe started as early as the seventh or eighth
century and that the stimulus for the growth lay in peasant enterprise. The tenth-
century land legislation is evidence of landed aristocracy and the existence of free
peasantry (Whittow, 2010). The free peasant farmers of the tenth century were
already responsible for a substantial proportion of the empire’s output. The response
was a feudal economy with more land in the hands of feudal landlords and free
peasant farmers working the land. According to Strayer (1956:16) “all authorities
would admit that feudalism reached its height in the eleventh and twelfth centuries.”
Life in Europe changed after 1000 which “provided the stimulus for major
developments in bookkeeping” (Edwards, 1960:451). The manor and village gave
way to the town, manufacturers and craft specialization increased, trade grew and
broadened and the guild system took root and flourished. At the end of the period,
some of the feudal lords were forced to let go of some of their land. Land in private
5
Domesday Book is a manuscript record of the great survey, completed in 1086 on orders of William the Conqueror,
of much of England and parts of Wales.
6
J.R. Edwards (1989:32–44) discusses charge and discharge accounting in detail.
7
In a feudal system the king or state provide land to a landlord to manage on behalf of the king or state. The landlord
then provides land to free peasants to work the land and earn income.
25
hands marked the very first steps of an exchange economy (Salvary, 1979). An
exchange economy involves the exchange of monetary units for resources (Brunner
& Meltzer, 1971).
2.3 Commercial Capitalism, 1000 to 1760
With private property ownership emerging it became possible for individuals to enter
the commercial market, first in an exchange economy (1000 to 1500) and later (1500
to 1760) as entrepreneur in a more private capital-intensive economy.
A number of developments encouraged the transition to an entrepreneurial economy

from the fourteenth century onwards. On the technological front, the printing press
was invented and the use of Arabic numerals became commonly accepted. On the
economic front, private property ownership became more common and individuals
started to invest capital in ventures and partnerships. The entrepreneur started to
manage a business exceeding his personal financial capacity.
The following developments, amongst others, provided the stimulus for more
accurate accounting and better financial reporting:
• the art of writing,
• money as monetary unit,
• cross regional commerce,
• provision of credit,
• private ownership,
• the invention of printing,
• the use of Arabic numerals,
• capital invested in ventures,
• joint ventures and partnerships, and
• the need to compute profits.
2.3.1 Exchange Economy, 1000 to 1500
The period between 1000 to 1500 was dominated by an exchange economy where
interregional trade flourished (Salvary, 1979). The stimulus during this period was a
lack of organised capital markets, the desire to make investments as well as the
inadequacy of the charge and discharge accounting system to meet growing
business requirements (Edwards, 1989). The Mediterranean commerce during the
eleventh to the thirteenth centuries signalled the advent of commercial capitalism
(Edwards, 1989).
a) Medieval trading: Genoa and Venice
Business developed during the late-Medieval (Lopez & Raymond, 2001) and early
Renaissance in the great Italian trading centres in the northern part of Italy when
Genoa and Venice were established as the main commerce centres between Europe
and the Near East (Edwards, 1989; Edwards, 1960).
26
The following illustration provides an overview of the trading routes used during the
late-Medieval times (Wukitsch, 2014) 8 .
Figure 2.3: Medieval Trade Routes
The increase in business with other regions stimulated the shipping industry. Venice
controlled the Mediterranean trade and became the leader in banking and record
keeping (Edwards, 1960).
b) Partnerships as business vehicle
The exchange economy depended upon the interaction between investors and
business operators. Those with wealth continually moved from opportunity to
opportunity (Salvary, 1979). The partnership contract was developed in Italy to
facilitate the business agreements. The capital of the partners was stated separately
and the partnership contracts stipulated how profits and loss were to be shared and
also made provision for the dissolution of the partnership (Edwards, 1960).
8
For a comprehensive discussion on Medieval Trade in the Mediterranean World see Lopez and Raymond (2001).
27
c) Method of Venice – double-entry bookkeeping
During the thirteenth and fourteenth centuries, the enormous growth in Florentine
commerce served as a stimulus for the development of bookkeeping as capital
owners had to keep track of their investments. Another stimulus to bookkeeping was
the discovery of the sea routes to India (Edwards, 1960; Littleton, 1966). The growing
importance of the Atlantic shipping routes and access to the East around the Cape of
Good Hope and the Americas served as a stimulus for financial innovation in Europe
to move to the north. Bruges emerged as the centre of trade between the
Mediterranean and the Baltic (Michie, 2008).
Because of the movement between opportunities, planning for investment by owners

of capital and the execution of the opportunities by business operators became a
major objective. “Partners in a business, …, required a record of the entire course of
trading so as to apportion profits, and it is in this necessity that we find the prime
motive for creating a system of book-keeping” (Fogo, 1905:97). A complete system of
double entry bookkeeping is found in the accounts of the stewards in Genoa in 1340
(Edwards, 1960; Fogo, 1905; Green, 1986). The firm Donado Soranzo and Brothers
used the double-entry system in their ledgers. One of the ledgers of this firm, which
covers the period 1406-1434, is complete with a Profit and Loss Account and a
Capital Account (Fogo, 1905; Green, 1986).
A document prepared by Benedetto Cortrugili entitled Della Mercatura e del Mircanti

Perfectto Della Mercautra that was most probably completed in 1458 (Edwards,
1960; Green, 1986) or 1463 (Fogo, 1905), is believed to be the foundation for the
influential publication of Luca Pacioli 9 entitled Summa de Arithmetica, Geometrica,
Proportioni et Proportinalita 10 published in 1494 (Edwards, 1960; Fogo, 1905; Green,
1986). The Franciscan Monk Fra Luca Bartolomeo de Pacioli was the first academic
to publish on accounting 11 and is seen as the father of modern accounting (Littleton,
1966).
Pacioli used the method of Venice already in use to systematise and formulate the
principles for the double entry bookkeeping system. The procedures prescribed by
Pacioli did not originate with him, he only formulated one of the bookkeeping
practices already in use in Italy (Fogo, 1905; Peragallo, 1956). This is made clear by
Pacioli when he stated that: “We shall use the method of Venice, which is certainly to
be commended above the others, and the understanding of all others” (from the title
page of the Summa de Arithmetica, Geometrica, Proportioni et Proportinalita as
translated by Green (1986:94)).
9
Littleton (1966:76) has a note on the spelling of Pacioli’s name. Some authors spell it Pacioli and others spell it
Paciolo. In this study, Pacioli will be used.
10
Fogo (1905:109–120) and Green (1986:95–105) provide a detailed discussion of the practises and procedures of
the method of Venice as explained by Pacioli in the “Summa de Arithmetica, Geometrica, Proportioni et
Proportinalita”.
11
Littleton (1966:23) provides a list of publications on bookkeeping until 1796 following the publication by Pacioli.
28
The main purpose of the Summa Arithmetica, Geometrica, Proportioni et
Proportinalita was to serve as a reference text to the merchants and as an aid for the
education of their sons. (Sangster, Stoner, & McCarthy, 2008). The Summa de
Arithmetica, Geometrica, Proportioni et Proportinalita served as a bookkeeping
framework and guide for bookkeepers in Italy, Europe and England through the
teachings and publications of Dominico Mangoni 1534, Jan Ympyn Christoffels 1543
and 1547 and Hugh Oldcastle 1543 (Edwards, 1960; Fogo, 1905). By the end of the
fifteenth century a fully developed bookkeeping system known as the “Method of
Venice” (Edwards, 1960; Fogo, 1905) was the response to the stimulus and was
functioning in the commercial centres of Italy.
d) Useful financial information
The expansion of commerce in Italy and Europe and the development of partnerships
created the need for business information. As already discussed, the response was
the basic principles of double entry bookkeeping as formulated by Pacioli. Green
(1986:91) confirms this by stating: “Pacioli’s treatise on bookkeeping which was
published in 1494 was the answer to an insistent economic demand for a
standardised system of recording business transactions.”
The bookkeeping system or framework and planning document provided information

to traders regarding their assets and liabilities (Edwards, 1960) to assist them with
making business decisions. According to Fogo (1905:111) “the object of book-
keeping is stated by Paciolo in precise terms: to give the trader without delay
information as to his assets and liabilities”. It seems as if the objective of usefulness
of general purpose financial reporting, as it is formulated in the CFfFR “to provide
financial information about the reporting entity that is useful to existing and potential
investors, …” (IASB, 2010a:par. OB2) was in essence part of the motivation for
Pacioli to publish the Summa de Arithmetica, Geometrica, Proportioni et
Proportinalita. Pacioli indicated the objective of usefulness and necessity of financial
information to the merchant as follows:
“The third and last thing necessary is that he should arrange all his
dealings in good order, in order that he may quickly find the complete
record of each, both as to debit and credit, for business takes no notice of
anything else. And this part is among others most useful to them, for it
would be impossible to conduct their business otherwise” (from the title
page of the Summa de Arithmetica, Geometrica, Proportioni et
Proportinalita as translated by Green (1986:93,94)).
Ijiri (1995:284) summarises the contribution of Pacioli as follows: “Fra Pacioli of

Sansepolcro deserves the highest praise that can be given to an intellectual product
– ‘Double-entry bookkeeping is a thing of beauty, indeed!’”
e) Acceptance of the Arabic numeric system
During this period, the use of the Arabic numeric system as part of the double entry
bookkeeping system contributed to the acceptance of the double-entry system.
According to Edwards (1989:46), “it was not impossible to use Roman numeral as the
29
basis for double entry but, in a society where only these existed, they prevented the
necessary conceptual breakthrough from being made.” The widespread use of the
Arabic numeral system only became common during the seventeenth century. The
Roman system was abandoned in Britain between 1668 and 1699 (Edwards, 1989).
The adoption of the new “technology” of Arabic numerals contributed to the
acceptance of the double entry bookkeeping system as it assisted with arithmetic
calculations or pen-reckoning when the numbers were neatly arranged in columns
(Edwards, 1989).
It can be concluded that the discussion of the period 1204 to 1500 indicates that the
response to the need for a developing exchange economy for useful financial
information resulted in the development of the double entry bookkeeping system that
still forms the basis of current bookkeeping practices. We also find that, usefulness
as the objective to provide financial information, formed part of Pacioli’s motivation to
publish the Summa de Arithmetica, Geometrica, Proportioni et Proportinalita. The
publication by Pacioli served as a framework on bookkeeping for other authors in
Italy in Europe. Lastly, the use of the Arabic numeral system as a “new technology”
assisted with the adoption of the double entry bookkeeping system.
2.3.2 Entrepreneur and Continuity of Business, 1500 to 1760
During the period 1500 to 1760, the entrepreneur emerged (Salvary, 1979). The
entrepreneur managed a business with resources exceeding his personal capacity
independent of himself. The economic development in Europe during the
seventeenth century is marked as the last phase of transition from a feudal to a
capitalist economy and is seen as the period of transition to capitalism (Wallerstein,
1980) with active securities markets established in Europe and America by the end of
the seventeenth century. According to Salvary (1979) the stimulus during the period
was the need for long term financing. The response was the concept of capital.
a) The accounting equation – Hugh Oldcastle 1543
The accounting concept of capital prepared the business world for the securities
market in the trading of capital (Salvary, 1979). The influence of Hugh Oldcastle
(1543) during this time is important to the development of financial reporting.
Oldcastle, a teacher of arithmetic and bookkeeping in London produced an English
translation of Pacioli's Summa (Brown, 1905; Edwards, 1960).
The concept of continuity as portrayed in the balance sheet is based on the capital
model formulated by Hugh Oldcastle in 1543 in England, 12 namely Capital = Assets
minus Liabilities. The balance sheet was regarded as the most important financial
statement and was used to answer stewardship questions. Emphasis was placed on
assets, liabilities and equity whilst revenues and expenses were not regarded as
important especially in the agricultural environment (Edwards, 1996). Oldcastle’s
12
According to Salvary (1979) the statement “balance sheet” is attributed to Hugh Oldcastle as cited in the work of
John Mellis (1588).
30
contribution is that he was more clear than Pacioli on how to deal with the profit and
loss and the capital accounts (Edwards, 1989) and provided a description of a trial
balance (Peragallo, 1956).The continuous effect of capital was carried in the trial
balance as clearly formulated by Ympyn.
b) The trial balance – Ympyn 1543
In 1543, Ympyn published his Nieuwe Instructie in Antwerp in which he describes the
trial balance. “Ympyn, is the first author to use the balance account properly as an
account in the ledger” (Peragallo, 1956:393). Ympyn firstly transfers the balances of
the various merchandise accounts to a “remaining goods” account. He then transfers
all the nominal accounts to the profit-and-loss account, the latter being closed into the
capital account. From this description, it seems that the use of a capital account was
already established in 1543. The concept of capital, carried forward from one year to
another, prepared the business world for the securities market.
c) The origin of the securities market
The securities market was formally recognised in 1773 when the brokers who erected
their own building in Sweeting’s Alley officially formed the London exchange. The
origins of the capital market can however be traced to Venice during 1171-2 when
the Venetian government promised to pay interest on compulsory loans from its
wealthy citizens. These interest-bearing bonds provided by the Venetian government
were sold by the holders in need of money and bought by others who wanted income
from their savings (Michie, 2008). The transactions and transfers of bonds between
individuals were, at that stage, private transactions and not regulated by the
government of Venice. As new shipbuilding technologies developed, other shipping
routes were discovered and the initiative moved away from Venice.
The importance of the Atlantic shipping routes to the East and the Americas resulted
in the financial incentive moving from Italy to the north of Europe. Trading of primarily
money and bills between the Italian merchants and entrepreneurs and bankers took
place on the Bruges Bourse in the Place de La Bourse. The Bruges Bourse was
named after the Beurse family who had an inn, the Place de La Bourse in Bruges
(Michie, 2008). According to Michie (2008) the term Bourse became synonymous
with that of Stock Exchange.
As trading across the Atlantic expanded the need for finances also increased. In the
early sixteenth century Bruges, Antwerp, Lyon and Genoa were viewed as the cities
giving financial leadership in Europe. The securities market developed with Bourses
built all over Europe in Cologne (1553), Paris (1563), London (1571), Seville (1583)
and Frankfurt (1585). Antwerp defaulted on its borrowings in 1570 and was replaced
by Amsterdam to become the commercial centre of Europe (Michie, 2008).
d) De Wisselbank van Amsterdam
The founding of the Bank of Amsterdam (De Wisselbank van Amsterdam) in 1609
marked the beginning of bank transfers of money between merchants through debits
31
and credits (Wallerstein, 1980; Michie, 2008). The role of Amsterdam as financial
leader in Europe and the ability to transfer money between merchants was important
to the economic development of the Dutch and Europe.
With the religious wars in France, Germany and Britain between 1550–1649, the
defeat of the Spanish Armada by the English in 1588, the Thirty Years’ War from
1618–1648 and the English civil war between 1642–1648 (Stearns, 2005) merchants
could no longer depend on governments to grant security for loans and bonds. There
were no securities that served the need for short-term money (Michie, 2008). In order
to keep on trading over the Atlantic the Verenigde Oostindische Compagnie (VOC) or
Dutch East India Company was established in 1602. The VOC issued a large number
of shares and very soon an active securities market emerged. It is estimated that by
1620 there were 65 000 investors in the Netherlands. The need to raise capital from
the general public in the active securities market in the early seventeenth century and
the separation of ownership from management resulted in published financial
statements for use by the shareholders. The officers of the VOC had to annually
provide a balance sheet (“Ballance of all the said accompts”) to the company by the
last day of June (Edwards, 1996).
Towards the end of the seventeenth century (around 1688) the securities market in
Amsterdam was quite sophisticated with financial techniques such as spot and future
contracts; call, put, and straddle options; margin trading, hedging, short-selling and
the ability to defer both payment and delivery (Michie, 2008). The contribution of
Amsterdam was “the design of trading methods which permitted investors to buy and
sell securities in such a way as allowed them to employ short-term funds
remuneratively, without exposing themselves to undue risk of either absolute loss or
inability to realize their investment when required” (Michie, 2008:28). The active
securities market stimulated the need to provide financial information to investors and
potential investors.
e) The era of mercantilism – Shipbuilding and productive efficiency
The period from 1600 to 1750 is known in history books as the era of mercantilism
(Wallerstein, 1980). Two agreed upon industry concepts of mercantilism, are
productive efficiency and shipbuilding (Wallerstein, 1980). The United Provinces
(Holland) took the lead in the early stages of mercantilism in both of these industry
concepts. 13 The Dutch increased their productive efficiency and shipbuilding
technology to become superior over other European countries to what is called the
Dutch hegemony in the world economy. The Dutch had “simultaneously productive,
commercial and financial superiority over all other core powers” (Wallerstein,
1980:39).
The stimulus for the era of mercantilism can partly be ascribed to the technological
advances to produce more efficiently and the ability of the Dutch to build cleaner,
13
Wallerstein (1980:37–71) presents a detailed discussion on the Dutch hegemony in the world economy between
1625-1675.
32
cheaper and safer ships (Wallerstein, 1980). One of the reasons for the capitalist
strength of Amsterdam in the seventeenth century was the sound public finances,
combined with a worldwide commercial network (Wallerstein, 1980) which can be
seen as a response to the economic expansion caused by the technological
advances developed by the Dutch. The need for long term financing by the
entrepreneur served as stimulus for the development of the concept of continuity of
capital.
The strength of the world-economy slowly shifted from the United Provinces to
England and France with England becoming stronger than France by the end of the
seventeenth century (Wallerstein, 1980). Wallerstein (1980) attributes England’s
strength in the world-economy to political measures by the English state. 14
On the European political front the period between 1651 and 1763 can be divided
into two phases. The first period, 1651 to 1689, is the period of Dutch hegemony that
ended with the accession of William and Mary to the throne of England. The second
period, 1689 to 1763, depicts a period of unbroken Anglo-French rivalry. Although
there was a lot of movement on the political front in Europe between 1600 and 1750,
the “European world-economy went through a long relative stagnation of the total
production of the system as a whole” (Wallerstein, 1980:245). After the stagnation, a
stimulus in the form of technological advancement in the production system resulted
in a reaction known as the Industrial Revolution.
2.4 Industrial Capitalism, 1760 to 1830
The period 1760 to 1830 is known as the period of the Industrial Revolution. Some
factors contributing to the increase in industrial activities were lower food prices in
Britain, better nutrition and health, and an increase in personal hygiene that caused
an increase in life expectancy. Because of the better living and health conditions a
growth in the population was experienced (Hendriksen & Van Breda, 1992). This in
turn led to growth in industries.
2.4.1 Demand for Capital and Capital Maintenance
The growth in industries during the industrial revolution lead to an increase in the
requirements for capital and the need to maintain capital in the canal, manufacturing,
steel, railway and coal industries (Sylla, 2009; Edwards, 1996). 15 During this time, a
key to the success of the railway companies was to obtain a monopoly to be able to
purchase land for the railway lines. The railway companies were capital intensive and
had to raise capital from investors. The need for capital had major implications for the
development of the capital markets (Edwards, 1996).
14
See Wallerstein (1980:114–125) for a detail discussion on the reasons why the English became stronger than the
French.
15
The requirements for capital is clear from the discussion of Sylla (2009) regarding the UK and US financial
systems.
33
The demand for capital is reflected in an increase in the number of banks during this
time. According to Hendriksen and Van Breda (1992) there were 80 banks in London
and 400 banks in the country by 1800. The London Stock Exchange was officially
established in 1773. The New York Stock Exchange followed shortly afterwards in
1792. In the UK, the chartered company dates back to the sixteenth century and
provided a vehicle to obtain capital and conduct trade overseas (Sylla, 2009).
2.4.2 Demand for Accountability and the Double-entry System
As investments grew, the call for accountability also increased. Shareholders started
to demand investigations into the books of companies and public accountants were
called in to provide financial expertise (Edwards, 1996).
Although the double-entry system was developed in the thirteenth century, the
tendency was to still use the charge and discharge system of accounting to manage
the finances of the growing companies at the beginning of this period (Edwards,
1989). Two major limitations of the charge and discharge system experienced with
the new economic development was that firstly, it did not show the amount of capital
invested by the owner and secondly, that it could not be easily adapted to provide
profit and other performance information (Edwards, 1989). The need to raise capital
from the general public and the separation of ownership and management created
the need for published financial statements (Edwards, 1996). The double-entry
accounting system suited this need. In addition, the double-entry system is also more
comprehensive and orderly, as it provides a check on accuracy and completeness of
the ledger and the records contain the information to prepare the required financial
reports (Edwards, 1996).
2.4.3 Demand for Financial Reports
The call by investors and business owners for accountability by the managers of a
business increased the demand for financial reports to absentee owners (Hendriksen
& Van Breda, 1992). There is evidence of financial reporting of a high standard.
Financial reporting of two firms of charcoal and iron makers for example included
transfer prices, allocation of joint costs to determine profits and losses on
departmental level and Welsh industrialists used fundamental accounting concepts
like – going concern, accruals, consistency and prudence (Edwards, 1996). The
stimulation for accounting development during the industrial revolution was the
demand and opportunity for large amounts of capital to be invested. The accounting
response was financial reporting to inform the investors of the status of their
investments.
The level of sophistication that stock exchanges reached by the early nineteenth
century, the ever-increasing demand for large amounts of capital and the relatively
high standard of financial reporting combined with some sound accounting practices,
created the opportunity for businesses to utilise the financial instruments at their
disposal to provide more investment opportunities for ordinary people.
34
2.5 Financial Capitalism: Return on Capital Invested 1830 to 1900
The period of financial capitalism started with the demand for large amounts of
capital to set up and expand large corporations. Capital was mainly raised by the
issue and trading of shares on stock markets. The demand for financial information
by managers, investors and other users of financial information therefore dominated
accounting and financial reporting in the capital markets.
The economic climate was positive at the start of the Victorian era due to economic
growth and the rise of capital markets to promote construction in the railway industry
(McCartney & Arnold, 2010). As London was the biggest securities market, taking
over from Amsterdam around 1820 (Michie, 2008) and continuing to be the financial
centre of the global capital market until 1913 (Neal, 2009), most of the discussion in
this section will be focused on the developments in the UK. During 1845-49,
expenditure in the railway industry represented 4-5 per cent of the gross national
product in the UK (McCartney & Arnold, 2010). In the United States the number of
railroad stocks increased from three in 1835 to ten by 1840 (Michie, 2008).
2.5.1 Unregulated Financial Reporting
Financial reporting in the UK was unregulated in the nine tenth century with few
statutory requirements (Arnold & McCartney, 2002). The London Stock Exchange
(Michie, 2008) prescribed minimum regulations and reporting practices varied and
changed considerably and quite quickly (McCartney & Arnold, 2010; Edwards, 1989).
Accounting regulation in the UK assumed a laissez-faire system with minimal
regulatory guidance (Gaffikin, 2008; Street, 1996). In the UK the Joint Stock
Companies Act was only passed in 1855 (McCartney & Arnold, 2010).
a) Capital expenditure and depreciation
The nature of the railway industry, having more long term assets, challenged
managers and accountants on the treatment and forecast of an assets life
(McCartney & Arnold, 2003; Edwards, 1989). The treatment of long-term assets
(capital expenditure) by calculating and accounting for depreciation 16 on such assets
was one of the most important accounting concepts to be standardised. The
recommendation of the Monteagle Committee (1849) and the passing of the Railway
Companies Act 1867 (Edwards, 1989) serve as evidence of the importance of
regulating capital expenditure.
b) Separation between management and ownership
According to Littleton (1966:149) “by the end of the nineteenth century the
development of separate financial statements was well under way.” The increase in
separation between management and ownership, where shares were traded on a
stock exchange, increased the importance of reliability and accuracy of financial
16
See Littleton (1966:223–241), Edwards (1989:113–116, 122–124) and (Arnold & McCartney, 2002) for a discussion
on the development and treatment of depreciation in the nineteenth century.
35
reports. With the separation between management and ownership, the role and
integrity of management increased, as they were required to report to the increasing
number of shareholders.
c) The Railway Mania
During the nineteenth century, management chose the accounting principles and
practices to suit the goals of the organisation. As investors were persuaded of the
profitability and returns in the railway industry, 17 speculations in railway shares
intensified. The speculation in railway shares in the UK reached a climax in the mid-
1840’s, a phenomenon known as the “Railway Mania” (Edwards, 1996:36).
In an uncontrolled accounting environment 18 during the time of the Railway Mania,

investors were exploited by manipulating accounting records to produce favourable
reports and promises of large dividends 19 (Edwards, 1996; McCartney & Arnold,
2010). According to McCartney and Arnold (2010:405) the overstatement of
profitability “was mainly effected by abandoning the practice of charging
depreciation”. It was only at the beginning of the twentieth century that railway
companies voluntarily started to recognise depreciation.
2.5.2 Demand for Regulation
a) Regulation in the UK
As dividend projections did not realise, investor confidence in the railway companies
plummeted and the share prices of the railway companies fell on average by 64 per
cent in the UK during the 1840’s (Edwards, 1996). Demands for regulation resulted in
the appointment of a government Select Committee on Joint Stock Companies in
1844, chaired by William Gladstone (Edwards, 1996). Based on the
recommendations of the Select Committee, the Joint Stock Companies Act was
passed in 1844 (Edwards, 1996). The Joint Stock Companies Act provided for the
creation of an organisational entity. Limited liability, which is dominant in most
financed business industries today, was introduced to the organisation entity in 1855
(Edwards, 1996). Regulation was not isolated to the UK. One of the trendsetters in
regulation of accounting practices was Spain after 1848.
17
Profits were in the early stages of the railway industry much higher than the 3 per cent available on UK government
securities (McCartney & Arnold, 2010). Campbell (2010) confirms that prices of railway shares were determined by
fundamental factors such as dividends and growth risk.
18
Although Bryer (1991:439) argues that according to the “swindle hypothesis” the railway mania was “the product of
a rational and rapacious social hierarchy, for whom accounting was simply a tool to be manipulated”, the uncontrolled
accounting environment favoured those accountants and managers who wanted to manipulate the accounting
records.
19
It was stated in an editorial in The Times of 27 August 1866 that “Directors were often tempted to disregard all
moral and legal obligations to make things look pleasant to their proprietors” (Edwards, 1989:117).
36
b) Regulation in Spain
The Spanish economic crisis of 1847-1848 20 also resulted in increased regulation of

joint stock companies by the introduction of the Joint Stock Companies Act 1848 in
Spain, that modified the Spanish Code of Commerce of 1829 (Llorens, 2000) . The
Joint Stock Companies Act 1848 required that existing companies apply for re-
authorisation to continue as limited companies and that the accounts be inspected
(Llorens, 2000). It does not seem as if rules were made to standardise accounting
practices. Regulation was limited to re-authorisation and inspection. Management’s
response was to perceive the inspection requirements as an intrusion of the principle
of confidentiality. This led to some companies dissolving and pursuing business
under a different legal entity (Llorens, 2000).
c) Response by business in the UK
Railway management in the UK responded to the Railway Mania during 1840-1855

by providing more information and by changing the conceptual basis of reporting
(Edwards, 1996; McCartney & Arnold, 2010). Disclosure levels of financial reports
increased and there were less variation in disclosure amongst the railway companies.
Balance sheet disclosure increased during 1845-1850 and major advances in
disclosure of income and expense were experienced between 1840-1845
(McCartney & Arnold, 2010).
d) Request for a standardised system of accounts after financial crisis
After another financial crisis in 1866, the Royal Commission on Railways in the UK
requested a standardised system of accounts. As a result the “Regulation of
Railways Act 1868 contained fifteen financial and statistical statements designed to
improve comparability” (Edwards, 1996:65) and provide shareholders with
information to assess the financial position of a company.
e) Fundamental accounting concepts emerge
The conceptual basis of reporting started to move from cash to an accrual basis with
one of the leading companies, the London and North-Western Company, setting the
example (McCartney & Arnold, 2010). Based on the financial report of The Staveley
Coal and Iron Company Ltd, which is regarded as a fair example of financial reports
during 1868, Edwards (1989:37) states that the following four fundamental
accounting concepts were applied in preparing the financial statements. “Stock of
goods … was valued at cost or below. Expenditure on fixed assets was capitalised at
cost. The depreciation charge was designed to recover the cost of fixed assets over
their expected useful life”, although not widely used before the twentieth century.
“Revenue was recognised in accordance with the realisation concept and amounts
owing to ‘sundry persons’ were accrued as liabilities.”
20
Llorens (2000:18–19) discusses the economic crisis from 1847-1848 in Spain.
37
f) Response: Increase in financial disclosure and establishment of
fundamental concepts
The response to the Railway Mania was an increase in financial disclosure, the
adoption of some accounting principles and the demand for objectivity (Salvary,
1979). Although there was progress in the disclosure of financial information between
1830 and 1900, accounting practices were not standardised (Edwards, 1989). 21 By
the end of the nineteenth century “the four fundamental concepts specified in the
Statement of Standard Accounting Practices (SSAP) 2 (1971) – accruals, going
concern, consistency and prudence – were already established” (Edwards,
1989:124–125).
In order to follow the development in accounting practices since the start of Industrial
capitalism the following summary from 1760-1900 is provided.
Major accounting developments during the period 1760-1830 were:

• the transition from charge and discharge accounting 22 to double-entry
accounting 23 (Macve, 1996; Edwards, 1996);
• the development of cost management accounting 24 (Fleischman & Tyson,
1993; Gutiérrez, Larringage, & Núñez, 2005), due to the need to determine the
cost of goods manufactured (Corns, 1996) and the valuation of inventories
(Hendriksen & Van Breda, 1992);
• the concept of depreciation becoming more important, due to the increased
cost of fixed assets (Edwards, 1996; Hendriksen & Van Breda, 1992);
• the introduction of the concept of capital protection or capital maintenance into
the accounting world (Salvary, 1979). According to Salvary (1979) the concept
of continuity implies permanence of capital for business that is a going concern
and,
• lastly, the growing demand for financial reporting (Arnold & McCartney, 2008).
Accepted accounting practices by the end of the nineteenth century were:

• the adoption of the going concern concept (Edwards, 1989; Hendriksen & Van
Breda, 1992);
• the historical cost concept being used to capitalise the cost of fixed assets
(Edwards, 1996);
• a move from cash to accrual basis of accounting (Edwards, 1989; McCartney &
Arnold, 2010);
• a selection of particular valuation procedures (Edwards, 1989);
21
Edwards (1989:119–122) discusses the inconsistency and bias of accounting practices between 1830-1900
referring to the Northampton Gas Light Company, Wigan Coal and Iron Co. Ltd and the Shelton Iron Steel and Coal
Co. Ltd.
22
Littleton (1966:123–124) explains the use of the “charge-and-discharge Account (statement)”.
23
The value of the double-entry system in the development of capitalism is treated in the academic discussion related
to Sombart’s theory. For the purpose of this study, it is sufficient to say that the double-entry system was widely
accepted at a stage of the economic development when the alternative methods could not provide the answers for
the questions asked.
24
Although there are evidence that costing techniques were already used before the Industrial Revolution the major
development in costing methods can be traced to the early stages or just before the Industrial Revolution (Maria &
Larrinaga-Gonzalez, 2001).
38
• the concept of prudence / conservatism (Edwards, 1989; Salvary, 1979);
• the adoption of depreciation accounting in some entities (Arnold & McCartney,
2002; Edwards, 1989);
• comparability (Edwards, 1996) and consistency (Edwards, 1989) of financial
statements, and;
• the absence of general agreement on profit measurement and asset valuation
procedures (Edwards, 1989).
2.6 Financial Capitalism: Corporate Capitalism and Verifiability, 1901 to 1938
The time between 1901 and 1938 is characterised by major events influencing the
accounting profession and the accounting standard setting environment. The lessons
learned from the Railway Mania, as listed above, were already incorporated in the
accepted accounting practices. Although financial capitalism, with shares traded on
numerous stock exchanges, was well established in the western world by the turn of
the nineteenth century, accounting and financial reporting were struggling to keep up
with developments on the business front. As the capital markets developed, the
demands for verifiability increased. It took a major event, the Great Depression, as
stimulus for the accounting profession to react and move from mainly being
unregulated to a more structured and regulated profession during the period from
1901 to 1938. This section (section 2.6) focuses on the events surrounding the Great
Depression and the impact of the Great Depression on financial reporting, changing it
to a more regulated profession.
2.6.1 Financial Reporting Unregulated
Accounting practices in the United States was unregulated prior to 1930 (Evans,
2003; Wolk, Dodd, & Rozycki, 2013) and clarity was needed on some accounting
problems. Some financial reporting structures were already functioning at the turn of
the century. The accounting profession, consisting of professional accountants, was
just emerging and still almost unknown outside of New York (Brown, 1905) 25.
a) Need: disclosure of reliable financial data
The accounting community was functioning without an accepted theoretical basis for
accounting i.e. an accounting conceptual framework. Progress in the accounting
domain was stimulated by mainly two factors: a major financial disaster on the
economic front (the Great Depression of 1929) and, in reaction to the financial
disaster, the introduction of regulation by means of legislation and accounting rules
and standards by authorities, professional bodies and accounting organisations. The
biggest areas requiring development were disclosure of financial data and the
standardisation of accounting principles and practices (Wolk et al., 2013).
Basic accounting concepts like the calculation and allocation of depreciation, the
responsibility for the valuation of stock (the auditors or management), the existence
25
See Brown (1905) for a detail discussion on the formation and work of the AAPA.
39
of secret reserves and group accounts (Edwards, 1989) were some basic aspects
that needed attention.
The increasing amount of money invested on the various stock exchanges,

managements’ promises of high dividend returns and capital growth combined with
disappointing financial results, limited information in financial reports and finally, the
collapse of the stock market in 1929 resulted in investors demanding verification of
the credibility of financial reports. According to Salvary (1979) the investment
community became concerned with accounting measurement and the stimulus to
improve accounting measurement was the lack of guidance on corporate policy and
financial reporting standards. “The accounting response was verifiability (auditing)”
(Salvary, 1979:18).
b) Reasons for and reaction to the stock market crash of 1929
Although the stock market crash of 1929 and the Great Depression following the
crash served as stimuli to improve financial reporting, financial reporting (or the lack
of it) was not the primary reason for the stock market crash, but rather a culmination
of U.S. government actions followed by irrational investor behaviour (Evans, 2003;
Wolk et al., 2013).
The issuing of Liberty Bonds by the U.S. government to fund World War I was a
turning point in share trading on the stock markets. The broad public was given the
opportunity to invest in Liberty Bonds. The U.S. government made lump-sum
repayments of the Liberty Bonds in the 1920s (Evans, 2003; Wolk et al., 2013) that
made capital available for the public to invest.
During this time, the automotive industry started to boom and people who received
lump sums from Liberty Bond repayments started to move their investments to the
stock market to realise profits from stock trading. The result was the first modern
stock market boom that unfortunately led to the stock market crash in 1929, which
eventually culminated in the Great Depression (Wolk et al., 2013). Although there
were some developments in financial reporting before the Great Depression, the
financial crisis of the Great Depression stimulated the improvement in financial
reporting.
c) Reaction: financial reporting improved beyond legislation
Regarding the effect on financial reporting, the balance sheet was still regarded as
the most important financial report until the early twentieth century as is evident from
the following remark by Sprague (1907:30): “The balance sheet may be considered
as the groundwork of all accountancy, the origin and the terminus of every
account”. 26 Sprague does not discuss a formal “income statement”. He discusses the
“economic summary” which according to Sprague is “known in practice by various
26
Sprague (1907) discusses two methods to construct a balance sheet, the “inventory” method and the “derivation”
method.
40
names: Profit and Loss, Loss and Gain, Trading, Outlay and Income, Revenue”
(Sprague, 1907:79) The economic summary or profit and loss account did not carry
the status of a financial statement in 1908.
General Electric was a trendsetter in financial reporting and disclosure of financial

information with its 1931 annual report. 27 The audited financial report consisted of a
comparative Statement of Income and Expenses, a condensed Balance Sheet, detail
on plant expenditures and notes on investments, foreign business, inventories,
capital stock and pension plans (Evans, 2003). Although there was no uniformity in
financial reporting, substantial improvements were made in the 1930s, even more
than what the law required (Edwards, 1989). The motive for improvements was “that
it enabled shareholders to be better informed” (Edwards, 1989:142). The
improvement of financial reporting could partly be seen as a response to the financial
crisis of 1929.
2.6.2 Development of the Accounting Profession
a) Establishment of the accounting profession in the U.S.
The establishment of an accounting profession in the U.S. started in 1886 when the
American Association of Public Accountants (AAPA) was formed. On April 18, 1896 a
bill, now known as the “C.P.A. Act”, was passed in the Senate and signed by the
governor “to regulate the profession of public accountants” (Roberts, 1987:103) and
became one of the Statute Laws of the State of New York. The “C.P.A. Act” created
the professional designation of the “Certified Public Accountant” (CPA) (Wolk et al.,
2013:65). The AAPA had a membership of 25 Fellows and 7 Associates in May 1889
(Brown, 1905). The Journal of Accountancy was founded by the AAPA in 1905. The
AAPA appointed a committee on terminology, resulting in a list of terms and
definitions that were adopted by the AAPA in 1915. The list of terms and definitions
were expanded upon, resulting in the publication of 126 pages in the Journal of
Accountancy in 1931 containing terms and definitions relevant to accounting and
financial reporting (Wolk et al., 2013).
The AAPA was succeeded by the Institute of Public Accountants and changed its
name to the American Institute of Accountants (AIA) in 1916 until 1957 when it
changed to the American Institute of Certified Public Accountants (AICPA) (Wolk et
al., 2013). In 1918, the AIA published a document titled “Approved Methods for the
Preparation of Balance Sheet Statements” (Wolk et al., 2013). The document was
used to conduct a balance sheet audit and was revised in 1929. In 1921, the
American Society of Certified Public Accountants (ASCPA) formed under pressure
from the New York State Society and acted as a federation of state societies (AICPA,
2015). In 1963, the ASCPA combined with the AIA and the Institute agreed to restrict
its future members to CPAs (AICPA, 2015).
27
Evans (2003:7–9) discusses the General Electric report in detail.
41
b) Impact of the Great Depression on the accounting profession
The Great Depression of 1929 had an impact on accounting with regards to

professionalism and the lack of accounting principles in accounting (Gaffikin, 2008).
According to Hendriksen (1970:29): “The formal presentation of accounting theory by
authoritative bodies emerged with the events that followed 1930.” The first attempt to
draft “accounting principles” on which “there is a fairly general agreement” (Storey &
Storey, 1998) was done by the Special Committee on Cooperation with Stock
Exchanges. According to Wolk et al. (2013:66) this cooperation between the New
York Stock Exchange (NYSE) and the AIA led to the preparation of one of the most
important documents in the development of accounting rule making to date. The
formal draft of the “five broad accounting principles” 28, was approved by the NYSE on
September 22, 1932 and is seen by Wolk et al. (2013:67) and Evans (2003:11) as
the “first formal attempt to develop generally accepted accounting principles”
(GAAP)”.
The five principles were:

1. Unrealised profit should not be credited to net income.
2. Additional paid-in capital (capital surplus) should not be charged with items that
are more appropriately charged to net income.
3. Retained earnings …of a subsidiary should not be added to consolidated
retained earnings.
4. In rare circumstances ...treasury stock may be considered an asset of the firm,
but dividends on such shares should not be considered as revenue.
5. Officers’, affiliates’, and employees’ notes receivable should be separately
disclosed (Evans, 2003; Gaffikin, 2008; Storey & Storey, 1998).
These principles were later incorporated as Chapter 1 of the Accounting Research

Bulletin (Wolk et al., 2013). Zeff (2012) summarises the standardisation of accounting
practices during this period as follows:
“While accounting guidance was provided by the organised United States
accounting profession as far back as 1917 and again in the early 1930s,
a programmatic approach to providing such guidance on a regular basis
was not implemented until 1939.”
Another direct consequence of the Great Depression was the establishment of the
Securities and Exchange Commission (SEC) by the U.S. Congress in 1934 (Gaffikin,
2008; Wolk et al., 2013). The purpose of the SEC was to administer the Securities
Act of 1933 and the Securities and Exchange Act of 1934 (Wolk et al., 2013) to
ensure full disclosure of accounting information by listed companies. The SEC had
broad and specific authority “to prescribe the form and content of financial information
filed with the SEC” (Wolk et al., 2013:67). According to the 1937 SEC commissioner,
Robert Healy, the SEC had the authority to fix and maintain accounting standards. In
order to avoid total government regulation of the accounting profession, the AIA
28
According to Storey and Storey (Storey & Storey, 1998) the principles “had nothing in them that made them more
basic or less concrete than conventions or rules.”
42
created the Special committee on Development of Accounting principles in 1933
(Evans, 2003; Wolk et al., 2013). The committee was inactive and replaced by the
Committee on Accounting Procedure (CAP) in 1936. The CAP only started to be
active in 1938.
c) Academic work on accounting theory
Important work from academia regarding accounting theory and accounting principles
were done by Sprague (1907), Hatfield (1909) and Paton (1922) during the period
from 1900 to 1938. At the turn of the century, the dominant theory regarding
ownership was the proprietary theory that was supported by Sprague and Hatfield.
Paton supported the entity theory as an alternative to the proprietary theory (Gaffikin,
2008). 29
Accounting academics interested in accounting education and research organised

themselves by forming the American Accounting Association (AAA), 30 an influential
academic body, in 1916. The purpose of the AAA is to develop worldwide excellence
in accounting education, research and practice by way of leading-edge research and
publications (AAA, 2015).
In 1936, the AAA published “A Tentative Statement of Accounting Principles

Underlying Corporate Financial Statements”, which was revised and reissued in 1944
and 1948 (Gaffikin, 2008; Storey & Storey, 1998). The report was criticised as
departing too much from practice. In response another report was published by
Sanders, Hatfield and Moore with the title “A Statement of Accounting Principles”
(Gaffikin, 2008; Storey & Storey, 1998). This report provided a survey of current
practices and did not reflect a systematic theoretical foundation (Storey & Storey,
1998). According to Gaffikin (2008:33) the search for “the establishment of a
theoretical foundation for accounting” lasted for the rest of the century.
In summary, during the period 1900-1938 two factors stimulated the development of
accounting: the Great Depression of 1929 to 1933 (Salvary, 1979) and in reaction
thereto the formation of the SEC in 1934. The accounting profession responded with
the list of five “accepted accounting principles” by the AIA in 1932 and the formation
of the Committee on Accounting Procedure (CAP) in 1936 to provide better
disclosure (Salvary, 1979). From a theoretical perspective, the proprietary theory and
the alternative entity theory of accounting were formalised by Sprague and Hatfield
and Paton respectively.
The search for a theoretical basis for accounting (conceptual framework), which had
not been accomplished during this period, would become one of the most pressing
accounting issues until 1973.
29
See Gaffikin (2008:30–32) for a discussion on the difference between the proprietary theory and entity theory.
30
See the history of the AAA from 1916 to 1966 in Zeff (1991).
43
2.7 Financial Capitalism: Professional Bodies’ Search for Principles, 1938 to 1973
After the 1929-1933 Great Depression, corporate and market failures started playing
an important role in the development of a theoretical foundation (conceptual
framework) for accounting and financial accounting standards. During the period
1938 to 1973, authorities and accounting professional bodies responded to corporate
and market failures by attempting to improve disclosure requirements and setting
standards to address problems that were highlighted by a financial crisis or corporate
failure, unfortunately on an ad hoc basis.
Zeff (1999:89) summarises efforts by the U.S. to develop a conceptual framework as

follows:
“Institutional efforts in the U.S. to develop a conceptual framework for
business enterprises can be traced to the Paton and Littleton monograph
in 1940 and later to the two Accounting Research Studies by Moonitz and
Sprouse in 1962-1963. A committee of the American Accounting
Association issued an influential report in which it advocated a ‘decision
usefulness’ approach in 1966, which was carried forward in 1973 by the
report of the American Institute of CPAs’ Trueblood Committee. All of this
laid the groundwork for the conceptual framework project of the Financial
Accounting Standards Board (FASB), which published six concepts
statements between 1978 and 1985.”
The actual development of a conceptual framework for accounting did not realise
during this period following the initial search for accounting postulates and principles
during the 1960s (Zeff, 1982), due to pressing demands to provide accounting
answers caused by various financial crises. Work on a single accounting theory, to
serve as basis for accounting standards, only commenced after the formation of the
FASB in 1973. The developments leading up to the framework were all important
milestones that contributed to the actual “product”.
2.7.1 Pressure from the SEC
a) AIA and CAP issue ARB's
The first initiative to set accounting standards was as a result of the SEC putting
pressure on the AIA after the market failure of 1929. The AIA, in reaction to the
pressure of the SEC, empowered the Committee on Accounting Procedure (CAP) in
1939 to issue accounting guidance, known as Accounting Research Bulletins (ARB)
(Zeff, 2012). It was the intention of the CAP to develop a theory of accounting.
Unfortunately, the CAP issued 51 ARB’s without a theoretical basis (Storey & Storey,
1998) “to put out the fire” on an ad hoc basis until 1959 when the Accounting
Principles Board (APB) was formed (Gaffikin, 2008:33). Problems experienced with
the ARB’s were that too many alternative accounting practices were allowed, a
reluctance to condemn bad practices that were widely applied and that the work was
done on an ad hoc basis as demanded by the SEC (Storey & Storey, 1998).
44
b) The APB replaces the CAP - publication of ARS1 and ARS3
In reaction to a speech by Alvin R. Jennings in 1957 at the AICPA’s annual meeting,

the approach to determine an acceptable accounting theory was changed (Evans,
2003). A conceptual approach had to replace the piecemeal method followed by the
CAP (Wolk et al., 2013) and the Accounting Principles Board (APB) replaced the
CAP. The Special Committee on Research Program recommended that financial
accounting should receive attention on a hierarchy of four levels: “first, postulates;
second, principles; third, rules or other guides ...; and fourth research” (Storey &
Storey, 1998). 31
The recommendations by the Special Committee on Research Program introduced a

lot of discussion on accounting postulates and principles between 1957 and 1973
(Zeff, 1982). 32 One of the first publications that followed was by The Accounting
Research Division (ARD), the full-time research division of the APB. The ARD
published Accounting Research Study No. 1 (ARS1): The basic postulates of
accounting by Maurice Moonitz in 1961. During April 1962 the ARD published ARS3:
A Tentative Set of Broad Accounting Principles for Business Enterprises, by Robert
T. Sprouse and Maurice Moonitz (Gaffikin, 2008; Storey & Storey, 1998; Wolk et al.,
2013).
c) ARS1 and ARS3 rejected
The professional accounting community rejected ARS1 and ARS3 and the APB
remained under pressure from the SEC to give guidance on specific problems
experienced in practice. 33
ARS1 and ARS3 were not accepted because the profession, SEC and APB
members, felt that the principles in ARS1 and ARS3 were too radically different from
the accounting practices relevant at that time and was too abstract and general (Wolk
et al., 2013). One of the aspects where ARS1 deviated from the accounting practices
of that period related to measurement. Sprouse and Moonitz advised on the use of
current replacement cost for merchandise inventories and plant and equipment. They
also recommended the use of discounted present values for receivables and
payables and that gains or losses resulting from the revaluation of inventories should
be taken to profit (Zeff, 1999).
The most obvious reason why ARS1 and ARS3 was not accepted was “the
profession’s inability to abandon historical costs” (Wolk et al., 2013:145) as historical
cost was regarded as an objective measurement method. The measurement
methods proposed in ARS1 and ARS3 had, according to the SEC, the potential to
deceive the readers of financial statements (Zeff, 1999). Members of the APB
expected an instrument supporting the status quo of accounting practices of the time
31
See Storey and Storey (1998) for a discussion on the differences between postulates, principles and rules.
32
The work of Zeff (1982) contains original documents from the discussion on postulates and principles between
1960–1963.
33
A summary of the comments on ARS1 and ARS3 is provided in Evans (2003:58).
45
whilst Moonitz and Sprouse developed a framework for a “sound approach to
financial reporting” (Zeff, 1999:94).
d) Reaction to the rejection of ARS1 and ARS3 – ARS5 and ASOBAT
As a result of the rejection of the postulates and principles proposed by Sprouse and
Moonitz, the APB started to focus more on specific issues. On advice of Paul Grady
and George O. May, that the theoretical basis for accounting should be derived
inductively from practice, the APB published Inventory of Generally Accepted
Accounting Principles for Business Enterprises (ARS5) in 1965 (Zeff, 1999). ARS5
was highly valued as it was seen as “an authoritative compilation of accepted U.S.
practice” (Zeff, 1999:95). However, the study did not contribute to the improvement of
accounting postulates and principles.
In reaction to the rejection of ARS1 and ARS3, the AAA took it upon itself to work on
accounting theory and appointed a committee in 1964 to develop an integrated
statement of basic accounting theory (Evans, 2003). In 1966, the AAA published “A
Statement of Basic Accounting Theory” (ASOBAT). ASOBAT defined four standards
for evaluating accounting information and five guidelines for communicating the
information.” The four standards recommended are:
• relevance,
• verifiability,
• freedom from bias and,
• quantifiability.
Relevance was regarded as the primary standard and necessary for all accounting
information.
The five communication guidelines are:

1. appropriateness to expected use,
2. disclosure of significant relationships,
3. inclusion of environmental information,
4. uniformity of practices within and among entities and,
5. consistency of practices through time (Evans, 2003:73; Wolk et al., 2013:186–
194). 34
e) Seidman Committee
In May 1965 the Special Committee on Opinions of the APB (Seidman Committee)
recommended that an authoritative identification of generally accepted accounting
principles was essential for the work of a CPA (Storey & Storey, 1998; Briloff, 1966).
Based on the recommendations of the Seidman Committee, the APB published
Statement No. 4, Basic Concepts and Accounting Principles Underlying Financial
Statements of Business Enterprises in October 1970 (Storey & Storey, 1998; Wolk et
34
Evans (2003:74–77) discusses the essence of ASOBAT as well as the criticisms by Morrison, Sorter and Sterling
on ASOBAT.
46
al., 2013). Statement No. 4 classifies objectives of accounting as particular, general
and qualitative.
The general evaluation of Statement No. 4 was also not positive as, contrary to ARS1
and ARS5, it mostly stated principles distilled from experience that was already
fifteen to twenty years old. Regardless of the negative evaluation, Storey and Storey
(1998) listed at least five examples of what financial accounting ought to be in the
future. According to Riahi-Belkaoui (2004:167) and Storey and Storey (1998) APB
Statement No. 4 “has directly influenced both the Trueblood Report … and The
Corporate Report … as well as the FASB’s attempts to develop a conceptual
framework for financial accounting and reporting”.
In the end it is clear that the ARS project failed to provide an accounting theory with
the non-acceptance of ARS1 and ARS3 (Evans, 2003) and according to Wolk et al.
(2013) marked the end of the postulates-principles approach to standard setting in
1970 and the rise of objectives and standards.
2.7.2 Formation of the FASB
a) The Wheat Committee
It became clear that the APB was not effective and had to be replaced (Evans, 2003;
Storey & Storey, 1998). 35 The most important problems were criticism of corporate
financial reporting and the lack of a framework for developing accounting principles
(Storey & Storey, 1998). In 1971 the AICPA reacted to the criticism and instructed the
Wheat Committee to determine changes needed to get better and faster results. The
primary function of the Wheat Committee was to establish the means and processes
by which accounting principles should be established (Storey & Storey, 1998; Street,
1996; Wolk et al., 2013). 36 The Wheat Committee recommended the formation of
FASB (Street, 1996).
b) The Trueblood Report
The AICPA appointed the Trueblood Committee in April 1971 to determine the
objectives of financial reporting (Evans, 2003; Trueblood, Cyert, Davidson, Edwards,
Gellein, et al., 1973). 37 The committee recommended Chapter 4 of APB Statement
No. 4, Basic Concepts and Accounting Principles Underlying Financial Statements of
Business Enterprises as a “logical starting point” to refine the objectives of financial
statements (Wolk et al., 2013; Trueblood et al., 1973:67). The committee formulated
35
Evans (2003:77–78) lists eight concerns during the time regarding the APB.
36
See Wolk et al. (2013:78) for the specific recommendations made by the Wheat Committee and accepted by the
AICPA's council.
37
The Trueblood Committee had to find answers to the following questions (Evans, 2003; Riahi-Belkaoui, 2004):
Who needs financial statements?
What information do they need?
How much of the needed information can be provided by accountants?
What framework is needed to provide the needed information?
47
12 objectives of financial accounting. 38 One of the most important recommendations
by The Trueblood Report was that it recommended decision-usefulness as the basic
objective of financial reporting, which was later accepted by the FASB in SFAC 1
(Evans, 2003; Street, 1996).
Chapter 11 of the Trueblood Report provides a summary of 12 objectives of financial

statements:
1. “The basic objective of financial statements is to provide information useful for
making economic decisions” (Trueblood et al., 1973:61).
2. “An objective of financial statements is to serve primarily those users who have
limited authority, ability, or resources to obtain information and who rely on
financial statements as their principle source of information about an
enterprise's economic activities” (Trueblood et al., 1973:62).
3. “An objective of financial statements is to provide information useful to

investors and creditors for predicting, comparing, and evaluating potential cash
flows to them in terms of amount, timing, and related uncertainty” (Trueblood et
al., 1973:62).
4. “An objective of financial statements is to provide users with information for

predicting, comparing, and evaluating enterprise earning power” (Trueblood et
al., 1973:62).
5. “An objective of financial statements is to supply information useful in judging

management's ability to utilise enterprise resources effectively in achieving the
primary enterprise goal” (Trueblood et al., 1973:63).
6. “An objective of financial statements is to provide factual and interpretive

information about transactions and other events which is useful for predicting,
comparing and evaluating enterprise earning power. Basic underlying
assumptions with respect to matters subject to interpretation, evaluation,
prediction or estimation should be disclosed” (Trueblood et al., 1973:63).
7. “An objective is to provide a statement of financial position useful for predicting,

comparing and evaluating enterprise earning power. This statement should
provide information concerning enterprise transactions and other events that
are part of incomplete earnings cycles. Current values should also be reported
when they differ significantly from historical cost. Assets and liabilities should
be grouped or segregated by the relative uncertainty of the amount and timing
of prospective realization or liquidation” (Trueblood et al., 1973:64).
8. “An objective is to provide a statement of periodic earnings useful for

predicting, comparing and evaluating enterprise earning power. The net result
of completed earnings cycles and enterprise activities resulting in recognizable
38
Evans (2003:86–87), Wolk et al. (2013:197–204) and Riahi-Belkaoui (2004:167–173) discuss the twelve objectives
for financial reporting as expressed in the Trueblood Report.
48
progress toward completion of incomplete cycles should be reported. Changes
in the values reflected in successive statements of financial position should
also be reported, but separately, since they differ in terms of their certainty of
realization” (Trueblood et al., 1973:64).
9. “An objective is to provide a statement of financial activities useful for

predicting, comparing and evaluating enterprise earning power. This statement
should report mainly on factual aspects of enterprise transactions having or
expected to have significant cash consequences. This statement should report
data that require minimal judgment and interpretation by the preparer”
(Trueblood et al., 1973:64).
10. “An objective of financial statements is to provide information useful for the
predictive process. Financial forecasts should be provided when they will
enhance the reliability of users” predictions” (Trueblood et al., 1973:65).
11. “An objective of financial statements for governmental and not-for-profit

organizations is to provide information useful for evaluating the effectiveness of
the management of resources in achieving the organization's goals.
Performance measures should be quantified in terms of identified goals”
(Trueblood et al., 1973:66).
12. “An objective of financial statements is to report on those activities of the

enterprise affecting society which can be determined and described or
measured and which are important to the role of the enterprise in its social
environment” (Trueblood et al., 1973:66).
The Trueblood Report also mentions the following qualitative characteristics:

“relevance and materiality, reliability, freedom from bias, comparability, consistency,
understandability, and the recognition of substance over form” (Trueblood et al.,
1973:66).
A new era commenced in financial reporting with the formation of the FASB. Table
2.1 summarises the most important documents that contributed to the FASB
conceptual Framework.
49
Table 2.1: Historical documents contributing to the FASB conceptual framework 39
Date Author / Organisation Document Significance of document
1922 W.A. Paton Accounting Theory • Restatement of the theory of accounting for conditions and
needs of business enterprises.
• Discussion on postulates.
1929 J.B. Canning The economics of Accountancy • Present a conceptual framework for asset valuation and
(Ph.D. student of Paton) measurement on future expectations.
1936 AAA A Tentative Statement of • Assumption: a corporation’s periodic financial statements
(revised 1941, Accounting Principles should be continuously in accord with a single coordinated
1948, 1957) Underlying Corporate Financial body of accounting theory.
Statements • Argue for the use of historical cost accounting.
• Twenty principles by which to evaluate rules and procedures.
• Highly regarded by the SEC.
1938 T.H. Sanders, H.R. Hatfield, U. A Statement of Accounting • Survey of current practices of accountants.
Moore Principles • First relatively complete statement of accounting practices.
• Reluctant to criticise dubious practices.
1938 - 1958 AIA task CAP Publish 51 Accounting • Serve as guidance for SEC on ad hoc basis.
Research Bulletins (ARB) • Decide not to develop a comprehensive statement of
accounting principles.
• Lack of statement of accounting principles lead to dissolution
of CAP.
• Allowed too many alternative practices.
1940 W.A. Paton, A.C. Littleton An Introduction to Corporate • Influenced by A Tentative Statement of Accounting Principles
Accounting Standards Underlying Corporate Financial Statements.
• Influential in establishing historical cost accounting as
principle in the U.S.
• Popularise “matching” of costs and revenue.
• Rejected LIFO and lower of cost or market value in valuation
of inventories.
1958 APB Report of Special Committee on • Financial accounting to be addressed at four levels:
Research Program postulates, principles, rules or other guides
1961 APB ARS1 The Basic Postulates of • Widely criticised.
39
The information presented is a summary of the previous work and summarized from (Zeff, 2002; Wolk et al., 2013; Evans, 2003; Gaffikin, 1987).
50
(M. Moonitz) Accounting • Retained historical cost.
1962 APB ARS3. A Tentative Set of Broad • Postulates not complete.
(R.T. Sprouse and M. Moonitz) Accounting Principles for • No mention of outside users of financial data.
Business Enterprises • Objectives of published financial statements not set.
• Seen as first attempt in US by the practicing arm of the
profession to provide a conceptual basis for rule-making
(Wolk et al., 2013).
1965 APB Inventory of Generally Accepted • Theoretical explanations should be derived inductively from
(P Grady) Accounting Principles for practice.
Business • Seen as an authoritative compilation of accepted U.S.
practice.
1966 AAA A Statement of Basic • Break from previous statements.
Accounting Theory (ASOBAT) • Accounting theory is descriptive and normative in nature.
• Theory defined as: “a cohesive set of hypothetical, conceptual
and pragmatic principles forming a general frame of
reference” (Wolk et al., 2013:187).
• Objective of accounting is decision usefulness of accounting
information for external users.
• “Four basic standards for accounting information: relevance,
verifiability, freedom from bias, and quantifiability”.
• Accounting reports do not make predictions.
• Managerial needs differ from those of external users.
• Stewardship functions to society as a whole.
• Provides guidelines for communicating accounting
information.
• Historical cost v. current value - accept both models.
1970 APB ARS4: Basic Concepts and • Purpose was to state fundamental concepts of financial
Accounting Principles reporting.
Underlying Financial • Linked with ASOBAT regarding decision-usefulness and the
Statements of Business diversity of users of Financial Statements.
Enterprises. • Defined assets, liabilities, owners’ equity, revenues and
expenses as the basic elements of financial accounting.
• Stated qualitative objectives: relevance, understandability,
verifiability, neutrality, timeliness, comparability and
completeness.
51
1972 Arthur Andersen & Co. Objectives of Financial • Critical of conservatism and historical cost as a goal.
Statements for Business • Financial statements must be fair to all users and should
Enterprises provide the basis for resolving conflicting interests (Zeff,
1999).
• Assets should be valued at current value.
• Unrealised gains and losses to be disclosed in the income
statement.
1973 AICPA Objectives of Financial • Adopts decision-usefulness from ASOBAT.
Statements (Trueblood Report) • Provides 12 objectives of financial accounting.
• FS should serve those users who have limited authority,
ability or resources to obtain information.
• Focuses more on future cash flows than ASOBAT.
• Qualitative characteristics: relevance and materiality, form
and substance, reliability, free from bias, comparability,
consistency and understandability.
• Valuation basis to be used: historical cost, exit values, current
replacement cost, and discounted cash flow.
• Social objective: report on activities affecting society that can
be determined and described or measured, citing pollution as
an example.
52
2.8 Financial Capitalism: Global Capital Markets: 1973 to the Present
During 1973, accounting standard setting changed on both sides of the North Atlantic
Ocean. The recommendations of the Wheat Committee resulted in the dawn of a new
era of standard setting in the U.S. with the formation of the new tripartite, structure the
Financial Accounting Foundation (FAF), the Financial Accounting Standards Advisory
Council (FASAC) and the FASB of standard setting in 1973. The stimulus behind the
restructuring was to adhere to pressure from the SEC to provide guidance regarding
financial reporting.
The main objective of the SEC since its formation in 1934 has been to protect
investors and try and avoid market failures by guarding against misleading financial
statements (Zeff, 1999). Although fear of market and corporate failures 40 were an
important stimulus behind the development of accounting principles and accounting
standards in the U.S., it is clear that the U.S. already started in the late 1950s and
early 1960s to attempt to develop accounting and reporting standards on an
international basis (FASB, 2014a).
Also in 1973, the international accounting community on the Western shores of the
Atlantic Ocean responded to the growing internationalisation of capital markets with
the formation of the International Accounting Standards Committee (IASC) under Sir
Henry Benson, with a head office in London due to a need for global harmonisation of
accounting standards (Camfferman & Zeff, 2009).
Back in the U.S., the AAA reconsidered the accounting theory in ASOBAT and
published A statement on accounting theory and theory acceptance (SATTA) in 1977.
The original task assigned in 1973 was to update ASOBAT, but due to big changes to
accounting after its release the various committees decided to focus on these
situations as they changed after ASOBAT (Evans, 2003).
In contrast to the optimistic view about a single accounting theory in ASOBAT,

SATTA portrayed pessimism to create a single accounting theory as various previous
attempts failed (Gaffikin, 2008). SATTA is however valuable in the sense that it
surveyed the accounting theory literature and provided a summary of the work of
many accounting theory writers (Evans, 2003; Gaffikin, 2008). After considering the
literature theory at the time, the committee concluded that no single theory for
accounting existed. 41 The release of the SATTA report in 1977 was discouraging for
the FASB that was busy searching for a single accounting theory on which to base
new accounting standards at the time.
40
Reinhart and Rogoff (2009) defines crises by (a) quantitative thresholds: inflation, currency crashes and
debasement , and (b) events: banking crises, external and domestic default.
41
Evans (2003:131–135) discusses the reason why SATTA believed there cannot be a single accounting theory in
the light of Kuhn’s view on scientific paradigms and scientific revolutions.
53
2.8.1 Financial Capitalism: The Conceptual Framework (FASB), 1973 to 1999
In 1973, the FASB initiated a conceptual framework project. The FASB concluded
that “accounting did possess a core of fundamental concepts that were neither
subject to, nor dependent on the moment’s particular, transitory consensus” (Storey &
Storey, 1998). The idea of the conceptual framework was to guide the FASB in
establishing accounting standards.
a) Statement of Financial Accounting Concepts (SFACs)
The FASB’s conceptual framework project comprised of six parts published as the
Statement of Financial Accounting Concepts (SFACs). The FASB conceptual
framework project is generally regarded as an evolutionary project. In December
1985, twelve years after the start of the project, SFAC No. 6 Elements of Financial
Statements replacing SFAC No. 3 (Elements of Financial Statements of Business
Enterprises) and amending SFAC No. 2 (Qualitative characteristics of Accounting
Information), was published. The next publication was in 2000 with the publication of
SFAC No. 7 Cash flow information and present value in accounting measurements. 42
The following is a summary of the publication of the SFAC’s by the FASB:

• SFAC No. 1 (1978): Objectives of Financial Reporting by Business enterprises.
• SFAC No. 2 (1980): Qualitative characteristics of Accounting Information.
• SFAC No. 3 (1980): Elements of Financial Statements of Business Enterprises.
• SFAC No. 4 (1980): Objectives of Financial Reporting by Nonbusiness
Organizations.
• SFAC No. 5 (1984): Recognition and Measurement in Financial Statements of
Business Enterprises.
• SFAC No. 6 (1985): Elements of Financial Statements. (Replacing SFAC No. 3,
and incorporating SFAC No. 2)
• SFAC No. 7 (2000): Using Cash Flow information and Present Value in
Accounting Measurements.
• SFAC No. 8 (2010): Conceptual Framework for Financial Reporting. (Replacing
SFAC No. 1 and No. 2).
b) The Stamp Report
The accounting community had mixed reactions to the FASB conceptual framework
publications. In its reaction, the Canadian Institute of Chartered Accountants (CICA)
published a research study in June 1980 entitled Corporate Reporting: Its Future
Evolution, also known as the “Stamp Report”. According to the Stamp Report the
42
The progress and publication of the different SFAC’s are discussed in detail by Evans (2003:146–162), Gaffikin
(2008:105–115), Riahi-Belkaoui (2004:chap. 6), Storey and Storey (1998) and Wolk et al. (2013:225–256).
54
FASB conceptual framework was not “suitable for Canada given the environmental,
historical, political and legal differences between the United States and Canada”
(Riahi-Belkaoui, 2004:192). At the end of the Stamp Report a conceptual framework
project for Canada was proposed, based on an evolutionary approach (Riahi-
Belkaoui, 2004). In general, mixed opinions were however expressed on the different
SFAC’s as they were published.
c) Opinions of the SFAC’s
People’s expectations of the conceptual framework determined their reactions. SFAC

No. 5 on recognition and measurement was the biggest disappointment, as it did not
provide any clarity on the use of historical cost as basis for measurement, thus
confirming the status quo without any guidance. The disappointment in SFAC No. 5
was so widespread that the whole project was seen as a failure by some respondents
(Zeff, 1999). 43
Storey and Storey (1998:161) concluded their assessment of the FASB conceptual
framework as follows:
“Despite the fact that the Board has left it incomplete, the FASB’s
conceptual framework:
• is the first reasonably successful effort by a standards-setting body to

formulate and use an integrated set of financial accounting concepts
• has fundamentally changed the way financial accounting standards are set
in the United States
• has provided a model for the International Accounting Standards Committee
and several national standards-setting bodies in other English- speaking
countries, which not only have set out their own concepts but also clearly
have been influenced by the FASB’s Concepts Statements, sometimes to
the point of adopting the same or virtually the same set of concepts.”
However, Zeff's (1999:122) assessment on the value of the FASB’s conceptual

framework is less favourable:
“This writer would interpose three reactions to the views expressed by
Storey and Storey. (1) Without question, the board has shown that it can
bring an immense project of this kind to completion, but whether the effort
has been ‘reasonably successful’ is still an open question. Looking back,
keeping in mind that the IASB in large adopted the FASB’s conceptual
framework, as well as the joint project between the FASB and IASB that
43
Zeff (Zeff, 1999) discusses the reactions of Richard Macve, David Solomons, Kenneth Most, Mike Davies et al.,
Simon Archer, Kevin Stevenson, Arthur Andersen, Robert Sterling, K.V. Peasnell, the AAA, Nicholas Dopuch, Shyam
Sunder and R.K. Storey and S. Storey on the FASB conceptual framework.
55
built on the FASB and IASB CF’s, it can be concluded that the FASB
conceptual framework project was a success. (2) One doubts that the
board’s approach to setting standards has been ‘fundamentally changed’
by the conceptual framework — changed, yes, but not fundamentally. (3)
It is true that the board’s conceptual framework has been imitated in other
countries and by the International Accounting Standards Committee
(IASC). But the IASC’s framework is no more helpful on measurement
than is the FASB’s Statement 5.”
In assessing the value and contribution of the FASB’s conceptual framework the two
most negative aspects clearly are: (1) the failure of SFAC No. 5 to provide clarity on
recognition and measurement and continuing with historical cost as basis for
measurement and, (2) the lack of status to influence the revision and setting of
accounting standards.
On the lack of status Wolk et al. (2013:225) are of the following opinion:
“It is somewhat difficult to take this project seriously, despite all the time,
money and effort spent on it, when in the preface of each of the standards
the Board declares that SFACs do not (a) require a change in existing
general accepted accounting principles; (b) amend, modify, or interpret
statements of Financial Accounting Standards; or (c) justify either
changing existing generally accepted accounting and reporting
practise…”
The same qualification quoted above is still present in the foreword of FASB SFAC
No. 8, Conceptual Framework for Financial Reporting, 2010. SFAC No. 8 is the result
of the joint project with the IASB, replacing FASB Concepts Statements No. 1 and
No. 2 (FASB, 2010a). The question is, what would cause the FASB to change its
qualification or improve the status of the Conceptual Framework? An inherently
consistent and unambiguous conceptual framework of the financial reporting domain,
accepted by the broad accounting community? Due to the development in the global
capital markets, the accounting profession in Europe also started a search for globally
acceptable accounting standards.
2.8.2 Financial Capitalism: The Conceptual Framework in Europe, 1973 to 2002
a) Stimulus: Global capital market
The same year that the FASB was formed (1973), the accountancy profession, under
the leadership of Sir Henry Benson, responded to the growing internationalisation of
capital markets with the formation of the International Accounting Standards
56
Committee (IASC). 44 The IASC was officially formed on 29 June 1973 when an
Agreement and a Constitution were signed (Camfferman & Zeff, 2009). The objective
of the IASC was “to formulate and publish in the public interest, basic standards to be
observed in the presentation of audited accounts and financial statements and to
promote their worldwide acceptance” (Camfferman & Zeff, 2009:51). The motivation
behind the formation of the IASC was to harmonise accounting standards in the
growing international market.
Dunning and Pearce (1995:22–43) indicated the growth in multinational enterprises

(MNE) from 1870 to 1990 and illustrated the explosion of global economy. During the
1990’s, the importance of the impact of differences in financial reporting between
countries is summarised by Nobes (1995:57) as follows: “What is clear is that readers
could be seriously misled if they compared financial statements from apparently
similar companies from various countries: the differences in asset valuation and profit
measurement are very great”. Against the background of growing MNE’s and
international economic integration, the IASC came into existence with the purpose of
harmonising financial reporting differences (Camfferman & Zeff, 2009). An example of
the need for harmonisation is the listing of Daimler-Benz on the New York stock
exchange in 1993. Under German GAAP Daimler-Benz made a profit of
DM 615 million while under U.S. GAAP the same company made a loss of
DM 1 839 million (Camfferman & Zeff, 2009).
The first call for “uniformity of accounting practices” was made in 1957 at the Seventh
International Congress of Accountants in Amsterdam by the president Jacob
Kraayenhof (Camfferman & Zeff, 2009; Kraayenhof, 1960). Kraayenhof (1960:35)
argued that a principle should be “based on economically and theoretically sound
valuation and profit concepts.” The IASC published its first standard, Disclosure of
Accounting Policies 45 IAS 1 in January 1975. Sir Henry Benson, the chairperson at
that stage, commented that the publication of the standard might be seen as a
“turning point” in the accounting profession (Camfferman & Zeff, 2009:95).
b) Different stimuli between Europe and the U.S.
The stimulus in Europe to set accounting standards under the IASC differs from the
stimulus in the U.S. In the U.S. the SEC played, initially after the Great Depression, a
decisive role in motivating the accounting community to set accounting standards.
The stimulus in Europe was the growth in MNE’s and need for comparative financial
information across international borders. The response was the search of the
accountancy profession, under the leadership of the IASC, to “harmonize vastly
different accounting practices across countries” (Camfferman & Zeff, 2009:1).
44
The founding countries of the IASC at a meeting of the ICAEW were: Australia, Canada, France, Germany, Japan,
Mexico, the Netherlands, the United Kingdom and Ireland and the United States (Camfferman & Zeff, 2009).
45
The title of IAS 1 changed in 1997 to Presentation of Financial Statements.
57
c) Pressure to develop a conceptual framework
As the setting of standards was the most urgent point on the agenda, the IASC only
later considered the use of a conceptual framework to guide it in setting standards.
The Board officially considered a conceptual framework project on an international
level in 1979. At first, the Board was reluctant to publish a conceptual framework as
an official document, but a U.S. comment letter in 1978 on the IASC foreign currency
translation project stated that progress by the IASC projects was unlikely “without
some explicit or implicit framework of objectives for the financial statements”
(Camfferman & Zeff, 2009:254). In April 1979, the IASC admitted that it does not
have a conceptual framework project on its agenda as it was waiting to see how the
FASB’s framework project would develop. However, in 1979, the Chairman John
Hepworth announced that the Board would consider a conceptual framework project
(Camfferman & Zeff, 2009).
d) Evolution of the IASC conceptual framework
The development of the IASC conceptual framework followed an evolutionary path.

The Initially, in 1983 and 1984, the Board had a “fill the gap” approach to the existing
framework. The existing framework was referred to by the IASC as not a separate
document such as the FASB’s Statement of Financial Accounting Concepts, but a
“framework of Standards” (Camfferman & Zeff, 2009). The “framework of Standards”
referred to “the implicit structure and internal consistency of the extant IASC
Standards” (Camfferman & Zeff, 2009:255) The recommendation by the Board to the
steering committees was in terms of filling the gaps in the existing “framework of
Standards”. The gaps identified in 1983 were related to “Owners” Equity, Liabilities,
Assets/Expenses – Definition and Recognition, Purchased Goodwill” (Camfferman &
Zeff, 2009:255). In 1984, the IASC board agreed to set up steering committees on
liabilities and owners’ equity. The “filling the gap” approach evolved into a “building
block” approach.
The building blocks that evolved from the “filling the gap” approach were “Objective of
Financial Statements, Liabilities, Owners’ Equity, and Assets and Expenses”. In the
first building block, the committee adopted the ideas from SFAC 2 “Qualitative
Characteristics of Accounting Information” published by the FASB, to suit the views of
the IASC. The IASC proposed relevance and reliability as basic qualitative
characteristics reflecting the ideas of SFAC 2. The IASC suggested a broader user
base than the FASB when the IASC expanded “economic and decision-making” with
“accountability” as a fundamental objective. The last building block, “Assets and
Expenses” project started in June 1985.
58
e) Single conceptual framework project
Eventually in 1986 the “building block projects were combined into a single project to
prepare a framework document” (Camfferman & Zeff, 2009:256). 46 In November
1986, a new steering committee was tasked to draw up a conceptual framework in a
separate document. After some draft versions, the first final single document of the
conceptual framework of the IASC was published in 1989.
Although there were some differences between the FASB’s conceptual framework
and the conceptual framework published by the IASC in 1989, the IASC conceptual
framework strongly corresponds with SAFC No. 1, 2, 3 and 5 (Agrawal, Jensen,
Meador, & Sellers, 1989; Wolk et al., 2013). The steering committee wanted the IASC
conceptual framework to be seen as including elements from different accounting
traditions, but the similarities with the FASB conceptual framework overshadowed the
differences. The differences related to emphasis given to “reporting on stewardship,
the true and fair view, prudence and maintenance of physical capital” (Camfferman &
Zeff, 2009:261).
The CFfFR built on the FASB conceptual framework and can be viewed as a
continuation of the development and evolvement of accounting concepts from the
past. From the start of the first accounting practices (sections 2.2.1 and 2.2.2), the
main purpose of accounting was to manage assets on behalf of the state and
landlords. It is also a continuation of the concepts that developed with the introduction
of companies and investors, and the separation of ownership and management of a
business. The need for financial reporting to investors and shareholders was a direct
consequence of the separation of ownership and management and evolved with the
growth and expansion of shareholding to the public in the twentieth century.
The publication of the IASC Conceptual Framework brought the accounting

community closer to the ideal of globally acceptable accounting standards, as it
provided a theoretical basis in the international community that was very close to the
accounting reference basis of the United States of America. In order to provide
globally acceptable financial accounting standards, one of the most basic
requirements is that standard setters should use the same theoretical basis. The next
step in setting globally acceptable accounting standards from the same theoretical
basis was therefore for the FASB and the IASB to work together on a conceptual
framework.
46
Camfferman and Zeff (2009:253–264) discuss the work done on the building blocks and the Framework project in
detail.
59
2002 to 2010
a) In the beginning
Based on the FASB website with the title “International convergence of accounting
standards – a brief history” (FASB, 2014a) it can be accepted that harmonisation and
convergence of accounting standards were always on the agenda of the FASB, with
numerous joint projects between the FASB and other accounting standard setting
bodies. According to the FASB (2014a:1) “the concept of convergence first arose in
the late 1950s in response to post World War II economic integration and related
increases in cross-border capital flows.”
One of the biggest hurdles for convergence of accounting standards was the SEC’s
reluctance to accept the use of financial statements prepared from foreign accounting
standards. Although there were still some questions asked by the SEC, the SEC’s
Concept Release, International Accounting Standards on 16 February 2000, officially
opened doors for the convergence of accounting standards. The SEC encouraged
the IASC and the FASB to converge their standards (Camfferman & Zeff, 2009). In
2001, the IASC reconstructed into the IASB and in 2002 the European Union passed
a regulation that required all listed EU companies to apply International Financial
Reporting Standards (IFRS’s) for fiscal years starting 1 January 2005 (Soderstrom &
Sun, 2007).
b) The Norwalk Agreement
With “The Norwalk Agreement” on 18 September 2002 (FASB and IASB, 2002), the
FASB and the IASB agreed on a shared goal of developing compatible, high-quality
accounting standards that could be used for both domestic and cross-border financial
reporting. The FASB and the IASB agreed to:
a) “undertake a short-term project aimed at removing a variety of individual
differences between U.S. GAAP and International Financial Reporting
Standards (IFRS's, which include International Accounting Standards,
IASs);
b) remove other differences between IFRS's and U.S. GAAP that will remain at
January 1, 2005, through coordination of their future work programs; that is,
through the mutual undertaking of discrete, substantial projects which both
Boards would address concurrently;
c) continue progress on the joint projects that they are currently undertaking;
and,
d) encourage their respective interpretative bodies to coordinate their

activities.” (FASB and IASB, 2002:1).
60
As a result of The Norwalk Agreement the FASB and IASB “added to their agendas a
joint project to develop an improved, globally acceptable conceptual framework that
builds on their existing frameworks” (FASB, 2014b). The purpose of the project is to:
1. “Focus on changes in the environment since the original frameworks were
issued, as well as omissions in the original frameworks, in order to
efficiently and effectively improve, complete, and converge the existing
frameworks.
2. Give priority to addressing and deliberating those issues within each phase
that are likely to yield benefits to the Boards in the short term; that is, cross-
cutting issues that affect a number of their projects for new or revised
standards. Thus, work on several phases of the project will be conducted
simultaneously and the Boards expect to benefit from work being conducted
on other projects.
3. Initially consider concepts applicable to private sector business entities”

(FASB, 2014b).
Halsey G. Bullen, FASB Senior Project Manager and Kimberley Crook, IASB Senior
Project Manager wrote a paper in May 2005 announcing that the FASB and IASB are
jointly revisiting their respective conceptual frameworks (Bullen & Crook, 2005). The
need for the project is stated by Bullen and Crook (2005:1) as follows: “...the common
goal of the FASB and IASB … is for their standards to be “principles-based”, …
rooted in fundamental concepts. The fundamental concepts need to constitute a
framework that is sound, comprehensive and internally consistent.” This statement by
Bullen and Crook forms the basis of the research questions formulated in section 3.2.
c) The September 28, 2010 Conceptual Framework for Financial Reporting

(CFfFR)
On 28 September 2010, the FASB and IASB completed the first stage of the joint
conceptual framework project that deals with the objective and qualitative
characteristics of financial reporting. The IFRS foundation published a document with
the title “The Conceptual Framework for Financial Reporting” (IASB, 2010a) which
consists of an introduction and four chapters. The approval of the Board, basis for
conclusions on chapters one and three and a table of concordance was published in
Part B of the 2010 edition of the IASB’s Conceptual Framework for Financial
Reporting.
The revised Chapter 1 consists of an introduction providing the purpose, status and
scope of the CFfFR. In Chapter 1 (par. OB1-OB11) the objective of general purpose
financial reporting is stated. The objective is in line with the 1989 version of the
CFfFR and the Trueblood report as “to provide financial information … that is useful
to existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entity” (IASB, 2010a:par. OB2).
61
The 1989 CFfFR was less specific regarding the users. The users in the 1989 CFfFR
described as “a wide range of users in making economic decisions” (IASB, 1989).
The basic principle of decision-usefulness as objective for financial statements had
already been part of Pacioli’s motivation to publish the Summa de Arithmetica,
Geometrica, Proportioni et Proportinalita (see section 2.2.2).
In paragraphs OB12-OB16 the basic concepts of and changes in economic resources

and claims are discussed. Financial performance of an entity is reflected by the
concepts of accrual accounting and past cash flows (par. OB17-OB20). In paragraph
OB21 it is stated that an entity's economic resources and claims may change for
reasons other than financial performance, such as the issue of ownership shares.
Chapter 2, “The Reporting Entity”, is still outstanding. The concept “Reporting Entity”
is one of the key concepts in financial reporting. The importance of the concept is
highlighted by the objective of the CFfFR where it is stated that “the objective of
general purpose financial reporting is to provide financial information about the
reporting entity” (IASB, 2010a:OB1). In 2010 the IASB published an exposure draft
(ED/2010/2) on the Reporting Entity chapter of the CFfFR (IASB, 2010b). In
ED/2010/2 (IASB, 2010b:RE2) a reporting entity is defined as follows:
“A reporting entity is a circumscribed area of economic activities whose
financial information has the potential to be useful to existing and potential
equity investors, lenders and other creditors who cannot directly obtain
the information they need in making decisions about providing resources
to the entity and in assessing whether management and the governing
board of that entity have made efficient and effective use of the resources
provided.”
In Chapter 3, the qualitative characteristics of useful financial information are

discussed. A very important difference between the 2010 CFfFR and the 1989 CFfFR
with regards to the qualitative characteristics is that the qualitative characteristics in
the 2010 CFfFR are split between fundamental and enhancing qualities, while that
was not the case in the 1989 CFfFR.
In the 2010 CFfFR, Chapter 4 consists of the remaining text from the IASB’s 1989
version, known as “The Framework”, namely (IASB, 2010a):
Underlying assumption.
Financial statements are prepared on the assumption that an entity will be a going
concern in the foreseeable future.
The Elements of Financial Statements.
In paragraphs 4.4-4.23 (IASB, 2010a), the definitions of the elements of the

statement of financial position i.e. asset, liability and equity are presented and
62
discussed. The measurement of performance and the elements of income and
expenses are defined and discussed in paragraphs 4.24-4.35 (IASB, 2010a). Capital
maintenance adjustments are addressed in paragraph 4.36.
Recognition of the elements of financial statements.
The different elements in financial statements can be recognised in financial

statements if there is a probability of future economic flow and if the value can be
measured with reliability (IASB, 2010a:par. 4.37–4.53).
Measurement of the elements of financial statements.
The four different measurement bases provided and discussed are: (a) historical cost,
(b) current cost, (c) realisable (settlement) value and, (d) present value. In the
discussion on the development of a conceptual framework, historical cost as
measurement basis was constantly criticised by various authors as not sufficient to
reflect the business reality of an enterprise. At the same time, it was the only basis
supported by the SEC. In paragraph 4.56 (IASB, 2010a) it is stated that “the
measurement basis most commonly adopted by entities in preparing financial
statements is historical cost.” Measurement is a contentious topic, and is under
revision with the IASB’s conceptual framework project of 2013 to 2015.
Concepts of capital and capital maintenance.
The concept of capital is synonymous with the equity of an entity. In the discussion of
the historical development of accounting concepts, it was indicated that Hugh
Oldcastle (see section 2.3.2) developed the concept of continuity of capital in 1543. In
paragraph 4.59 (IASB, 2010a), financial capital maintenance and physical capital
maintenance concepts are explained. Capital maintenance provides the link between
the concepts of capital and profit.
In order to trace the development of the qualitative characteristics between the 1989
and 2010 conceptual frameworks, a summary of the qualitative characteristics is
provided. See the table below for a comparison of the qualitative characteristics
between the 1989 CFfFR and the 2010 CFfFR.
63
Table 2.2: Comparison of qualitative characteristics between the 1989 CFfFR and the
2010 CFfFR
1989 CONCEPTUAL FRAMEWORK 2010 CONCEPTUAL FRAMEWORK
(No indication of fundamental or enhancing
Fundamental qualitative characteristics
qualitative characteristics)
Understandability
Relevance Relevance
• Materiality • Materiality
Reliability Faithful representation
• Faithful representation
• Substance over form
• Neutrality
• Prudence
• Completeness
Applying the fundamental qualitative
characteristics (paragraphs QC 17 and QC 18 is
explaining how to apply the fundamental
qualitative characteristics)
Enhancing qualitative characteristics

Comparability • Comparability
• Verifiability
• Timeliness
• Understandability
Constraints on relevant and reliable information The cost constraint on useful financial reporting.
• Timeliness
• Balance between benefit and cost
• Balance between qualitative characteristics
The differences between the two conceptual frameworks are not discussed further as
the primary purpose of this study is not to discuss or explain the differences or the
implication of the differences between the respective CFfFRs. The purpose for
Chapter 2 of the study is to provide an indication of the development of the concepts
as found in the 2010 CFfFR.
Although the joint conceptual framework project was suspended on

17 November 2010 (FASB and IASB, 2010), the IASB decided on a meeting in
May 2012 to continue with the conceptual framework project. The IASB proceeded
with the conceptual framework project without the FASB, thus ending the official joint
project on the conceptual framework between the FASB and the IASB (IASB, 2012a;
IASB, 2012b). The IASB published a discussion paper called: A Review of the CFfFR
on the remaining parts of the conceptual framework project during July 2013 (IASB,
2013a).
As the 2010 CFfFR published by the IASB is the last completed document providing a
conceptual framework for financial reporting, this study will use the IASB CFfFR of
2010 as basis to build the formal ontology.
64
2.9 Summary of the Historical Development of the IASB’s CFfFR
Over the ages, the function of accounting was generally agreed to be the satisfaction
of the need for information of society. While the need(s) was satisfied between 1500-
1830, the system experienced homeostasis (Salvary, 1979) and very little
development was needed regarding accounting information. However, if something in
the environment changes, the system is in turbulence and a new need is
experienced. The system will stay in turbulence until the accounting response
satisfies the new need. Different types of activities have an influence on society that
serves as a stimulus in need of a response.
Table 2.3 provides a summary of stimuli and responses identified during the
discussion of the history of accounting that had an influence on the development of
accounting practices, accounting theory and the 2010 IASB, CFfFR.
65
Table 2.3: Summary of stimuli and response in the development of the CFfFR
Date Period Stimulus Response Contribution to
accounting and CFfFR
4000 B.C. – Pre-capitalist period Need to control resources
1000 A.D.
3350 B.C. – Public Economy: • The village economy changes from • Technology: Writing • Sumerian tokens used to
1900 B.C. Mesopotamia hunting to cultivation. developed in Sumerian keep daily records of
• Surplus production is stored and temples and Mesopotamia to agricultural resources.
distributed from temples. control resources. • Mesopotamian tablets used
• Expansion of the urban • Wheel causes mobility of for receipts, disbursements,
environment, social stratification, goods. partnership formations and
technology, political nobility, large dissolutions, inventories
labour projects, commodity leases, purchases, sales,
distribution, intercity and rentals and loans.
international exchange.
• Increase in population.
• Development of state-level
societies.
1900 B.C. – Public Economy: • Build palaces in Crete. • Technology: Use tablets to • Records of transactions,
1400 B.C. Palaces keep records for palaces. people, animals,
commodities, food,
implements and weapons are
kept.
• Keep records of incoming and
distribution of goods.
1400 B.C. – Public Economy: • Colonisation takes place over the • Use Mesopotamian record • Parthenon as an example:
700 B.C. Greek Empire Mediterranean. keeping practices. Accountants report annually
• Intellectual development makes • Record keeping practices to the state.
progress with Greek philosophy and spread to Greece and Egypt. • Financial statements are
mathematics and literature. • Increase in the sophistication drafted, indicating income
• Wealth in temples is under control of of writing and mathematical from rentals, interest on loans
the state. skills is experienced. and expenditure for
• The state wants to secure imports of • Technology: Paper and sacrifices, wages and
materials and commodities and tax written documents are entertainments.
collections. developed. • The state appoints Clerks and
• Achieve control over assets: Treasurer of Public Revenue.
 Control stabilises the state and
66
the economy.
700 B.C. – Feudal System • Socio political: • Develop legislation to ensure • Expansion of administration
1000 A.D.  Expand to neighbouring states honest dealings. develops to keep track of
and master sea-routes. • New profession immerge: resources and taxes.
• Economy: Banking-system. • Corporate governance
 Import metals, food and raw • Moveable wealth results in develops – publish accounts
materials. private initiatives – of financial administration.
 The dominant state ownership partnerships and companies. • Daily entries of receipts and
economy moves to a feudal • Capitulore de Villis 812: disbursements entered in
system. Steward on Emperor’s estate daybook.
 Discover money as form of reports annually on the • Exchequer uses charge and
wealth. inventory of land, income discharge accounting system.
 Money as economic commodity and expenses. • The state uses financial
results in a growth in peasant • In England: Domesday Book, information for planning and
enterprises. Pipe Roll and Exchequer budgeting.
provide royal control over
revenue and property.
• Byzantine accounting
practices advanced and well
established.
1000 – 1760 Commercial Lack of organised capital markets.
Capitalism Inadequacy of charge and discharge
accounting system
1000 - 1500 Exchange economy. • Economic developments: • Main commerce centres are: • Genoa 1340: Donado
 Inter-regional trade. Genoa and Venice trade with Soranzo and Brothers use the
 Interaction between investors Near East. double-entry system.
and business operators. • Capital owners should keep • The profit and loss account
 Provision of credit. track of investments. and capital accounts are
 Move wealth according to • Investors need record of developed.
opportunities available. trading to apportion profits, • “Method of Venice”
 Florence, enormous growth in need bookkeeping system. publication in 1458:
commerce experienced. • The development of the Benedetto Cortrugili – Della
• Business / reporting requirements: Atlantic shipping route Mercatura e del Mircanti
 Need arises for useful business causes the financial Perfectto Della Mercautra.
information: Planning of innovation move to Bruges. • The first academic publication
67
investments” major objective. • A wider acceptance of the on accounting is made in
 Joint ventures and partnerships double-entry system is 1494: Luca Pacioli – Summa
contracts are used: Need detected. de Arithmetica, Geometrica,
information on sharing of profits Proportioni et Proportinalita.
and losses and dissolution Principles for double entry
agreement. bookkeeping system.
• Technological developments: • Pacioli: The purpose of
 Use of Arabic numeric system. bookkeeping is to give the
 Art of writing becomes more trader information as to his
common. assets and liabilities without
 The invention of printing delay. Information should be
technology. useful for decision-making.
1501 - 1760 Entrepreneur and Need for long-term financing Concept of Capital
Continuity
• Economic developments: • Continuity as formulated in • Other influential authors:
 The entrepreneur manages a the capital model of Hugh  1534 Jan Ympyn,
business with resources Oldcastle. describes the trial
exceeding his personal • Revenues and expenses are balance. He transfers the
capacity. not regarded as important. nominal accounts to a
 Need experienced to finance • The banking industry profit-and-loss account.
business ventures. develops and example is De Closes P&L account off to
 Use of Atlantic shipping routes, Wisselbank van Amsterdam. capital account.
requires finances. • Active securities markets  1543 Hugh Oldcastle,
 Trading of money and bills develop: formulates the capital
between merchants, bankers  Starting with Bruges model “Capital = Assets
and entrepreneurs starts. Bourse in the Place de minus Liabilities”
 The VOC issues shares to raise La Bourse • See a wider use of the double
finance from the general public.  Amsterdam 1620 - entry accounting system.
• Political developments: 65 000 investors. • Prepare financial reports to
 Wars in France, Germany and  Amsterdam 1688 – spot inform owners and investors.
Britain – Governments cannot and future contracts, • Transfer money between
grand security for loans and call, put and straddle merchants through an
bonds. options, margin trading, accounting entry of debits
• Business / reporting requirements: hedging, short selling, and credits.
 Stewardship questions defer payment and • Capital represents continuity
regarding assets, liabilities and delivery.
68
equity. • First economic bubbles in a business enterprise.
 VOC officers must provide a occur: Mississippi Bubble
balance sheet on the last day of and South Sea Bubble.
June.
 Trading on the securities market
stimulates the need for financial
information to investors and
potential investors.
• Technological developments:
 Productive efficiency.
 Dutch shipbuilding.
1760 - 1830 Industrial Capitalism Demand for large amounts of capital Increase in financial
institutions
• Social developments: • Number of banks increase – • At the beginning of the period
 Better living and health 1800, 80 banks in London, the charge and discharge
conditions exist. 800 in Britain. accounting system is still
 Population grows. • The period experiences the used.
• Economic developments: official opening of Stock  Reporting of the system
 Big corporations emerge in exchanges – London 1773, is limited as it does not
canal, manufacturing, steel, New York 1792. show amount of capital
railway and coal industries. • Public accountants provide invested and,
 Statutory company is invented. financial expertise.  The system does not
 Large companies are capital • Better financial reporting is provide profit and other
intensive. required. performance information.
 The number of large • The double-entry system is
manufacturing companies widely used.
increases. • Cost management accounting
 Large businesses have high develops.
costs of fixed assets. • The concept of depreciation
• Business / Reporting requirements: becomes more important.
 Capital becomes mobile. • Capital protection is
 The demand to maintain capital important.
increases. • Increase in quality of financial
 Owners are absent from statements is noted.
businesses. • Fundamental accounting
 Accountability of business
69
managers increases. concepts in use are:
 Shareholders demand  Going concern,
investigations into books.  Accruals,
 Demand for financial reporting.  Consistency,
• Technological developments:  Prudence.
 Manufacturing techniques
develop.
 Costing methods of
manufactured products
develops.
 Mining techniques develop.
 Use of large numbers of
labourers in labour intensive
industries.
1830 – 1900 Return on capital Industrial development Increase in financial
invested disclosure and adoption of
some accounting principles
• Economic developments: • Financial reporting develops • Standardisation of
 General positive economic on demand of investors. depreciation treatment is
climate exists. • The importance of the developed.
 The growth in railway industry reliability and accuracy of • Accounting moves from the
stimulates the economy. financial reports increases. cash to an accrual basis.
 An increase in the separation • The disclosure levels of • The accepted accounting
between management and financial reporting in the practices at the end of this
ownership occur. railway industry increases period (section 2.5):
 Speculation in railway shares after the Railway Mania.  the adoption of the going
causes the Railway Mania in • The Royal Commission on concern concept;
mid-1840. Railways requests the  the historical cost concept
 There is a demand for return on standardisation of accounts. was used to capitalise the
investment in the form of The result is the “Regulation cost of fixed assets;
dividends. of Railways Act 1868”.  a move from cash to
 A Financial crisis occurs in • The U.S. accounting accrual basis of
1866. profession is established in accounting;
• Business / Reporting requirements: 1886 with the American  a selection of particular
 Financial regulation in UK is a Association of Public valuation procedures;
laissez-faire system. Accountants.  the concept of prudence /
70
 The general status on financial conservatism;
reporting is that it is unregulated  the adoption of
with little statutory requirements. depreciation accounting
 Minimum regulations are in some entities;
prescribed by the London Stock  comparability and
Exchange. consistency of financial
 The railway industry has long- statements, and;
term assets. Need exists to  the absence of general
forecast on assets life. agreement on profit
 The Companies Act is measurement and asset
promulgated in 1855. valuation procedures.
 Management chooses
accounting principles and
practices to suit the goals of the
organisation.
 Investors are exploited by
manipulating accounting
records.
• Technological developments:
 The manufacturing industry and
the development of the steam
engine for railway industry boost
technological developments.
1901 – 1938 Corporate Corporate policy Verifiability and
Capitalism and standardisation of reporting
Verifiability
• Social / Political developments: • Establishment of • Proprietary theory dominant
 World War I professional accounting at turn of century, replaced
 Availability of cash due to bodies. with entity theory.
repayment of Liberty Bonds by  Professional accounting • Publication of:
the U.S. government stimulates bodies take  A Tentative Statement of
stock market. responsibility for Accounting Principles
• Economic developments: accounting standards. Underlying Corporate
 Increase in trading on stock • Implementation of Financial Statements” by
exchanges. standardisation process on the AAA and,
 Financial disaster - 1929 Great accounting principles and  the “Statement of
71
Depression. practices initiated. accounting principles”
 Establishment of the Securities • Balance sheet is regarded as published by Sanders,
and Exchange Commission the most important financial Hatfield and Moore.
(SEC) in 1934. report.
• Business / Reporting requirements: • General Electric becomes
 Regulation on financial reporting trendsetter in financial report
required. in 1931:
 No uniformity in financial  General Electric
reporting. publishes an audited
 Shareholders demanded better financial report with
information. comparative Statement
 Cooperation between AIA and of Income and
New York Stock Exchange to Expenses, Balance
draft accepted accounting Sheet and notes on
principles. some assets.
• Technological developments: • AIA reacts to government
 Mass production of documents. regulation by appointing a
special committee to develop
five accepted accounting
principles.
• Academic work starts on
accounting theory to
formulate postulates and
principles for accounting.
• Academic body, AAA is
created to encourage
academic thinking on
accounting principles.
 Founding of academic
journals for accounting.
1938 – 1973 Market failures and Market failures, statutory pressure to Professional bodies search for
extension of regulate accounting accounting principles
Accounting
Disclosure
• Economic developments: • Professional bodies • In 1957, the APB
 Enormous growth in stock summarise accounting recommends a conceptual
72
exchanges. practices without a approach for accounting on
 Pressure from the SEC in theoretical basis. four levels: postulates,
reaction to the 1929 depression • Ad hoc reactions from the principles, rules and other
to improve financial reporting. professional accounting guides and research.
 Corporate failures and stock bodies on SEC requests. • A lot of discussion during
market crashes. • Alternative accounting 1960 – 1973 on accounting
• Business / Reporting requirements: practices allowed. postulates and principles,
 Financial reporting should be • The APB issue ARB's ARSs are published.
standardised. without a theoretical basis. • In 1966 the AAA publishes
 SEC requires guidance on • APB replaced due to lack of ASOBAT.
specific problems in accounting a framework for developing • In 1970 the APB publishes
practices. accounting principles. Statement No. 4.
 SEC approves accounting • In 1971, AICPA appoints: • Wheat committee
standards for the U.S.  Wheat committee – recommends restructuring
should determine and formation of FASB.
changes needed to get • Trueblood Committee
better and faster results. recommends decision-
 Trueblood Committee – usefulness as objective for
objective to determine financial reporting.
objectives of financial • See summary of historical
reporting. document building up to the
FASB conceptual framework
(Table 2.1).
1973 to the Global Capital Global Capital Markets Search for global acceptable
present Markets financial accounting standards
Conceptual • Economic developments: • Formation of the FASB in • SATTA concludes that no
frameworks published  Global corporations formed after 1973. single theory of accounting
in the U.S. World War II.  FASB searches for exists.
 Internationalisation of capital single accounting theory • FASB starts a conceptual
markets with listings in different to serve as basis for framework project.
countries. accounting standards.  Publishes 8 SFAC’s
 SEC requires reconciliation  FASB published between 1978 and 2010.
between U.S. GAAP and foreign accounting standards.  SFAC No. 5 rejected by
accounting standards. • AAA reconsiders accounting accounting community.
• Business / Reporting requirements: theory in 1977 – publishes  Lack of status of the
73
 Need for global standardisation SATTA. SFAC has to influence
of financial reporting. • Historical cost as the revision and setting of
measurement criteria causes standards contributes to a
problems in SFAC No. 5. negative evaluation of the
• Acceptance of accounting project.
standards based on a sound  SFAC No. 10 is a joint
theory hindered by: effort between the FASB
 Pressure and and the IASB.
acceptance
requirements from SEC,
 Non-agreement on
principles by
accountants.
CFfFR in Europe • Growth in MNE's experienced in • Formation of IASC followed • IASC publishes IASs
Europe. up by the IASB in Europe. • IAS 1 published in 1995.
• Need arises to harmonise vastly • IASC criticised because it • Start a framework project in
different accounting standards drafts IAS’s without a 1984 following a “fill the gap”
across countries. conceptual framework as approach that evolves into a
• New York Stock Exchange accepts basis. “building block” approach.
listing under IFRS before SEC • XBRL project • IASC publish a conceptual
approves it. • Numerous software framework based on FASB
• Technology developments: packages to capture and SFAC’s in 1989.
 Computer technologies such as manage accounting data.
mainframes, desktop computers • Business to business
and laptops. transactions over the
 Internet and World Wide Web. internet.
2002 - 2010 Joint FASB and IASB • SEC supports convergence of • European Union decides in • The first stage of the joint
conceptual accounting standards. 2002 to use IFRSs from 1 conceptual framework, “The
framework. • SEC accepts reporting under IFRS January 2005. Conceptual Framework for
without reconciliation with U.S. • Norwalk Agreement between Financial Reporting” is
GAAP. FASB and IASB in 2002 published on 28 September
• Need for principles-based encourages joint projects 2010.
accounting standards rooted in between the FASB and
fundamental concepts expressed by IASB.
74
FASB and IASB.  Joint project adopted to
develop a globally
acceptable conceptual
framework and remove
individual differences
between U.S. GAAP and
IFRS’s.
(This summary was done by the author)
75
In summary, the need for a conceptual framework for accounting to guide accounting
standard setters in setting inherently consistent accounting standards existed from
the early stages of the twentieth century. The search for acceptable accounting
postulates started in 1922 with the publication of W.A. Paton “Accounting Theory”
and reached a certain degree of maturity and acceptance by the accounting
community with the publication of the IASC CFfFR document in 1989. However, in
practice other factors like general practices, acceptance by law enforcement bodies
for example the SEC, cultural and personal preferences and not necessarily being
linked to a consistent theoretical basis are sometimes given preference over a more
theoretically sound document like the CFfFR.
Although the IASB is currently revising the CFfFR, there is no guarantee that the
revised CFfFR will be internally consistent and internationally converged as
envisaged by the IASB (2010a). The purpose of this study is to investigate how to
build an ontology of the CFfFR in a formal language that can contribute towards
formulating a global CFfFR that is internally coherent, logically consistent and
unambiguous.
2.10 A Global CFfFR: A Wicket Problem
From the literature review in Chapter 2, it is argued that there is a need for a globally
acceptable CFfFR in the accounting community. During the discussion in Chapter 2 it
is indicated how it happened that the CFfFR is not globally accepted. The various
stimuli for developments in accounting and financial reporting can be summarised
under the following classes: political developments, social developments, economic
developments, business / reporting requirements, and technological developments
(Table 2.3). It is indicated in Table 2.3 how some of the responses on the stimuli
contributed to the postulates and principles of financial reporting, and were included
in the CFfFR. The fact that, after decades of dedication, there is not one global
CFfFR is an indication that the creation of a global CFfFR is complex process
involving influences, factors and reasons of diverse nature (Chapter 4).
An appropriate and well-established research strategy, Design Science Research

(DSR), is used in Information Systems (IS) 47 for research projects that can be
described as wicked problems (Hevner et al., 2004; Hevner & Chatterjee, 2010).
Wicked problems in IS are characterised by:
• “unstable requirements and constraints based upon ill-defined environmental
contexts
• complex interactions among subcomponents of the problem and its solution
• inherent flexibility to change design processes as well as design artefacts (i.e.,
malleable processes and artefacts)
• a critical dependence upon human cognitive abilities (e.g., creativity) to
produce effective solutions
47
IS instead of computing is used here as that is the term used by Vaishnavi and Keuchler (2013) and Hevner et al.
(2004) in relationship to DSR.
76
• a critical dependence upon human social abilities (e.g. teamwork) to produce
effective solutions” (Hevner et al., 2004:81).
The research problems answered in this study comply with the characteristics of
wicked problems. The requirements of a global CFfFR are not clearly defined by
either the FASB or the IASB. During interaction with the IASB it was discovered that
a formal definition for a global CFfFR does not exist. Secondly, there are many
complex interactions among subcomponents of the problem on how to develop a
global CFfFR. These interactions are discussed in Chapter 4, when the requirements
of a global CFfFR are identified. The process to design an artefact (CFfFR ontology)
is flexible and consists of several iterations to change the design process. The DSR
design of the CFfFR ontology depends upon the cognitive abilities (domain
knowledge) of the researcher, consulting with an ontology engineer to produce an
effective solution. The project was critically dependent on the teamwork between an
ontology engineer and a domain specialist.
The wicket research problem identified is how the use of ontology technologies can
contribute towards the improvement of the CFfFR by designing a CFfFR ontology.
The DSR process of designing the CFfFR ontology contributes towards solving the
wicked research problem of creating a global CFfFR by indicating internal
incoherencies, logical inconsistencies, unintended meanings and incompletenesses
in the CFfFR when the CFfFR is compared to the ideal CFfFR.
It could be concluded that historical development of the CFfFR can be described as

an uncompleted evolutionary process (Camfferman & Zeff, 2009; Riahi-Belkaoui,
2004; Stamp, 1980; Stamp, 1970). This study attempts to contribute towards the
evolutionary process of improving the CFfFR.
2.11 Conclusion
The purpose of the literature review was to determine, looking through a system of
stimuli / response, how the CFfFR evolved and identify the research gap. Chapter 2
starts with the first traces of accounting in the Sumerian temples during the pre-
capitalist period (4000 B.C. – 1000 A.D.) (Section 2.2). The objective of accounting in
a public economy (4000 B.C. – 700 B.C.) was to control state assets (section 2.2.1).
The sophistication of the accounting systems used in the Greek Dynasty and Roman
Empires were discussed under the Feudal System (700 B.C. – 1000 A.D.) (section
2.2.2). During this period (700 B.C. – 1000 A.D.), money as moveable wealth was
discovered, the banking system developed, the first steps were taken towards
corporate governance, and private ownership were introduced.
The period 1000 A.D. – 1760 was labelled as the period of commercial capitalism
(section 2.3). With money as moveable wealth the exchange economy (1000 A.D. -
1500) flourished. Medieval trading, with Venice and Genoa as centres, developed
and business saw the introduction of partnerships (sections 2.3.1a) and 2.3.1b)).
During this period one of the most basic fundamentals of modern day accounting was
developed. The principles of the double entry accounting system (the Method of
Venice section 2.3.1c)) was published in the Summa de Arithmetica, Geometrica,
77
Proportioni et Proportinalita in 1494 by Luca Pacioli. The stimulus for the
development of the double entry accounting system was the demand for useful
financial information (section 2.3.1d)). Another important technological development
for the purpose of accounting was the acceptance of the Arabic numeric system
(section 2.3.1e)).
During the period 1500 to 1760, the entrepreneur emerged (Salvary, 1979). The
accounting equation (section 2.3.2a)) introducing the concept of capital and the
maintenance of capital, was developed by Hugh Oldcastle in 1543. In the same year
1543, Ympyn is credited with the development of the trail balance (section 2.3.2b)).
The economic development in Europe during the seventeenth century is marked as
the last phase of transition from a feudal to a capitalist economy and is seen as the
period of transition to capitalism (Wallerstein, 1980) with active securities markets in
Europe and America by the end of the seventeenth century. The founding of De
Wisselbank van Amsterdam in 1609 marked the beginning of bank transfers of
money between merchants through debits and credits (section 2.3.2d)). A boom in
the shipbuilding industry stimulated a need to productive and efficient manufacturing
practices (section 2.3.2e)).
During the industrial capitalism period (1760-1830) (section 2.4), known as the period
of the Industrial Revolution, the demands for capital and capital maintenance (section
2.4.1), better accountability (section 2.4.2), and financial reports (section 2.4.3)
caused the general acceptance of the double-entry system already documented by
Pacioli in 1494.
From 1830-1900, labelled as financial capitalism: the return on capital invested

period (section 2.5), financial reporting was unregulated with demands for regulation
starting after the Railway Mania (section 2.5.1c)) in the 1840’s. It took financial crises
to put demands for financial reporting regulation into legal action. The Royal
Commission on Railways in the UK requested a standardised system of accounts in
1866. As a result, the “Regulation of Railways Act 1868 contained fifteen financial
and statistical statements designed to improve comparability” (Edwards, 1996:65)
and provided shareholders with information to assess the financial position of a
company (section 2.5.2d)). The response was the emergence of fundamental
accounting concepts and the increase in financial disclosure (sections 2.5.2e) and
2.5.2f)).
During the period 1901-1938 (section 2.6), financial reporting developed from
unregulated to a regulated industry that improved beyond legislation (sections 2.6.1a)
and 2.6.1c)), mainly in reaction to the stock market crash of 1929 and the Great
Depression (section 2.6.1b)). The regulation of financial reporting developed
simultaneously with the development of the accounting profession (sections 2.6.2a),
2.6.2b)). It also introduced the first steps towards the academic search of an
accounting theory (section 2.6.2c)).
The search for accounting postulates and principles were continued during 1938-
1973 with the formation of professional bodies reacting to pressure from the SEC
(sections 2.7.1 and 2.7.2). The globalisation of capital markets after World War II
78
stimulated and increased the intensity to produce one set of global accounting
standards. The formation of the FASB resulting from a recommendation by the
Wheat Committee (section 2.7.2a)) introduced a new era in standard setting (section
2.7.2).
Since 1973, with the development of computer technologies and the introduction of
the World Wide Web, global companies trading across continents became the norm
rather than the exception. The need for global accounting standards demanded an
internally coherent and consistent framework that could serve as basis to develop
accounting standards. The FASB reacted to the demand and produced SFAC’s that
could serve as a conceptual framework for financial reporting (section 2.8.1). In
Europe, global capitalisation was the main stimulus to develop one set of high quality
accounting standards. The IASC was formed in 1973 with the purpose to produce
such a set of standards (section 2.8.2). Initially the IASC developed its standards
without a conceptual framework. In order to obtain legitimacy for its standards, the
IASC adopted and adjusted the FASB’s SFAC’s, with inputs from frameworks from
other standard setting bodies, and published the “Framework for the Preparation and
Presentation of Financial Statements” as a single document in 1989 (IASB, 1989).
With both the IASB and the FASB closely related, but not identical frameworks, the
search for a single globally acceptable conceptual framework officially started on 18
September 2002 with “The Norwalk Agreement” (FASB and IASB, 2002) (section
2.8.3b)). On 28 September 2010 the first product of the joint conceptual framework
project was published with chapters 1 and 3 of the Conceptual Framework for
Financial Reporting (CFfFR) being the fruit of the joint project between the FASB and
the IASB (IASB, 2010a) (section 2.8.3c).
Since the publication of the CFfFR, the joint project between the IASB and the FASB
to develop one global CFfFR was stopped leaving a wicket problem to be solved
(section 2.10). This study contributes towards answering the wicket problem by
attempting to indicate how the use of ontology technologies could contribute towards
the improvement of the CFfFR by designing a CFfFR ontology.
79
SECTION B – RESEARCH DESIGN
Figure 2.4: Chapter map - Section B, Chapter 3
80
CHAPTER 3
TABLE OF CONTENT
3 RESEARCH METHODOLOGY AND RESEARCH PLAN.......................................... 82

3.1 Introduction ............................................................................................................... 82
3.2 Research Problem and Research Questions ............................................................ 83
3.3 Philosophy: Ontological View of Reality and Axiological Implication ......................... 84
3.3.1 Pragmatism .............................................................................................................. 84
3.3.2 Positivism ................................................................................................................. 84
3.3.3 Realism .................................................................................................................... 85
3.3.4 Interpretivism ............................................................................................................ 85
3.3.5 Philosophy Used in this Study .................................................................................. 86
3.4 Research Approaches .............................................................................................. 87
3.4.1 Deductive ................................................................................................................. 87
3.4.2 Inductive ................................................................................................................... 87
3.4.3 Abductive .................................................................................................................. 88
3.4.4 Research Approaches Used in This Study................................................................ 88
3.5 Methodological Choice ............................................................................................. 90
3.6 Research Strategy .................................................................................................... 90
3.6.1 DSR as Research Strategy: The Main DSR Cycle .................................................... 93
3.6.2 DSR Cycle 1: Requirements of a Global CFfFR........................................................ 95
3.6.3 DSR Cycle 2: The Role of a Global CFfFR as a Model ............................................. 96
3.6.4 DSR Cycle 3: Ontologies and Financial Reporting .................................................... 97
3.6.5 DSR Cycle 4: A Formal Domain Ontology of the CFfFR ........................................... 98
3.7 Time Horizon .......................................................................................................... 101
3.8 Research Techniques and Procedures ................................................................... 101
3.8.1 Systematic Review ................................................................................................. 102
3.8.2 Interdisciplinary Research....................................................................................... 106
3.8.3 Ontology Technologies: The OLC Model ................................................................ 108
a) Phase 1: Requirements Development .............................................................. 109
b) Phase 2: Ontological Analysis .......................................................................... 111
c) Phase 3: Ontology Design ................................................................................ 112
d) Phase 4: System Design .................................................................................. 113
e) Phase 5: Ontology Development and Reuse .................................................... 113
f) Phase 6: System Development and Integration ................................................ 114
g) Phase 7: Deployment ....................................................................................... 114
h) Phase 8: Operation and Maintenance .............................................................. 114
3.9 Knowledge Contribution and Verification ................................................................ 114
3.10 Limitations .............................................................................................................. 120
3.11 Conclusion .............................................................................................................. 120
81
3 RESEARCH METHODOLOGY AND RESEARCH PLAN
3.1 Introduction
Section A that consists of Chapter 2 provides the background on the historical

development of the Conceptual Framework for Financial Reporting published by the
IASB (the CFfFR), as well as the research problem, (section 2.10, a global CFfFR: A
wicket problem) addressed by this study.
This is a qualitative multi-disciplinary study, involving mainly accounting and

computing, but also touching on philosophy and the philosophy of science. Various
research techniques and procedures are utilised to address the research problem
proposed in section 2.10. Chapter 3 provides an overview of the research design of
this study.
The research design adopted in this study is mainly based on the “research onion”
concept of Saunders et al. (2012). The research onion consists of (1) philosophy: the
ontological view of reality (positivism, realism, interpretivism and pragmatism), (2) the
research approach or epistemology (deduction, induction and abduction), (3)
methodological choice, (4) research strategy, (5) time horizon of the study and (6) the
specific techniques and procedures of research. It can be graphically illustrated as
depicted in Figure 3.1.
Figure 3.1: The research “onion”
With the research onion of Saunders et al. (2012) as basis, the following research
plan was followed in this study to address the research problem identified in section
2.10.
• The research questions formulated to address the research problem are revisited
in section 3.2.
• The philosophy i.e. the ontological view of reality adopted in the study as well as
the axiological implications of the ontological view is provided in section 3.3.
82
• The choice of research approaches followed in this study are motivated in
section 3.4.
• The methodological choice is discussed in section 3.5.
• The research strategy is explained in section 3.6.
• The time horizon of the study is given in section 3.7.
• The last step of the research plan, the research techniques and procedures
used, is provided in section 3.8.
In section 3.9, the verification of the research results are explained and section 3.10
provides the limitations and boundaries of the study.
3.2 Research Problem and Research Questions
Since the Great Depression of 1929 to 1933, the accounting community have been
searching for a globally acceptable conceptual framework that could provide
fundamental concepts to form a sound foundation for the development of accounting
standards that are principally based, internally consistent and internationally
converged (Bullen & Crook, 2005). In section 2.10, the research problem was
identified as follows: how can the use of ontology technologies contribute towards the
improvement of the CFfFR by designing a CFfFR ontology. Based on the research
problem the main research question is posed.
The main research question (MRQ): How can a CFfFR consisting of logically
formalised fundamental concepts be developed, which could function as a sound
foundation for accounting standards that are principle-based, internally consistent
and internationally converged?
The following sub-research questions are posed to solve the main research question:
• Sub-research Question 1 (SRQ 1):
What are the role, definition and requirements of a global CFfFR consisting of

How can model building assist to construct a global CFfFR consisting of

How can the formalisation of the CFfFR using ontologies assist to construct a
CFfFR consisting of logically formalised fundamental concepts, which could
function as a sound foundation for accounting standards that are principle-
based, internally consistent and internationally converged?
In this study the CFfFR is used as a model to test the role and requirements of a
globally acceptable conceptual framework for financial reporting (global CFfFR).
83
Based on the research onion of Saunders et al. (2012) as provided in Figure 3.1, the
first step in research design is to determine the ontological view of reality adopted in
a study. The ontological view of reality is discussed in section 3.3.
3.3 Philosophy: Ontological View of Reality and Axiological Implication
From a philosophical perspective ontology is concerned with the nature of reality

(Saunders et al., 2012), also described as “the theory of being” (Gaffikin, 2008:6).
Based on the ontological commitment a research project makes assumptions on
what exists and what does not or cannot exist (Gaffikin, 2008). Saunders et al. (2012)
provides a summary of research philosophies and approaches in what they call the
“research onion” (Figure 3.1). The philosophical assumption of reality or ontology
adopted by a researcher determines the research approach followed in a particular
study. The four popular research philosophies used to conduct research are
pragmatism, positivism, realism and interpretivism. 48 The four philosophical
ontological views of reality are discussed in sections 3.3.1 to 3.3.4. The ontological
view adopted in this study is stated and motivated in section 3.3.4. The research
philosophy adopted is linked to the values of a researcher.
Axiology is the study of the role values play in the research process. The different
research philosophies of reality have different axiological implications. The axiological
implication of the adopted research philosophy on the research process is discussed
in section 3.3.5.
3.3.1 Pragmatism
According to pragmatism, the most important determinant is the research question. If

the research question does not without a doubt point towards a particular philosophy,
a pragmatist’s view is that it is possible to work with different philosophical positions.
The implication is that multiple methods are possible and possibly highly appropriate
within one study (Saunders et al., 2012). It would be possible for this study to adopt a
pragmatist’s view as multiple methods are used to answer the different research
questions. However, in this study the nature of the reality under investigation and not
the research questions determines the philosophical perspective of reality.
3.3.2 Positivism
Positivism is traditionally associated with the natural sciences. As far as possible,

research is undertaken in a value-free way and knowledge is objectively determined
(Gaffikin, 2008; Saunders et al., 2012). According to a positivist view, reality is
external to the researcher (Gaffikin, 2008). The researcher has an objective stance
towards reality and is independent of the research object (Gaffikin, 2008).
Traditionally a researcher with a positivist view of reality would develop a hypothesis
48
Myers (2013) discuss the positivist, interpretive and critical perspectives. Riahi-Belkaoui (2004) distinguishes
between four different views for accounting research: the functionalist view, the interpretive view, the radical humanist
view, and the radical structuralist view.
84
regarding the research object and then collect data in an objective manner to either
prove or falsify the hypothesis (Deegan, 2014).
This study does not adopt a positivist view of reality. Data is not collected objectively
in a value-free way to test a specific hypothesis or theory. It is conceded that the
building of a formal ontology of the CFfFR can be done adopting a positivist view of
reality. The argument would be that the CFfFR is an objective social reality and the
method used to build the formal ontology involves an objective process of applying
rules using a logical, mathematically proven and technically advanced computer
program. In this study it is assumed that the researcher is subjectively involved when
making modeling decisions rather than applying a rule objectively during the decision
making process.
3.3.3 Realism
Realism, according to Ryan et al. (2002:13), represents “the common-sense view

that, when we describe something, that thing has a reality which is independent of
our perception of it”. The philosophy of realism assumes that objects in the world is a
reality independent of the mind and exists independently of the us (Saunders et al.,
2012; Gaffikin, 2008). Realism is similar to positivism regarding data collection “in
that it assumes a scientific approach to the development of knowledge” (Saunders et
al., 2012:136). Two forms of realism, direct realism and critical realism are identified.
According to direct realism, what you see is what you get and the world is portrayed
accurately through our senses. According to a critical realism perspective reality
“exists independently of human thoughts and beliefs or knowledge of their existence,
but is interpreted through social conditioning” (Saunders et al., 2012:140). As with
positivism, this study can arguably be done from a realism perspective. The same
objections can however be raised against realism than what was raised against
positivism. The researcher’s involvement in making modeling decisions suggests a
more subjective involvement in the research process than allowed by realism. The
ontological perspective adopted in this study is close to critical realism. The model
theory of Mäki (2008) utilised in Chapter 5 can be viewed from a critical realism
perspective.
3.3.4 Interpretivism
Interpretivism adopts a more subjective view of reality i.e. “that social phenomena are
created from the perceptions and consequent actions of social actors” (Saunders et
al., 2012:132). According to a non-realist ontology 49 (Gaffikin, 2008) the world is
socially constructed and can only be understood in terms of how people describe it.
Social reality is constantly changing and in a state of revision as it is being

constructed. Researchers may interpret a social reality differently in consequence of
their own view and experience of reality. It is the role of the researcher to understand
49
Gaffikin (2008) uses non-realist ontology to describe what Saunders et al. (2012) classifies as interpretivism.
85
the subjective reality of the social phenomena under investigation. The subjective
reality to be understood includes the motives, actions and intentions that are
meaningful to a specific social phenomena (Saunders et al., 2012).
3.3.5 Philosophy Used in This Study
An interpretivist ontological and epistemological view is adopted in this study with

respect to a view on social realities as being socially constructed, subjective and may
therefore change (Saunders et al., 2012). The conventional test for an interpretivist
view is whether an object still exists if one takes away the human mind. If an object
does not exist when the human mind is taken away, it is a social construct and is
mind-dependent (Saunders et al., 2012) 50 .
Based on the history of the development of the CFfFR (Chapter 2), it may be argued
that accounting as phenomenon, financial accounting standards and the CFfFR is the
result of human involvement, thoughts and activities. The underlying reality of
accounting is economic activities that constitute social activities. This is in agreement
with Ryan et al. (2002:9) who stated that “research in accounting and finance is
generally accepted as being social scientific”. The nature or ontology of the reality
under investigation, the CFfFR, is a social construct and can be classified as a social
entity.
For the purpose of this study the ontological assumption adopted is that the CFfFR
as a social phenomenon is created from the perceptions and actions (Saunders et
al., 2012) of the accounting community – the IASB. The CFfFR is a social construct,
created by a social organisation (IASB) with input from the accounting community,
written in natural language. It can be concluded that the CFfFR as a social reality “is
variously shaped by, and dependent on people’s beliefs and expectation, goals and
wants, plans and impulses, emotions and reasonings” (Mäki, 2008:339).
One of the characteristics of social phenomena is that they are in a constant state of
revision (Saunders et al., 2012). The history of the development of the CFfFR
(Chapter 2) clearly indicates how the CFfFR evolved over time, and is constantly
revised by humans (Gaffikin, 2008). The IASB as the body responsible to draft and
revise the CFfFR also serves as a representative of the community within which the
perceptions and actions regarding the CFfFR are formed. Based on the nature and
characteristics of the CFfFR, an interpretivist ontological view of the nature of the
CFfFR is adopted. From the perspective of the ontologist, the interpretivist view is in
agreement with Wolterstorff (1970:Xiii) that the ontologist description of reality is
“invariably shaped and formed by many factors – cultural, linguistic, religious, and
more.” The interpretivist assumption adopted in this study agrees with the research
perspective for DSR as described by Vaishnavi and Keuchler (2013:Table 3).
50
This study does not adopt the extreme non-realist world view of the solipsist as described by Gaffikin (2008).
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Axiological Implication
The axiological implication of an interpretivist ontological view is that “the researcher

is part of what is being researched and cannot be separated and so will be
subjective” (Saunders et al., 2012:140). This study is in agreement with Ryan et al.
(2002:20) who stated that an “explanation in the social sciences invariably entails
interpretation”. The interpretation has a subjective element to it, as the researcher
forms part of the thought process of other researchers to formulate and create a new
social reality – a formal ontology of the CFfFR. The subjective involvement of the
researcher in the modeling process has already been established in the discussion of
positivism and realism above.
The approach to a research project is linked to the researchers’ ontological view of

reality adopted for the study. In section 3.4 different research approaches and how
they are applied in this study, are discussed.
3.4 Research Approaches
According to Saunders et al (2012) research can be approached from basically two

perspectives, an inductive approach or a deductive approach with a combination of
the two known as an abductive approach. These approaches are based on the
reasoning direction adopted in a research project. The epistemology to do research
on the CFfFR from an interpretivist philosophical stance is inclined to be subjective
and qualitative in nature.
3.4.1 Deductive
Deductive reasoning is used when logical conclusions are made from a set of
premises and the conclusion is true if all the premises are true (Deegan, 2014).
Deductive reasoning is the dominant research approach in the natural sciences
(Saunders et al., 2012). A deductive approach generalises from the general to the
specific and uses data to evaluate propositions or hypotheses related to a theory
(Deegan, 2014; Saunders et al., 2012). Deductive reasoning involves the
development of theory and then subject the theory to rigorous testing. The verification
or falsification of the tested theory is the aim of a deductive study. This study utilises
deductive reasoning in answering some of the research questions.
3.4.2 Inductive
An inductive approach is used when a theory is formulated by collecting data and

analysing it and is traditionally associated with positivism (Gaffikin, 2008). The theory
is “often expressed as a conceptual framework” (Saunders et al., 2012:146). In an
inductive approach, a study generalises from the specific to the general. Instances of
a phenomenon are studied and by way of induction a conclusion or theory is derived
based on the study (Gaffikin, 2008).
Data collection is used to explore a phenomenon, themes and patterns are identified
and a theory or conceptual framework is constructed based on the identified themes
and patterns (Saunders et al., 2012). Theory building and generation is the result of
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an inductive study. In accounting an inductive study usually makes use of the tools of
statistics to draw a conclusion (Gaffikin, 2008). Although an inductive approach was
used to answer some of the research questions by building a theory regarding the
value of the use of models in building the formal domain ontology of the CFfFR, no
statistical tools were used in the process.
3.4.3 Abductive
An abductive approach moves back and forth between inductive and deductive
approaches, thus combining induction and deduction approaches. According to
Saunders et al. (2012) many business and management researchers use an
abductive approach. According to Saunders et al. (2012:147) “abduction begins with
the observation of a ‘surprising fact’; it then works out a plausible theory of how this
could have occurred”. In an abductive approach, known premises are used to
generate testable conclusions and interaction between the specific and the general is
used to generalise. According to Saunders et al. (2012:144) in an abductive
approach “data collection is used to explore a phenomenon, identify themes and
patterns, locate these in a conceptual framework and test this through subsequent
data collection and so forth.
3.4.4 Research Approaches Used in This Study
According to Myers (2013:23) “both inductive and deductive reasoning can be used
in qualitative research”. In this study, both inductive and deductive reasoning
approaches were used to answer the respective sub-research questions. The main
research question was answered using an abductive approach.
The phenomenon and development of the CFfFR were explored in the literature
review in Chapter 2 using an inductive approach. An inductive approach was also
used in Chapter 4 to answer the first sub-research question (SRQ 1) 51 (section 3.2).
SRQ 1 was answered by investigating the literature on the CFfFR, documents
published in the run-up to the development of the CFfFR, and the CFfFR itself to
identify the definition and requirements of a global CFfFR from the documents
investigated. The results of Chapter 4 are refined in Chapter 5 by determining the
role of a global CFfFR using a different research technique (section 3.8.2).
The second sub-research question (SRQ 2) 52 was answered using a deductive

approach. Chapter 5 focuses on the second sub-research question and uses
modeling theories from philosophy of science and Computing to refine and expand
on the results of Chapter 4. A deductive approach was followed by applying model
building theories and methodologies in Chapter 5 to the CFfFR to answer SRQ 2.
The modeling theories used, serve as the set of premises against which the CFfFR is
51
SRQ 1: What are the role, definition and requirements of a global CFfFR consisting of fundamental concepts, which
could function as a sound foundation for accounting standards that are principal-based, internally consistent and
52
SRQ 2: How can model building assist to construct a global CFfFR consisting of fundamental concepts, which
could function as a sound foundation for accounting standards that are principal-based, internally consistent and
88
tested. After the characteristics of the CFfFR were compared against the modeling
characteristics obtained from the modeling theories a conclusion was made regarding
the role of a global CFfFR.
The third sub-research question (SRQ 3) 53 was answered using a deductive

approach. SRQ 3 was answered in Chapter 6. Chapter 6 builds on the modeling
theories of Chapter 5. The applicability of theories regarding ontologies, from both
philosophical and computing perspectives was used and the applicability and value of
the use of ontologies on the CFfFR were demonstrated in Chapter 6. Based on the
applicability of the theories on the CFfFR it was concluded that ontologies could
assist to construct a CFfFR consisting of logically formalised fundamental concepts.
The main research question (MRQ) 54 was answered by building a formal domain
ontology of the CFfFR. The building process went through four iterations and is
reported on in Chapter 7. The building of the formal ontology of the CFfFR (see
Chapter 7) follows mainly an abductive approach 55 as it involves an analysis of the
natural text (observation or data collection). Plausible theories regarding a decision
process to report decision-useful information were identified (Figure 7.19) and a
model regarding competency questions, classes and relationships to be included in
the CFfFR ontology were constructed (Figure 7.21). Based on these premises
testable conclusions were made identifying inconsistencies and unintended
meanings during the formalisation process by making modeling decisions and testing
the modeling decisions. Incomplete aspects and implied domain knowledge were
also reported on during the modeling process.
Existing theories from different disciplines were adopted, adapted, used and
incorporated to build and test the theory that a formal domain ontology of the CFfFR
could assist in creating a global CFfFR. By building the formal domain ontology of the
CFfFR the main research question is answered using an abductive approach.
Finally, if the formal domain ontology of the CFfFR adheres to more of the
requirements and role of an idealised CFfFR than the CFfFR itself, the main research
question is answered. The formal domain ontology of the CFfFR does adhere to
more of the requirements and role of a possible global CFfFR than the CFfFR.
In section 3.5, the next layer of the research onion i.e. the methodological choice is
discussed.
53
SRQ 3: How can the formalisation of the CFfFR using ontologies assist to construct a CFfFR consisting of logically
formalised fundamental concepts, which could function as a sound foundation for accounting standards that are
principal-based, internally consistent and internationally converged?
54
MRQ: How can a CFfFR consisting of logically formalised fundamental concepts be developed, which could
function as a sound foundation for accounting standards that are principal-based, internally consistent and
55
The abductive and deductive approaches in building the CFfFR ontology artefact are in agreement with the
cognitive processes during a DSR project as explained by Vaishnavi and Kuechler (2013:Figure 4).
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3.5 Methodological Choice
The methodological choice of a research project involves the choice between

quantitative and qualitative methods of data collection and data analysis (Saunders et
al., 2012). Quantitative methods are concerned with numeric data while qualitative
methods use non-numeric data such as words, images, video clips and similar
material (Saunders et al., 2012). This study is a qualitative study utilising different
qualitative methods to answer the different research questions. The specific data
collection techniques and procedures to collect and analyse data are discussed in
section 3.8.
The approach in this study towards choosing a research methodology is to select the
method best suited to answer a specific research question. The research design in
this study is to use multiple qualitative research methods in order to achieve the
stated research objective. The use of multiple qualitative research methods is
supported by Myers (2013) and Ryan et al. (2002). This study is in agreement with
Ryan et al. (2002:30) who states that “we believe that a plurality of methodologies is
possible and each can lead to fruitful research”. This study can be described as a
multi-method qualitative study 56 as it is restricted to qualitative methods of data
collection and data analysis only (Saunders et al., 2012).
The multi-method qualitative study was performed adopting a research strategy

utilised in the Computing discipline known as Design Science Research (DSR).
3.6 Research Strategy
The research strategy entails the plan of action to achieve the research objective.
Research strategies that are traditionally associated with a qualitative research
project are: “...action research, case study research, ethnography, Grounded Theory
and narrative research” (Saunders et al., 2012:163). However, the overall research
strategy of this study does not fit one of the more commonly used research strategies
as mentioned in Saunders et al. (2012). The nature of the study was more cyclic with
one cycle building on the results of a previous cycle and answering new questions
that resulted from the previous cycle.
An appropriate and well-established research strategy, Design Science Research

(DSR) is used in Information Systems (IS) (March & Storey, 2008; Peffers,
Tuunanen, Rothenberger, Marcus, & Chatterjee, 2007). 57 DSR “is distinguished from
routine design by the production of interesting (to a community) new knowledge”
(Vaishnavi & Kuechler, 2013:6). DSR efforts typically target the “we don’t know how
to do this yet” areas of design distinguishing DSR from routine design by the
intellectual risk and number of unknowns in a proposed design (Vaishnavi &
Kuechler, 2013; Kuechler & Vaishnavi, 2008).
56
Mixed methods of research combines qualitative and quantitative methods of data collection and data analysis in
one study.
57
IS instead of computing is used here as that is the term used by Vaishnavi and Keuchler (2013) and Hevner et al.
(2004) in relation to DSR.
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The complexity and intellectual risk attached to DSR projects gave rise to the
description of DSR research problems to be typified as wicked problems (Hevner et
al., 2004; Hevner & Chatterjee, 2010). Wicked problems are characterised by
unstable requirements with complex interactions among subcomponents. The design
processes are inherently flexible and is critically dependant on the researcher’s
cognitive and creative abilities to produce effective solutions. DSR projects depends
on social abilities such as teamwork to produce effective solutions (Hevner et al.,
2004:81). In section 2.10, the research problem solved in this study was typified as a
wicked problem, illustrating the suitability to use DSR as a research strategy to solve
the research problem and answer the research questions.
Vaishnavi and Kuechler (2013) illustrate DSR as research strategy in IS

schematically as portrayed in Figure 3.2:
Source: Vaishnavi and Kuechler (2013)
Figure 3.2: Design Science Research Process Model
Figure 3.2 illustrates one DSR Cycle that can be repeated numerous times until the
desired results of the research project are accomplished. The process steps 58 are:
Awareness of a problem, Suggestion, Development, Evaluation, and Conclusion.
Each process step results in an output. Knowledge can be generated during the
Development Step, Evaluation Step or Conclusion Step. When knowledge is fed back
to another cycle of Awareness and Suggestion, it is called circumscription.
58
For the purpose of this study, a decision was made to capitalize any reference to the five Steps of the DSR process
model, whether abbreviated or listed in full.
91
Knowledge contribution during the process steps is the result of some restriction or
constraints to complete the process identified during a specific process step. Once a
final conclusion is reached after the final DSR Cycle, the operational principles and
design theories resulting from all the DSR Cycles represents the knowledge
contribution of the DSR project.
Awareness of the Problem: A DSR process starts with the Awareness Step of a
problem that “may come from multiple sources including new developments in
industry or in a reference discipline” (Vaishnavi & Kuechler, 2013:7). Readings in
other disciplines may stimulate opportunities for new findings in the researcher’s field.
The Awareness Step results in a proposal for a new research effort.
Suggestion: The Suggestion Step follows on the Awareness Step and is linked to the
output of the Awareness Step, i.e. the proposal, via the tentative design as output of
the Suggestion Step, to solve the problem. The suggestion to solve the problem can
be a tentative design “or at least the germ of an idea for problem solution” (Vaishnavi
& Kuechler, 2013:8). The Suggestion Step is essentially a creative step in problem
solving.
Development: The tentative design is further developed and implemented during the
Development Step. The techniques and procedures followed during the Development
Step depend on the desired output (section 3.8). The output of the Development Step
is an artefact. In IS an artefact is frequently used as a prototype to demonstrate the
feasibility of addressing a problem (March & Storey, 2008). Hevner et al. (2004:77)
defines artefacts as “constructs (vocabulary and symbols), models (abstractions and
representations), methods (algorithms and practices), and instantiations
(implemented and prototype systems)”. Constructs are also described as “vocabulary
and conceptualizations that enable communication and description of problems
(phenomena, possibly within a causal chain), solution components, constraints, and
objectives for the designed artefact” (March & Storey, 2008:726).
The Development Steps of the respective DSR Cycles in this study (Figure 3.3)
resulted in an artefact as an output of the specific DSR Cycle.
Evaluation: The artefact or developed tentative design is evaluated against the

criteria set in the proposal. Deviations are noted and explained and can lead to a new
Awareness Step. The results are then fed back into another Suggestion Step thus
repeating the DSR Cycle.
Conclusion: The conclusion of the contribution can be the end of a research cycle or
the result of a research project. The conclusion is reached when either the overall
research problem is solved or the research question is answered. The results of the
research project are reported on during the conclusion, thus providing the research or
knowledge contribution of the research project.
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This study consists of a Main DSR Cycle and four sub-DSR Cycles and is
schematically illustrated in Figure 3.3 and described in sections 3.6.1 to 3.6.5.
3.6.1 DSR as Research Strategy: The Main DSR Cycle
The Awareness Step of the Main DSR Cycle follows directly from the description of
the historical development of the CFfFR (Chapter 2). The need for a global CFfFR
was identified as a wicked problem in section 2.10. Hevner et al. (2004) proposes
DSR as a strategy to investigate wicked problems. The main and three sub-research
questions are formulated to provide answers on how the use of ontology technologies
could contribute towards the improvement of the CFfFR to be closer to a global
CFfFR by designing a CFfFR ontology.
The proposal resulting from the Awareness Step lead to the suggestion to build a
CFfFR ontology that could adhere to more of the requirements of a global CFfFR
than the CFfFR. The tentative design included a search in current accounting
literature and in other disciplines for technological developments, theories and
guidelines on how to develop a conceptual framework that could be globally
acceptable. It was suggested that a formal domain ontology of the CFfFR as tentative
design could produce a method to assist in developing a conceptual framework that
could be globally acceptable as it would be inherently consistent and clearly
formulated. The building of a formal domain ontology of the CFfFR would be a
93
novelty in financial reporting as it proposes a new functionality of the application of
ontology technologies.
The Development Step of the Main DSR Cycle went through four sub-DSR Cycles in
order to develop a formal domain ontology of the CFfFR (Figure 3.3). According to
the OLC, adopted and adapted from Neuhaus et al. (2013) (Figure 3.8), the first
phase of designing an ontology is to develop the requirements of the ontology. The
tentative design was expanded to establish the requirements of a global CFfFR in
DSR Cycle 1 (Figure 4.6). Once the requirements of a global CFfFR were determined
and the CFfFR evaluated against these requirements, the role of a global CFfFR
within financial reporting as a model was determined in DSR Cycle 2 (Figure 5.12).
The role of a global CFfFR was identified as equal to a meta-metamodel in

computing based on idealised assumptions in order to be a truth bearer (Mäki, 2011)
of the CFfFR. The knowledge contribution of DSR Cycle 2 led to a further
interdisciplinary investigation into the role and use of ontologies in philosophy and
computing respectively in DSR Cycle 3. During DSR Cycle 3 it was established that it
might be possible to build a formal domain ontology of the CFfFR, testing the
idealised assumptions identified in DSR Cycles 1, 2 and 3 (section 5.4 and 6.5).
In DSR Cycle 4, a formal domain ontology of the CFfFR was developed using
ontology technologies developed in computing (section 3.8.3). The development of
the formal domain ontology consists of four iterations, with each iteration expanding
on the knowledge obtained from the previous iterations.
The final output of DSR Cycle 4, the artefact as output of the main DSR Cycle
(section 7.6), is a formal domain ontology formalising the most basic classes and
relationships needed to provide decision-useful information to the users of financial
reports (Figure 7.30 and Figure 10.2). This formal domain ontology of the CFfFR
complies with the definition of a model artefact according to the definition of an
artefact (Hevner et al., 2004; March & Storey, 2008). The CFfFR ontology is an
abstraction and representation of the most basic classes and relationships in the
financial reporting domain needed to provide decision-useful information to the users
of financial reports.
In Chapter 8 the design process of CFfFR ontology was evaluated to determine if the
main and sub-research questions were answered. The CFfFR ontology was
evaluated by running the reasoner to test if the classes and relationships are
internally consistent and comparing if the classes and relationships comply with the
competency questions posed in section 7.2. By building the CFfFR ontology, the
CFfFR was evaluated against the requirements and role of the ideal CFfFR. The
findings resulting from this evaluation process indicate how the CFfFR can be
improved to be nearer to being globally acceptable.
The Main DSR Cycle concludes when it is determined that the research questions
are answered by documenting the knowledge contributions. The knowledge
contribution of the Main DSR Cycle is a combination of the knowledge contributions
94
of all the DSR Cycles. The knowledge contributions resulting from the DSR strategy
followed in this study are summarised in Chapter 9.
3.6.2 DSR Cycle 1: Requirements of a Global CFfFR
Figure 3.4: DSR Cycle 1
The Awareness Step for DSR Cycle 1 links to the first phase of the OLC (Figure 3.8)
in which the requirements of the ontology are developed (Vaishnavi & Kuechler,
2013). The first problem to solve was to identify the requirements that a CFfFR
should adhere to in order to be globally acceptable. In order to determine how the
building of a CFfFR ontology could assist in improving the CFfFR to be more globally
acceptable, the requirements of a global CFfFR had to be determined. The CFfFR
ontology was tested against these requirements to determine if it adheres to more of
the requirements than the CFfFR. The output of the Awareness Step (Figure 3.3) was
the proposal to identify such requirements.
The suggestion was to investigate literature regarding conceptual frameworks in

accounting to identify requirements and a definition for a global CFfFR from the
literature. The tentative design as output of the Suggestion Step was to perform a
systematic review on documents and webpages regarding conceptual frameworks
(including discussions on postulates and principles of accounting) in accounting and
to abstract from the literature the possible requirements for a CFfFR to be globally
acceptable.
During the Development Step of DSR Cycle 1 a systematic review protocol was
developed (Table 3.3). A systematic review was performed on the literature as
indicated in the protocol and the requirements were abstracted from the literature.
The identified requirements serve as the output of the Development Step. The
artefact produced during DSR Cycle 1 as the output of the Development Step can be
described as a construct (Hevner et al., 2004). The requirements (Figure 4.6) and the
proposed definition (section 4.7) for a global CFfFR provides the vocabulary and
conceptualisations to enable communication and a description regarding the problem
on what is required for a CFfFR to be more globally acceptable.
The Evaluation Step of the requirements and proposed definition of a global CFfFR
complies with the criteria of the first step of the OLC. It was determined that it is
possible to test a CFfFR ontology against these requirements, as ontology
technologies allows for the testing of logical consistency between classes and
relationships in an ontology. The evaluation led to a transition from DSR Cycle 1 to
DSR Cycle 2. The circumscription identified during the evaluation resulted in a new
Awareness Step, that the role of a global CFfFR should also be determined in order
95
to test the CFfFR against the identified requirements. The knowledge contribution
leads to the Awareness Step of DSR Cycle 2.
3.6.3 DSR Cycle 2: The Role of a Global CFfFR as a Model
During the Evaluation Step of DSR Cycle 1 the awareness was gained that the role of
a global CFfFR as a model within accounting has to be clarified in order to test the
CFfFR against the requirements and proposed definition identified in DSR Cycle 1.
The role of a global CFfFR was investigated in DSR Cycle 2.
The Suggestion Step entailed the investigation of the functioning and role of models
within other disciplines, as no evidence to explain the role of the CFfFR as a model
within financial reporting could be obtained. The tentative design to investigate the
role of models within philosophy and computing as a formal ontology comprises both
philosophical and computing elements.
During the Development Step an interdisciplinary investigation was undertaken to

determine the role of a global CFfFR by investigating some models in philosophy and
computing. The output of the Development Step resulted in three artefacts. The first
artefact, the idea of an ideal CFfFR, can be classified as a construct. The idea of an
ideal CFfFR and that an ideal CFfFR could serve the role of a truth bearing model
(Figure 5.5 and Figure 5.6) as explained from a philosophical or scientific perspective
(Mäki, 2011) provides a vocabulary and conceptualisation that could enable
communication regarding the role of the CFfFR as a model. The second artefact of
DSR Cycle 2 is a model in which the ideal role of the CFfFR is described as a meta-
metamodel according the four level OMG hierarchy (OMG, 2014) within the financial
reporting domain (Figure 5.12). From the discipline of computing, it was determined
and confirmed that an ideal CFfFR should have the role of a meta-meta type model
(Kühne, 2005; Kühne, 2006b). The third artefact, related to the idea of an ideal
CFfFR, is the ideal assumptions of an ideal CFfFR. The ideal assumptions can be
classified as a construct artefact as it provides the vocabulary and the
conceptualisation to communicate regarding an ideal and possible global CFfFR. The
knowledge obtained during the Development Step in DSR Cycle 2 left the study with
the circumscription of how to use this knowledge to answer the third and main
research questions.
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3.6.4 DSR Cycle 3: Ontologies and Financial Reporting
The Awareness Step of DSR Cycle 3 flows directly from the Development Step
outputs of DSR Cycle 2. The role of an ideal CFfFR as a meta-metamodel stimulated
the need to investigate if and how an ideal CFfFR can function as an ontology when
compared to the four level OMG hierarchy.
During the Suggestion Step of DSR Cycle 3, an interdisciplinary investigation was

proposed in order to establish the applicability of ontologies to evaluate the role and
requirements of an ideal CFfFR. As the term and concept ontology originates from
philosophy, philosophy was the first discipline investigated to determine the
applicability and requirements of ontologies relating to an ideal CFfFR.
The second discipline investigated was computing. The purpose of the investigation
was to determine if ontology technologies as used in computing could contribute
towards the development of a method to build a CFfFR that adheres to the
requirements of a global CFfFR. The tentative design output of the Suggestion Step
was to investigate the applicability of ontologies in philosophy and computing.
During the Development Step of DSR Cycle 3, an interdisciplinary investigation

between philosophy, computing and financial reporting was conducted to established
if and how the ideal CFfFR could serve as a formal upper ontology for the financial
reporting domain. The outputs of DSR Cycle 3 resulted in two artefacts. The first
artefact is in the form of a model. The model demonstrates the role of the ideal
CFfFR as a formal domain ontology according to the Object Management Group
(OMG) four level hierarchy (Figure 6.6). The second artefact is a construct in the form
of the conceptualisation on how a CFfFR ontology could contribute towards
answering a research question and assist in improving the CFfFR to comply with
more of the requirements of a global CFfFR. The outputs of DSR Cycle 3 left the gap
to use the knowledge obtained from DSR Cycles 1, 2 and 3 to attempt the
construction of a formal domain ontology of the CFfFR in DSR Cycle 4.
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3.6.5 DSR Cycle 4: A Formal Domain Ontology of the CFfFR
The results of the Development Step of DSR Cycle 3 are the awareness that a formal
domain ontology of the CFfFR could assist in testing the CFfFR against the
requirements, role and model theories determined during DSR Cycles 1, 2 and 3.
The suggestion was to build formal domain ontology using ontology technologies of
the CFfFR.
During the Development Step ontology technologies (Protégé, FACT++ and OWL,
DL) were used to build the formal domain ontology of the CFfFR. The CFfFR was
analysed and classified into classes and relationships according to the requirements
of the OLC Model as proposed by Neuhaus et al. (2013). The formal domain ontology
of the CFfFR went through four iterations for the CFfFR to be constructed. In total, 5
artefacts were produced during DSR Cycle 4, one construct artefact and 4 model
artefacts.
The first artefact, laying the foundation to build the ontology, is a construct providing
the basic assumptions to build a formal domain ontology and the use of the OLC
Model in the financial reporting domain (section 7.2). During iteration 1, time (section
7.2.3) and the definitions of the elements of the SFP was modelled (section 7.3),
producing the first model artefact. 59 During iteration 2, the basic classes and
relationships of the SFP elements were identified (section 7.4.1) and logically
consistent definitions for these elements were proposed (sections 7.4.2b), 7.4.3b),
and 7.4.4b)). 60 In iteration 3, the key classes and relationships in the CFfFR ontology
(section 7.5.1), and the decision process to determine decision-useful information for
the CFfFR ontology (section 7.5.2) were developed. 61 During iteration 4 the CFfFR
ontology is the final output of DSR Cycle 4 and is also the model output of the main
DSR Cycle (section 7.5.3).
The artefact resulting directly from the building process of the CFfFR ontology is a
construct related to the findings on logical inconsistencies, incompleteness,
unintended meanings and implied knowledge detected in the CFfFR during the
building process of the CFfFR ontology. These findings provide conceptualisations
and the description of problems that could be discussed in order to improve the
CFfFR.
59
This artefact was published in (Gerber et al., 2014).
60
This artefact was published in (Gerber, Gerber, Van der Merwe, et al., 2015).
61
Some elements of this artefact were published in (Gerber, Gerber, & Van der Merwe, 2015).
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The first aspect of evaluation was to determine if it is possible to build a formal
domain ontology of the CFfFR. The second aspect was to determine if a formal
domain ontology of the CFfFR adheres to more requirements of a global CFfFR than
the CFfFR. Part of the evaluation was the documentation of logical inconsistencies,
incompleteness, unintended meanings and implied knowledge detected during the
building process of the formal domain ontology of the CFfFR. The evaluation and
findings are documented in Chapter 8. The DSR project concluded with the
knowledge contribution as provided in Chapter 9.
Table 3.1 summarises the artefacts developed during the different DSR Cycles. The
table also indicates how the artefacts contributed towards answering the research
questions.
99
Table 3.1: Summary of artefacts contributing towards answering the research questions in the DSR Cycles
MAIN DSR CYCLE DSR CYCLE 1 DSR CYCLE 2 DSR CYCLE 3 DSR CYCLE 4
Chapter 4 Chapter 5 Chapter 6 Chapter 7
Construct: Construct: Model: Construct:
Development Step moves to DSR Requirements & Definition of a Idea of an ideal CFfFR as truth The role of the ideal CFfFR as a • Basic assumptions to build a
Cycle 1. global CFfFR. bearing model (section 5.2.4). formal domain ontology according formal domain ontology of the
(Sections 4.6 and 4.7) to OMG four level hierarchy CFfFR (section 7.2.2).
Construct:
Idea of an ideal CFfFR as truth
(section 6.4. • Use of OLC Model in financial
bearing model (section 5.2.4). reporting domain (section 7.2).
Model: Construct: Model:

Role of the ideal CFfFR as a Conceptualisation on how a Iteration 1 (section 7.3):
meta-metamodel (type and token CFfFR ontology could contribute • Modeling of time.
models of financial reporting towards the research questions • Modeling definitions of asset,
domain) (section 5.3.5). (section 6.4.3. liability and equity.
Model:
Role of the ideal CFfFR as a
meta-metamodel (type and token
ARTEFACT
models of financial reporting

domain) (section 5.3.5).
Construct: Model:
Ideal assumptions provide Iteration 2 (section 7.4):
vocabulary and conceptualisation • Identification of basic classes
to communicate regarding ideal and relationships in SFP
and possible global CFfFR element definitions.
(section 5.4). • Proposed SFP element
Model:
definitions that are logically
The CFfFR ontology indicating
consistent.
internal incoherence’s, logical
Model:
inconsistencies, implied
Iteration 3 (section 7.5):
knowledge and incompleteness of
• Identification of key classes and
CFfFR (sections 7.4, 7.5 and 7.6).
relationships in the CFfFR
ontology.
• Decision process model.
Model:
Building the CFfFR ontology.
Main RQ SRQ 1 SRQ 1 SRQ 2 SRQ 3 SRQ 3 Main RQ
100
The main research question is answered with the development of the CFfFR ontology
indicating the internal incoherence’s, logical inconsistencies, implied knowledge and
incompleteness in the CFfFR. SRQ 1 is partially answered with the development of
the construct artefact in Chapter 4 during DSR Cycle 1. In Chapter 5, during DSR
Cycle 2, the rest of SRQ 1 is answered with the development of the idea of an ideal
CFfFR as truth bearing model (a construct artefact). The indication of the role of the
ideal CFfFR as a meta-metamodel (a model artefact) and the ideal assumptions of an
ideal and global CFfFR (a construct artefact) answered SRQ 2.
In Chapter 6 during DSR Cycle 3, SRQ 3 was partially answered with the
establishment of the role of the ideal CFfFR as a formal domain ontology according
to the OMG four level hierarchy. The development of the how a CFfFR ontology
could contribute towards a global CFfFR also contributed towards answering SRQ 3.
With the development of the CFfFR ontology in Chapter 7 during DSR Cycle 7, SRQ
3 and the main research question were answered. The matrix in Table 3.2
summarises how the different research questions are answered during the DSR
Cycles.

MAIN RQ √ √
SRQ 1 √ √
SRQ 2 √
SRQ 3 √ √
3.7 Time Horizon
This study focuses on the CFfFR as published in September 2010 by the IASB.
Although the CFfFR are currently under revision and will evolve over time, the
document under investigation represents a static document at a specific time in
history. The study is classified as a cross-sectional study and not a longitudinal study.
3.8 Research Techniques and Procedures
According to Myers (2013:25) “a research method is a strategy of enquiry”. The

research method is the way to find data about the reality that is being researched. A
research method builds on a philosophical assumption (Myers, 2013) and influences
the way a researcher collects and evaluates data, and verifies the results of the
research process. The overall research methodology for the study is an interpretivist
qualitative study adopting an interpretivist ontological view of reality. However,
different methods of enquiry are utilised to answer the three different sub-research
questions.
The following research techniques were used during the study: Chapter 4,
Systematic Review (section 3.8.1); Chapters 5 and 6, an interdisciplinary
investigation (section 3.8.2); Chapter 7, ontology technologies (section 3.8.3).
101
3.8.1 Systematic Review
The first sub-research question is answered in Chapter 4 using a systematic review 62

method (Biolchini, Mian, Natali, Conte, & Travassos, 2007; Harden & Thomas, 2010;
Mian, Conte, Natali, Biolchini, & Travassos, 2005). Systematic review is commonly
used in the health sciences with the Cochrane Handbook for Systematic Reviews of
Interventions as standard setter (Green, Higgins, Alderson, Clarrke, Mulrow, et al.,
2008; Thomas & Harden, 2008). The method is also utilised in software engineering
research (Biolchini, Mian, Natali, & Travassos, 2005; Biolchini et al., 2007; Mian et
al., 2005) and information systems (Okoli & Schabram, 2010).
The reason for using a systematic review method is to enable the researcher to
derive a definition and determine the requirements for a global CFfFR from literature.
This method can be viewed as an inductive approach, starting from the literature and
working towards a generalisation of different requirements and definitions. Although
the research design is viewed as an inductive approach, no statistical analysis is
used.
Systematic review is a method to obtain relevant results from a body of literature

(Mian et al., 2005). In software engineering systematic review is a specific
methodology developed to gather and evaluate evidence regarding a specific topic
(Biolchini et al., 2007). Harden and Thomas (2010:751) defines systematic review as
“an explicit method to conduct a review … that follows standard stages and
methods”.
Mian et al. (2005) identify the following phases during a systematic review process:
planning, execution and result analysis. According to Harden and Thomas (2010) a
research question forms the starting point of a systematic review, followed by a
sampling stage, data collection stage and data analysis stage. All three stages were
performed in this study (Table 3.3).
A systematic review is planned in a formal and systematic way. During the planning
stage, the type of acceptable evidence is determined and stated at the beginning.
During the sampling stage, information is retrieved according to the planned protocol.
Should relevant evidence be collected that does not form part of the planning stage,
the data collection protocol is reviewed to include the additional information and a
new version is created (Mian et al., 2005).
During the execution or data collection stage the search is executed and the studies
obtained are evaluated according to the established criteria. After the review
execution the results are summarized and analysed according to the methods
defined during the Planning Phase (Mian et al., 2005).
62
Synonyms for this methodology are: “overview, research review, research synthesis, research integration,
systematic overview, systematic research synthesis, integrative research review, and integrative review” (Biolchini et
al., 2007:135).
102
The systematic review method was used in this study based on an interpretative
philosophical assumption as judgements were made during the review process
regarding the literature to use in order to identify relevant information, sorting,
categorising and summarising the selected information in order to answer the
research question. During DSR Cycle 1 (section 3.6.7), a systematic review method
was followed to determine the requirements of a global CFfFR.
In this study the systematic review protocol template suggested by Mian et al. (2005)
is adopted and adapted in Chapter 4 to answer the first sub-research question.
Table 3.3: Systematic review protocol

CONTROL PROTOCOL
PLANNING STAGE
1. Question formularisation:
Stating the research
objectives
1.1 Question focus: The research objective is to determine a definition and
requirements for a global CFfFR.
1.2 Question quality and In a global economy the accounting community is in need of a
amplitude: global CFfFR to guide the setting of globally acceptable accounting
• Research problem: standards.
• Research question: What are the role, definition and requirements of a global CFfFR
consisting of fundamental concepts, which could function as a
sound foundation for accounting standards that are principle-based,
The systematic review is focussed on answering SRQ 1 and
applied during DSR Cycle 1.
• Keywords and • Requirements of a conceptual framework;
synonyms: • Definition of a conceptual framework;
• Objective of a conceptual framework;
• Function of a conceptual framework in accounting;
• Need for a conceptual framework for accounting;
• Purpose of the conceptual framework;
• IASB and FASB joint project;
• Development of the conceptual framework;
• Postulates and principles in accounting;
• Reasons and motivation for a conceptual framework
• Procedures to draft a conceptual framework.
• Intervention: Publications discussing the definition, need, objectives and
requirements of a global CFfFR to be identified.
• Control: During the literature review on the historical development of the
CFfFR some resources dealing with the requirements and needs for
a global CFfFR were identified. These resources formed a basis to
start the systematic review.
• Effect: It is expected that discussions in the literature will be found
indicating the requirements, needs, role, and definition of a global
CFfFR.
• Outcome measure: No metrics will be applied. Sources with relevant information are
studied and documented.
• Population: The population is observed until a stage saturation is reached.
• Application: Some clarity will be provided to the accounting community
regarding what are perceived as the need and requirements of a
global CFfFR. A definition for a global CFfFR is derived from the
literature reviewed.
• Experimental design: No statistical analysis is applied as the information obtained is not
in a statistical format. Trends in concepts and ideas regarding the
need and requirements of a global CFfFR are identified and
summarised.
103
CONTROL PROTOCOL
2. Sources Selection:
Sources for primary
studies searches
2.1 Sources selection criteria Conceptual frameworks and notes published by the FASB and
definition: IASB are considered to be primary sources.
Important studies that preceded the development of conceptual

frameworks by the FASB and the IASB are also considered but not
viewed as primary sources.
• Studies languages: Primary studies are mainly obtained in English. Other languages
also considered are Afrikaans, Dutch and German.
2.2 Sources identification:
• Sources search Primary documents are obtained from the websites of the FASB
methods: and the IASB.
The team revising the CFfFR at the IASB is contacted via email.
• Search string: See keywords and synonyms above.
• Sources list: The following data basis and search engines are used:
• University of Pretoria library e-resources and e-journals;
• ProQuest, Accounting & Tax, Accounting; EbscoHost; Science
Direct; JStor; Wiley Online Library and Google Scholar.
2.3 Sources selection after • Information regarding the function and criteria regarding a
evaluation: global CFfFR are evaluated.
2.4 References checking References are checked by study supervisors when the results are
presented in a written document.
2. Studies selection:
3.1 Studies definition: Studies dealing directly with the drafting, purpose and criteria of a
conceptual framework for accounting.
• Studies inclusion and Inclusions:
exclusion criteria • Studies dealing with the theory behind and need for a global
definition: CFfFR.
• Studies dealing with critique on and problems with conceptual
frameworks.
• Studies discussing the purpose of conceptual frameworks in
accounting.
• Studies dealing with the motivation to draft a conceptual
framework for accounting.
• Important studies preceding the development of the FASB and
IASB conceptual frameworks.
Exclusions:
• Studies dealing with detail on the content of conceptual
frameworks for accounting.
• Studies not related to the conceptual framework for
accounting.
• Study types definition: Primary sources are:
• The respective conceptual frameworks published by the FASB
and the IASB;
• Documents published by professional bodies influencing the
CFfFR of the IASB (see the literature review).
• Secondary sources dealing directly with the drafting, need and
requirements of a conceptual framework or postulates and
principles as it was known during the 1960s.
• These studies include books, e-books, peer reviewed journal
papers, dissertations, reports, minutes of meetings, and web
pages of organisations.
• Selection is a qualitative observation, based on the judgement
of the researcher regarding relevance to the study and
information needed at that stage.
104
CONTROL PROTOCOL
• Procedures for study Selection procedure for studies:
selection: • Primary resources are obtained from the different standard
setting bodies.
• A web search is done using the keywords and search strings
on the different sources identified.
• A first selection on web searches is done by evaluating the
titles of studies.
• A second selection is made from the first selection judged on
information in the abstract.
• A third selection is made from the second selection: Studies
selected during the second selection stage are downloaded
and evaluated by reading the introduction and conclusions of
the study.
• Studies selected during the third selection stage are studied
and relevant information is captured.
• Further selections based on the third and final selection. The
selection cycle is repeated from the first to the third selection
stages:
o The references of selected studies are scrutinised for
possible relevant studies.
o Documents citing the selected studies are scrutinised for
possible relevant additional studies.
• The searching cycle is repeated if new information becomes
available regarding certain aspects of the study. Based on the
newly required information, new search strings are developed
and refined until relevant information is found.
• Studies selected are included in a Mendeley database.
EXECUTION STAGE
3.2 Selection execution:
• Initial studies selection: 556 documents, studies, reports, dissertations and web pages were
initially selected and included in the Mendeley data base program.
• Studies quality The quality of the studies are evaluated and selected based on the
evaluation: criteria to provide information on the need, purpose and
requirements of a global CFfFR.
• Selection review: The final selection of 45 documents, studies, reports, dissertations
and web pages is included in the references list at the end of the
document.
4. Information extraction:
4.1 Information inclusion and The information is selected based on the contribution towards the
exclusion criteria clarification of the need, purpose and requirements of a global
definition: CFfFR.
4.2 Data extraction forms: No forms are used. Information is documented and sorted as it is
extracted.
4.3 Extraction execution:
• Objective results Not applicable as this is an interpretive study - extraction is
extraction subjective based on the judgement of the researcher.
o Study identification
o Study methodology
o Study results
o Study problems
• Subjective results The relevant information is selected by judgement, documented and
extraction roughly sorted according to the election criteria.
o Information through
authors
o General
impressions and
abstractions
105
CONTROL PROTOCOL
4.4 Resolution of Does not form part of this study.
divergences among
reviewers:
RESULT ANALYSIS
5. Results Summarisation:
5.1 Results statistical Not applicable
calculus:
5.2 Results presentation in The documents, studies, reports, dissertations and web pages are
tables: inspected for the following categories and grouped accordingly:
• Need for a global CFfFR;
• The objective of a conceptual framework;
• Requirements of a global CFfFR;
• Information that can contribute towards a definition for a global
CFfFR.
The categories identified above are grouped together and then

analysed for similar and conflicting trends and arguments. The
different trends and arguments are colour coded and summarised
to provide a summary of the arguments and trends.
5.3 Sensitivity analysis: Not applicable in this qualitative study.
5.4 Plotting: Not applicable in this qualitative study.
5.5 Final comments
• Number of studies: A total of 45 documents, studies, reports, dissertations and web
pages are used to provide the information.
• Search, selection and As the researcher is involved in the selection, analysis and
extraction bias: evaluation of the information the selection process can be viewed
as biased. Another researcher may identify more or different needs,
requirements and definitions.
• Publication bias: The results need to be evaluated by a peer review process of
publication.
• Inter-reviewers The study supervisors review the results before submission for
variation: examination.
• Results application: Should the results be published via a peer review process it could
contribute towards the drafting of a global CFfFR for Financial
Reporting?
5.6 Recommendations It is not possible to confirm the role of a global CFfFR towards the
setting of financial accounting standards from the systematic
review. In the next section, the role of a conceptual framework is
investigated using modeling theories from philosophy of science
and computing. The two disciplines have progressed on the
utilization of models for scientific research.
Further studies are needed to either confirm or adjust the proposed

definition and requirements for a global CFfFR.
3.8.2 Interdisciplinary Research
In order to refine the requirements identified during the systematic review process in
Chapter 4 and to establish the role of a global CFfFR within financial reporting, the
study moved to an interdisciplinary investigation between philosophy, computing and
accounting. 63 Within the DSR strategy, design cycles two and three are conducted
using an interdisciplinary investigation.
63
Lyall et al. (2011) discusses the benefits and constraints of interdisciplinary research.
106
The interdisciplinary research involved the following steps: 64
1. Identify the knowledge need in the primary discipline.
2. Identify the potential secondary discipline(s) that could contribute to provide and
answer to the knowledge need in the primary discipline.
3. Identify complementary knowledge between the different disciplines.
4. Apply the complementary knowledge obtained from the secondary discipline(s)
to the knowledge need identified in the primary discipline.
5. Report on the findings and contribution of knowledge in the primary discipline.
The following explains how the interdisciplinary investigation steps were executed
during DSR strategy cycles two and three.
Table 3.4: Interdisciplinary research steps

DSR CYCLE 2 DSR CYCLE 3
(Chapter 5) (Chapter 6)
Step 1:
Identify the knowledge need
The knowledge need was identified in DSR The knowledge need was identified in DSR
Cycle 1. Cycle 2.
The role of a global CFfFR had to be identified in The role and requirements of an ideal CFfFR as
order to test the CFfFR against the requirements a meta-metamodel had to be investigated.
identified in DSR Cycle 1.
The suggestion was that the role of a global The suggestion was to establish the applicability
CFfFR can be determined if it can be viewed as a of ontologies to evaluate the role and idealised
model. assumptions of the ideal CFfFR.
The role of the CFfFR viewed as a model was The role of the ideal CFfFR, viewed as an
identified as the knowledge needed to answer the ontology, was identified as the knowledge
question. needed to answer the question.
A satisfactory discussion regarding the role of a A satisfactory discussion regarding the role of
global CFfFR as a model could not be identified the ideal CFfFR as an ontology could not be
within accounting literature during the DSR identified within accounting literature in DSR
Cycle 1. Cycle 1 and the interdisciplinary investigation
conducted in DSR Cycle 2.
Step 2:
Identify the secondary disciplines
The secondary disciplines identified that could The secondary disciplines identified that could
contribute to the knowledge need were: contribute to the knowledge need were:
Philosophy of science: Philosophy:
Within philosophy of science, a discussion Ontology as discipline originated in philosophy
regarding the role, value and requirements of and forms the basis of the theory of ontologies
models to generate knowledge was identified. in computing.
Computing: Computing:
The use of models to represent specified domains In computing, conceptual modeling and
is commonly used in computing. ontologies are used to formally represent
specific domains.
Step 3:
Identify complementary knowledge
The use of idealised models as truth bearers, as The applicability of ontology as discipline
64
These steps were developed in order to systematise the investigation.
107
DSR CYCLE 2 DSR CYCLE 3
(Chapter 5) (Chapter 6)
argued by Mäki (2011; 2008), was identified as includes the background regarding the
complementary knowledge that could contribute to development of the use of formal languages,
determine the role of a global CFfFR as a model. and logical consistencies as prerequisite for
cross cultural acceptance of theories were
identified as complementary knowledge from
philosophy.
The classification of type and token models as The requirements of ontologies in computing,
well as the characteristics of metamodels and the use of formal upper domain ontologies and
meta-metamodels as discussed by Kühne (2005; the Object Management Group (OMG) four level
2006b) was identified as complementary hierarchy were identified as complementary
knowledge that could contribute to determine the knowledge from computing.
role of a global CFfFR as a model.
Step 4:
Apply the complementary knowledge
The characteristics and theory of idealised models The value of the use of formal languages and
as truth bearers were compared and applied to the the importance of logical consistency as
CFfFR. Based on the knowledge obtained from prerequisite for cross-cultural acceptance of
philosophy of science, idealised assumptions of theories was applied to refine the role and
an ideal CFfFR were drafted. requirements of the ideal CFfFR. It also
contributed to expand the idealised assumptions
of an ideal CFfFR to contribute knowledge in
order to be able to develop a global CFfFR.
The characteristics of type and token, metamodels The requirements of ontologies in computing,
and meta-metamodels were applied to the the use of formal upper domain ontologies and
financial reporting domain to refine the the Object Management Group (OMG) four level
requirements and determine the role of the ideal hierarchy were used to position and justify the
CFfFR that could contribute towards a global role of the ideal CFfFR as an upper domain
CFfFR. ontology within the financial reporting domain.
Step 5:
Report on the findings
The findings were reported in Chapter 5. The findings were reported in Chapter 6.
3.8.3 Ontology Technologies: The OLC Model
Ontology technologies are used as modeling a technique in Chapter 7 to test the

CFfFR against the idealised assumptions, requirements and role of a global CFfFR
as determined in Chapters 4 to 6. The Ontology Life Cycle (OLC) Model suggested
by Neuhaus et al. (2013) (Figure 3.8) was adopted and adapted as a method to build
the formal ontology of the CFfFR.
108
The OLC Model was chosen as a
high-level method to develop the
formal representation of the CFfFR.
Leading experts in computing
ontologies during the 2013 Ontology
Summit developed the OLC Model to
evaluate ontologies. 65 The document
by Neuhaus et al. (2013:2) “represents
a synthesis of a subset of ideas
presented, discussed, and developed
over the course of … four months, and
reflects the contributions of the
Summit’s participants and the
consensus of the Summit community”.
Figure 3.8: An OLC Model from Neuhaus et al. (2013)
The OLC Model consists of the following eight Phases 66 (Neuhaus et al., 2013):
a. Phase 1: Requirements development;
b. Phase 2: Ontological analysis;
c. Phase 3: Ontology design;
d. Phase 4: System design;
e. Phase 5: Ontology development and reuse;
f. Phase 6: System development and integration;
g. Phase 7: Deployment and,
h. Phase 8: Operation and maintenance.
Due to the scope and purpose of the study, only Phases 1-3 and 5 were performed in
order to answer SRQ 3 and the main research question. The System design (Phase
4) and System development and integration (Phase 6) concerns the design of the
computer system and integration of the ontology and other components into
subsystems (Neuhaus et al., 2013). This study does not include the System design,
Development, Integration, Deployment and Operation Phases.
Data collection takes place in the process of making modeling decisions and building
the formal representation or ontology of the CFfFR. The modeling decisions, detected
inconsistencies and unintended meanings form part of the findings of the study. The
following is a short description of the different Phases in the OLC:
a) Phase 1: Requirements Development
During the Requirements Development Phase the expected and intended usages
and interpretations of the ontology are determined. During this Phase, the
65
. The purpose of the ontology life cycle as published by Neuhaus et al. (2013:2) “is to advance the understanding
and adoption of ontology evaluation practices”.
66
For the purpose of this study, a decision was made to capitalize any reference to the 8 Phases of the OLC model,
whether abbreviated or listed in full.
109
requirements of the ontology are specified using competency questions (Neuhaus et
al., 2013). During Phase 1 of the OLC Model, the context, scope, initial requirements
and a general understanding of the ontology is established. The requirements stated
under Phase 1 are based on the work done during DSR Cycles 1, 2 and 3 (Chapters
4-6).
According to Neuhaus et al. (2013:5) the Requirements Phase should answer the
following questions:
• “Why is this ontology needed? (What is the rationale? What are the expected
benefits?) The need for a global CFfFR was argued in the literature review
(Chapter 2). In sections 4.3.6 and 4.4.2 the need for internal coherent, logically
consistent and an unambiguous CFfFR was indicated as some of the
requirements of a global CFfFR. The ontology of the CFfFR is used to build a
model and test if it is possible to get closer to the requirements of a global CFfFR
as indicated in Chapters 4 and 5. The benefits of the ontology of the CFfFR are
that during the building process unintended meanings in the natural text were
detected. The reasoner indicated inconsistencies between classes and their
relationships to the CFfFR when these classes and relationships were
formalised.
• What is the expected or intended usage (e.g. specified as use-cases,

scenarios)? The current use of the ontology of the CFfFR in this study is to
determine if it is possible to contribute towards a global CFfFR. The ontology is
used to identify unintended meanings in the natural text and to understand which
classes are fundamental in the generation of a financial report. Future uses of
the CFfFR ontology might be to link the ontology of the CFfFR with ontologies of
accounting standards to test for inconsistencies between accounting standards
and the CFfFR. The ontology of the CFfFR might also be used to provide a link
with the XBRL project (section 6.4).
• Which groups of users need to understand which parts of the ontology? The
users of the CFfFR (IASB, 2010a) as indicated in section 4.4.2 are the target
audience of the ontology.
• What is the scope of the ontology? The scope of the CFfFR ontology is the
financial reporting domain as portrayed in the natural text of the CFfFR and a
specimen financial report.
• Are there existing ontologies or standards that need to be reused or adopted?

There is no existing ontology to be used at this stage. Other ontologies in the
accounting domain were indicated in section 6.4. These ontologies function on a
different level and cannot be used in this study.
• What are the competency questions? The ontology must contain the most
fundamental classes and relationships of principles providing decision-useful
financial information to the primary users of financial reports.
110
• Is the competency questions representative of all expected or intended usages?
The competency questions are related to the idealised assumptions provided in
section 6.5.
• What are the requirements from the operational environment? As the ontology
will not be employed (Phase 7) as part of a larger system there are no
operational requirements. In future research a system may be developed to
support the work done in this study.
• What resources need to be considered during the ontology and system design
Phases (e.g., legacy databases, test corpora, data models, glossaries,
vocabularies, schemas, taxonomies, ontologies, standards, access to domain
experts)? The main resource is the CFfFR itself (IASB, 2010a). Other resources
are implicit domain knowledge by domain experts.
b) Phase 2: Ontological Analysis
During the Ontological Analysis Phase the key entities of the ontology such as the
individuals, classes/properties or as referred to in this study, i.e. concepts, and the
relationships between them are identified. The concepts and relationships are also
linked to the terminology used in the domain. The Ontological Analysis Phase
“usually involves the resolution of ambiguity and the identification of entities that are
denoted by different terms across different resources and communities” (Neuhaus et
al., 2013:6).
The output should include the specification of:

• “Significant entities within the scope of the intended usage,
• important characteristics of the entities, including relationships between them,
disambiguating characteristics, and properties important to the domain and
activities within the scope of the intended usage, and
• the terminology used to denote those entities, and provide enough contextual
information to disambiguate polysemous terms” (Neuhaus et al., 2013:6).
The following high-level criteria were used to evaluate the output of the Ontological
Analysis Phase (Neuhaus et al., 2013:6):
i. Are all relevant terms from the use cases documented? The CFfFR is the main
source document to be analysed based on the idealised assumptions (section
6.5). The relevant terms as documented in the CFfFR were documented.
ii. Are all entities within the scope of the ontology captured? The scope was
defined as the most fundamental classes and relationships to provide decision-
useful information to the users of financial reports. Some of these fundamental
classes are not documented (section 7.6.3) in the CFfFR and is an indication
that the CFfFR is not complete and does not comply with the completeness
requirement as determined in Chapter 4.
iii. Do the domain experts agree with the ontological analysis? Some of the work
has already been published in peer reviewed publications indicating some
agreement from domain experts (Gerber & Gerber, 2011; Gerber, Gerber, &
Van der Merwe, 2014).
111
iv. Is the documentation sufficiently unambiguous to enable a consistent use of the
terminology? Some ambiguities were detected in the source document (the
CFfFR) and modeling decisions were needed to formalise the terminology.
Once the terminology was formalised the ambiguities were eliminated or
explained (Chapter 8).
The Ontological Analysis Phase forms the bulk of this study. Chapter 7 and a large
part of Chapter 8 are devoted to the Ontological Analysis Phase. The following
requirements of a global CFfFR are tested against the CFfFR during the Ontological
Analysis Phase internal coherence between concepts, clear and unambiguous
formulation and logical consistency.
c) Phase 3: Ontology Design
The Ontology Design Phase is based on the outputs from the Requirements
Development Phase and the Ontological Analysis Phase. During the Ontology design
Phase, representation ontology languages are chosen, design principles are
determined and structural choices for the ontology are made.
Structural choices involve decisions on if and how the ontology will be separated into
modules and how the modules will be integrated. The ontology of the CFfFR is not
separated into different modules. It is suggested that if ontologies of accounting
standards are created, each standard should be a different module.
The design principles include the determination of the top-level concepts in the
domain. The design principles determine “whether and how some fundamental
aspects of reality are represented (e.g., change over time)” (Neuhaus et al., 2013:7).
The design principles of the ontology of the CFfFR are guided by the structure of the
CFfFR as the CFfFR already provides the fundamental postulates/concepts
regarding financial reporting.
The language chosen for the ontology is Web Ontology Language (OWL). The
following are used in evaluating the ontology design results (Neuhaus et al., 2013:7–
8):
• “Is the chosen ontology language expressive enough to capture the knowledge
with sufficient detail in order to meet the ontology requirements?
• Is the chosen query language expressive enough to formalise the competency
questions?
• Does the chosen language support all required ontology capabilities?
• Is every individual or class that has been identified in the Ontological Analysis
Phase either and instance or a subclass of some top-level class?
• Are naming conventions specified and, where names are provided, followed?
• Does the design call for multiple, distinct ontology modules? If so, do the
ontology modules together cover the whole scope of the ontology?
• Does the design specify whether and how existing ontologies will be reused?
• Are all modules of the ontology associated with (informal) competency
questions?
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• For each module, is it specified what type of entities is represented in the
module (the intended domain of quantification)?
• For each module, is it specified how it will be evaluated and who will be
responsible?
• Does the design avoid addition of features or content not relevant to
satisfactions of the requirements?”
d) Phase 4: System Design
“During system design, decisions are made that lead to requirements for the
capabilities and implementation of the ontology and its integration within the larger
information system” (Neuhaus et al., 2013:8). The System Design Phase is not
applicable to this study but may be developed in future research to support the
verification of an adapted CFfFR ontology.
e) Phase 5: Ontology Development and Reuse
The Ontology Development Phase consists of four activities: (1) informal modeling,
(2) formalisation of competency questions, (3) formal modeling and (4) operational
adoption. These activities follow on the Requirements Development, Ontological
Analysis and Ontology Design Phases.
During informal modeling the individuals, concepts and their relationships are
identified and terminology of the domain are mapped to them (Neuhaus et al., 2013).
The informal modeling results are evaluated by asking the following questions
(Neuhaus et al., 2013:9):
• “Does the model capture only entities within the specified scope of the
ontology?
• Are the defined classes and relationships well defined? (e.g., no formal
definition of a term should use the term to define itself)
• Is the intended interpretation of the undefined individuals, classes and
relationships well documented?
• Are the individuals, classes and relationships documented in a way that is easily
reviewable by domain experts?”
The results of the informal modeling are used to formalise the scenarios and
competency questions. The competency questions are evaluated by asking the
following questions (Neuhaus et al., 2013:9):
• Is the competency questions representative for all intended usages?
• Does the formalisation capture the intent of the competency question
appropriately?
During the informal modeling of the ontology, the concepts and their relationships are
captured in the ontology language OWL and D.L. The result of the formal model is
evaluated by determining if the “ontology represents the domain appropriately
(fidelity), adheres to the design decisions made in the Ontology Design Phase
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(craftsmanship), and is supposed to meet the requirements for domain representation
(fitness)” (Neuhaus et al., 2013:10). 67
In order to have an operational ontology the ontology is adapted to the operational

requirements during the operational adaptation activity. The concern is whether the
ontology will respond in a time-frame that meets its performance requirements
(Neuhaus et al., 2013). The operation adaptation activity is not important during this
study as it is not part of the study to deploy the ontology.
f) Phase 6: System Development and Integration
During this Phase, the system is built and integrated with other components into
subsystems as specified during the System Design Phase. This study does not
include a System Development and Integrations Phase.
g) Phase 7: Deployment
During the Deployment Phase, the ontology is going to be deployed live in its
intended environment. The formal domain ontology of the CFfFR will not be
deployed, as it does not form part of the purpose of the ontology.
h) Phase 8: Operation and Maintenance
“This Phase focuses on the sustainment of deployed capabilities, rather than the
development of new ones” (Neuhaus et al., 2013:13). As this study does not include
a Deployment Phase, it also does not include an Operation and Maintenance Phase.
3.9 Knowledge Contribution and Verification
One of the key activities in DSR is the evaluation of the design artefacts and design
theories “as it provides feedback for further development and … assures the rigour of
the research” (Venable, Pries-Heje, & Baskerville, 2014:1). Venable et al. (2014)
developed a Framework for Evaluation in Design Science (FEDS). One of the
aspects to determine is when to evaluate during a DSR project. Three points in the
evaluation episodes are suggested by Venable et al. (2014).
A DSR project can be evaluated at different stages or episodes of the design process
(Venable et al., 2014:Fig. 1). An ex-ante evaluation is a predictive evaluation to
estimate and evaluate the impact of future situations. It “serves the purpose of
deciding whether or not it serves the purpose of deciding whether or not to acquire or
develop a technology or the purpose of deciding which of several competing
technologies should be acquired or adopted. It happens before design and
construction begins” (Venable et al., 2014:3). In this study, DSR Cycles 1-3 forms
part of an ex-ante evaluation period. The artefacts or outputs form part of different
evaluation episodes (Figure 3.9) during the specific evaluation strategy.
67
Neuhaus et al. (2013) discuss fidelity, craftsmanship and fitness in detail.
114
An ex post evaluation assess the value of the implemented system (Venable et al.,
2014). As the CFfFR ontology is not implemented during this study (section 3.8.3),
this study does not contain an ex post evaluation. Evaluations can also occur
intermediately, between an ex-ante evaluation and an ex post evaluation. The CFfFR
ontology is developed in DSR Cycle 4, making the development of the CFfFR
ontology artefact and the four Iterations to build the artefact part of an intermediate
evaluation episode. If the artefact outcomes of the different DSR Cycles provide
satisfactory answers to the respective research questions, that specific DSR Cycle
can be deemed to be successfully performed. According to the FEDS, four basic
evaluation strategies that can be followed should be chosen according to four steps
listed above.
The four step process of choosing and evaluation strategy according to the FEDS
are: “(1) explicate the goals of the evaluation, (2) choose the evaluation strategy or
strategies, (3) determine the properties to evaluate and (4) design the individual
evaluation episode(s)” (Venable et al., 2014:1). The four FEDS DSR evaluation
strategies are: (1) Quick & Simple, (2) Human Risk & Effectiveness, (3) Technical
Risk & Efficacy and (4) Purely Technical Artefact (Figure 3.9).
The following table summarises the circumstances for selecting a relevant DSR
evaluation strategy (Venable et al., 2014:6):
Table 3.5: Circumstances for selecting a DSR evaluation strategy (Venable et al.,
2014)
DSR evaluation
Circumstance selection criteria
strategies
Quick & Simple If small and simple construction of design, with low social and technical
risk and uncertainty
Human Risk & If the major design risk is social or user oriented
Effectiveness and/or
If it is relatively cheap to evaluate with real users in their real context
and/or
If a critical goal of the evaluation is to rigorously establish that the
utility/benefit will continue in real situations and over the long run
Technical Risk & Efficacy If the major design risk is technically oriented
and/or
If it is prohibitively expensive to evaluate with real users and real
systems in the real setting
and/or
If a critical goal of the evaluation is to rigorously establish that the
utility/benefit is due to the artefact, not something else
Purely Technical Artefact If artefact is purely technical (no social aspects) or artefact use will be
well in future and not today
Venable et al. (2014) proposes two dimensions in the evaluation strategy, why to
evaluate and how to evaluate.
Dimension 1: Why to evaluate – functional purpose of evaluation
The functional purpose of evaluations consists of formative and summative

evaluations. The difference between formative and summative evaluations is as
follows:
115
• “The functional purpose of formative evaluations is to help improve the outcomes
of the process under evaluation” (Venable et al., 2014:4). With formative
evaluations “meanings are validated by their consequences” (Venable et al.,
2014:4).
• The functional purpose of summative evaluations is to judge the extent that the
outcomes match expectations” and “consequences are validated by their
meanings” (Venable et al., 2014:4).
The artefacts developed during the respective DSR Cycles in this study serve as
evaluation points on a continuum progressing from formative towards summative
functions of evaluation ending in the CFfFR ontology as a summative episode of
evaluation.
Dimension 2: How to evaluate – paradigm of the evaluation study
A distinction is made between artificial and naturalistic paradigms of evaluation as the

second dimension on how to evaluate a DSR project.
• An artificial evaluation, although mainly positivist and reductionist, may also use
interpretive techniques to understand why an artefact works. Critical techniques
may also be used to prove or disprove the design theory of DSR artefacts.
“Artificial evaluation includes laboratory experiments, simulations, criteria-based
analysis, theoretical arguments and mathematical proves” (Venable et al.,
2014:5).
• In a naturalistic evaluation, the “complexities of human practice in real
organisations” are involved. A naturalistic evaluation ”is always empirical and
tends towards interpretivism” (Venable et al., 2014:5). “Naturalistic evaluation
methods typically include case studies, field studies, field experiments, surveys,
ethnography, phenomenology, hermeneutic methods and action research”
(Venable et al., 2014:5).
In this study, both evaluation paradigms are applicable. The building of the CFfFR
tends to fall more under the artificial evaluation paradigm as it tends to be a criteria-
based analysis building the artefact. The artefacts developed during DSR Cycles 1-3
fits the naturalist evaluation using hermeneutic methods of evaluation.
Both artificial and naturalistic evaluation methods can be used for formative and
summative purposes. The combination of artificial and naturalistic evaluation
methods with formative and summative purposes provides the relevant DSR
evaluation strategies as summarised in Table 3.5.
Figure 3.9 illustrates four DSR evaluation strategies indicating the relationship
between the evaluation paradigms (artificial and naturalistic) and the functional
purposes (formative and summative).
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Figure 3.9: FEDS with evaluation strategies
In this study, the CFfFR ontology developed during DSR Cycle 4 is the final
evaluation point (equivalent to the red triangle in Figure 3.9). The CFfFR ontology is
evaluated against the competency questions posed during the development of the
CFfFR ontology according to the OLC (Figure 3.8).
Taking the four-step process for choosing a DSR evaluation strategy into
consideration for this study a double DSR evaluation strategy was chosen. The first
strategy followed the Human Risk & Effectiveness strategy and the second strategy
followed the Technical Risk & Efficacy strategy.
The Human Risk & Effectiveness strategy of evaluation is used for the artefacts
developed during DSR Cycles 1-3. The design of these artefacts are socially
oriented, are evaluated as social constructs and their benefits should continue in real
situations. The benefits should continue if the CFfFR is considered a meta-
metamodel in the financial reporting domain and the CFfFR ontology is considered as
a formal domain ontology within the financial reporting ontology domain. The initial
artefacts developed in DSR Cycle 1 and early in DSR Cycle 2 are more formative
while the last artefacts developed in DSR Cycle 2 and those developed in DSR Cycle
3 are more summative.
The development of the CFfFR ontology, through four Iterations, is evaluated from
the Technical Risk & Efficacy paradigm. The major design of the artefact is
technically oriented using the OLC (Figure 3.8) as design technique. The benefits of
the artefact are derived from the use of the artefact in other words to determine if it is
possible to get closer to the ideal and a global CFfFR by analysing the CFfFR for
inherent coherence, internal consistencies, unintended meanings and completeness.
The first two Iterations are more formative, testing and helping to improve the
outcomes of the process. The last two Iterations and the accompanying artefacts are
more summative, judging the extend that the outcomes would match the expectations
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to answer the main research question. Figure 3.10 illustrates the double evaluation
strategy followed in this study.
Figure 3.10: FEDS double evaluation strategy
The goal of DSR Cycle 1 is to determine the requirements and a definition of a global
CFfFR that can be used as a benchmark against which the CFfFR can be measured.
The valuation strategy is included in the research technique to determine the
requirements that are commonly accepted in the research field from the literature.
The artefact outputs (section 3.6.2) from the Development Step of DSR Cycle 1
provide answers to SRQ 1. DSR Cycle 2 finally answers SRQ 1 using model
theories.
According to Mäki (2011:57) a way to characterise successful representation by a

model is that “the direct examination of the model’s properties may indirectly provide
information about the properties of the target”. A person learns about the target (the
CFfFR) by studying the model (formal ontology of the CFfFR). A pragmatic concept
of truth reveals where we can find truth in a model.
Mäki (2011:58) mentions two pragmatic properties of truth: “usefulness in regard to a

purpose, and persuasiveness in regard to an audience”. Truth as usefulness in the
formal ontology of the CFfFR is situated in the identification of internal incoherence’s,
logical inconsistencies and unintended meanings in the natural text of the CFfFR.
Truth as persuasiveness is situated in the shaping of the beliefs of the accounting
community of the value of a formal ontological representation of the CFfFR. For the
purpose of this study only usefulness as pragmatic property of truth is set as goal of
the model. Persuasiveness of the accounting community of the value of the formal
ontology of the CFfFR is not part of the truth objective of this study.
The application of the model theory of Mäki (2011; 2009; 2008) (section 5.2), and the
use of models in computing (section 5.3) to determine the role of a global CFfFR
serves as verification of the truth regarding the ideal role and status of the CFfFR
towards providing guidance in setting globally acceptable accounting standards. The
118
output artefacts from DSR Cycle 2 (section 3.6.3) finally answer SRQ 1 and answer
SRQ 2.
The main research question and SRQ 3 are answered during DSR Cycles 3 and 4. 68
The verification of the formal domain ontology of the CFfFR is linked to the evaluation
questions mentioned during the discussion of the OLC Model (Figure 3.8). These
questions are used to verify the success of the formal domain ontology. The success
of the application of the ontology methodology on the CFfFR is verified by the
findings on the modeling decisions, detection of unintended meanings, the indication
of logical inconsistencies by the reasoner and indications of internal incoherence.
Verification of the formal ontology of the CFfFR consists of the following:

1. Evaluation of the CFfFR when building the formal ontology during the reasoning
cycles, indicating internal incoherence’s, logical inconsistencies and unintended
meanings.
2. Providing a formal representation of the CFfFR that is inherently coherent,
logically consistent and unambiguous.
The evaluation of the formal ontology of the CFfFR based upon the competency
question posed for the ontology, represents the final answer to the main research
question and the research project in total.
Figure 3.10 illustrates how the artefacts developed during the respective DSR Cycles
(section 3.8.3) build towards the final evaluation of the CFfFR ontology.
Figure 3.11: FEDS double evaluation strategy for the CFfFR ontology
In section 3.10 limitations were identified to determining the scope and applicability of
the study.
68
See Table 3.2 for an indication on how the DSR Cycles answer the respective research questions.
119
3.10 Limitations
The purpose and focus of this study is to set and test the requirements and role of a
global CFfFR against the CFfFR with the stated purpose to provide fundamental
concepts that offer a sound foundation for the development of accounting standards
that are principally based, internally consistent and internationally converged.
This study does not attempt to analyse or build a theory or an ontology of the
financial accounting domain. The study is focused on the analysis and testing of the
existing CFfFR against certain requirements (Target R in Figure 5.6).
Regarding the fundamental concepts formulated in the CFfFR, this study does not
intend to discuss the theoretical correctness or acceptability of the concepts by the
accounting community. The study tests only the given fundamental concepts in the
CFfFR for internal coherence, logical consistency and clear formulation. In cases
where unintended meanings of words, concepts or definitions within the CFfFR are
indicated, modeling decisions were made in order to be able to build the formal
domain ontology. This study neither attempts nor proposes to provide a final or
generally acceptable answer when making modeling decisions, as the decisions are
primarily focused on the building of an internally coherent and logically consistent
formal domain ontology of the CFfFR. The accounting community may, or may not,
due to various theoretical or political reasons agree or not agree with the modeling
decisions.
Regarding the definitions for the elements of the financial statements, modeling
decisions are made to provide clear and unambiguous definitions for the purpose of
the formal domain ontology. The proposed definitions may or may not be acceptable
to the accounting community. The reasoner tests the definitions used in the formal
ontology to be internally coherent and logically consistent.
Some information in the CFfFR is not modelled as it served as competency questions

to inform the formalisation process. This information serves as notations explaining
the classes and relationships modelled in the formal ontology. It further serves as
competency questions informing on how the CFfFR ontology supports the provision
of decision-useful information.
3.11 Conclusion
In conclusion, the study is designed to answer the main research question:
Main Research Question: How can a global Conceptual Framework for Financial
Reporting (global CFfFR) be developed that provides fundamental concepts that
are a sound foundation for the development of accounting standards that are
principally based, internally consistent and internationally converged?
The research questions were answered from an interpretivist ontological stance using
an abduction approach applying a DSR strategy. The main research question was
answered by posing and answering three sub-research questions. The sub-research
questions are:
120
• SRQ 1: What is the role, definition and requirements of a global Conceptual
Framework that provides fundamental concepts for the development of
accounting standards that are principally based, internally consistent and
internationally converged? (SRQ1)
• SRQ 2: How can model building assist to construct a global Conceptual

Framework that provides fundamental concepts for the development of
internationally converged? (SRQ2)
• SRQ 3: How can the formalisation of the CFfFR using ontologies assist to
construct a global Conceptual Framework that provides fundamental concepts
for the development of accounting standards that are principally based, internally
consistent and internationally converged? (SRQ3)
An inductive approach using a systematic review method was used in Chapter 4 to

answer most of SRQ1. The systematic review method was used to collect data from
academic and other publications to determine the role, a definition and requirements
of a global CFfFR. The systematic review was performed according to a systematic
review protocol.
A deductive approach using an interdisciplinary investigation was used in Chapters 5

and 6 to partially answer SRQ 2. An idealised role and refinements on the
requirements for a global CFfFR resulting from the systematic review were
investigated. Models as isolations, idealised representations and resemblance, and
truth containers as proposed by Mäki (2011) were used to position the value of the
CFfFR as an ideal model to provide fundamental concepts for the development of
globally acceptable accounting standards. The application and use of models and
ontologies in computing in an interdisciplinary investigation were deductively used in
Chapter 6 to determine the role, value and requirements of the CFfFR as a
metamodel and meta-metamodel in the financial reporting domain. The application of
ontologies in computing was adopted to indicate the applicability and value of
ontology technologies in determining the idealised global CFfFR.
SRQ 3 was answered using an abductive approach by building a formal domain

ontology of the CFfFR in Chapter 7. The internationally recognised OLC (Figure 3.8)
was used as method to build and evaluate the formal domain ontology. During the
building process internal coherence, logical consistency and the clarity of meanings
in the natural text were tested.
During the modeling process, modeling assumptions were made. In Chapter 8 the
findings of the modeling process were documented and the CFfFR was evaluated
against the idealised assumptions formulated by using the modeling technique of
isolation (Mäki, 2011). In Chapter 9, the contribution and suggestions for further
research based on the findings were presented.
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SECTION C – IMPLEMENTATION OF RESEARCH PLAN
Figure 3.12: Chapter map - Section C
122
INTRODUCTION
In Section C, the research design provided in Section D (Chapter 3) is implemented.

Section C consists of four chapters developed around answering the research
problem and research questions (section 3.2).
The following are the research questions answered in Section C:

The main research question (MRQ): How can a CFfFR consisting of logically
formalised fundamental concepts be developed, which could function as a sound
and internationally converged?
• Sub-research Question 1 (SRQ 1): What are the role, definition and
requirements of a global CFfFR consisting of fundamental concepts, which
could function as a sound foundation for accounting standards that are
principle-based, internally consistent and internationally converged?
• Sub-research Question 2 (SRQ 2): How can model building assist to
construct a global CFfFR consisting of fundamental concepts, which could
• Sub-research Question 3 (SRQ 3): How can the formalisation of the CFfFR
In Chapter 4 (DSR Cycle 1) the requirements and definition for a global CFfFR is
given. The requirements were determined by undertaking a systematic review of
literature concerning the building of conceptual frameworks for accounting. Based on
the requirements a definition for a global CFfFR was developed. The requirements
are provided in section 4.6. In section 4.8, the CFfFR is tested against these
requirements. By determining the definition and requirements of a global CFfFR, the
first sub-research question (section 3.2) was partially answered. The role of a global
CFfFR forms part of SRQ 1 and is answered during DSR Cycle 2 (Figure 5.2).
In Chapter 5 (DSR Cycle 2) the role of a global CFfFR is determined using the model
theories of Mäki (2011; 2009), Kühne (2005; 2006a) and the OMG model hierarchy
(OMG, 2014). During DSR Cycle 2, SRQ 1 and 2 (section 3.2) were answered. By
answering SRQ 2, the theoretical foundation was established to answer SRQ 3
(section 3.2) and the main research question (section 3.2).
In Chapter 6 (DSR Cycle 3), the applicability of ontologies from the philosophical and
computing disciplines to financial reporting was investigated. By determining the
applicability of the use of ontologies on financial reporting, SRQ 3 (section 3.2) was
answered and the study could proceed to DSR Cycle 4 (Chapter 7) in which the main
research question (section 3.2) was answered by building the CFfFR ontology
(Figure 7.30) and testing the CFfFR against the requirements of an ideal CFfFR.
123
The DSR Cycles were implemented as follows in Section C:
Figure 3.13: DSR strategy implemented in Section C
The matrix in the following table summarises how the DSR research strategy was
implemented in Section C to answer the research questions.

MAIN RQ √ √
SRQ 1 √ √
SRQ 2 √
SRQ 3 √ √
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CHAPTER 4
TABLE OF CONTENT
4 REQUIREMENTS OF A GLOBAL CFfFR ............................................................... 127

4.1 Introduction ............................................................................................................. 128
4.2 Data Collection Method: Systematic Review Protocol ............................................. 130

4.3 The Need for a Conceptual Framework in a Global Economy................................. 135
4.3.1 Foundation for the Development of the CFfFR – 1960s .......................................... 136
4.3.2 Practical and Political Reasons ............................................................................... 136
a) Financial disasters............................................................................................ 137
b) Legitimacy and credibility ................................................................................. 139
c) Rational ground for a conceptual framework .................................................... 141
4.3.3 Functional and Technical Reasons ......................................................................... 142
a) Technical and theoretical reasons by Moonitz .................................................. 142
b) Epistemological perspective by Chambers ....................................................... 143
4.3.4 Teleological Principle .............................................................................................. 144
4.3.5 Pedagogic, Information and Justification Functions ................................................ 145
4.3.6 Need According to FASB ........................................................................................ 146
4.4 The Purpose of a Conceptual Framework for Financial Reporting .......................... 147
4.4.1 The Purpose According to the FASB Conceptual Framework ................................. 147
4.4.2 The Purpose of the CFfFR According to IASB ........................................................ 147
4.5 The Objective of a Conceptual Framework in Accounting ....................................... 148
4.5.1 Objective Approaches............................................................................................. 149
a) The information economics based approach .................................................... 149
b) The classical approach ..................................................................................... 149
c) The decision-usefulness approach ................................................................... 150

4.6 Characteristics and Requirements of a Global CFfFR............................................. 152
4.6.1 Category 1: Characteristics and Perceptions .......................................................... 152
a) Credibility and Legitimacy ................................................................................. 152
b) CFfFR as a body of shared knowledge ............................................................. 152
c) Objective of the CFfFR: Improve the Financial Report ...................................... 153
d) Agreed paradigm: Decision-useful Financial Information .................................. 153
4.6.2 Category 2: Content Requirements of a Global CFfFR ........................................... 153
a) Content Requirements of a global CFfFR: Structure of the CFfFR: What?,
When?, and How? ........................................................................................... 153
b) Content Requirements of a global CFfFR: Complete and Comprehensive ....... 155
c) Content Requirements of a global CFfFR: Internally Coherent ......................... 155
d) Content Requirements of a global CFfFR: Clear and Unambiguous ................. 155
e) Content Requirements of a global CFfFR: Logically Consistent........................ 156
125
4.7 A Proposed Definition for a Global CFfFR .............................................................. 156
4.8 Evaluation of the CFfFR Against the Requirements of a Global CFfFR................... 158
4.8.1 Complete and Comprehensive ............................................................................... 159
4.8.2 Internally Coherent ................................................................................................. 159
4.8.3 Clear and Unambiguous Formulation ..................................................................... 160
4.8.4 Logically Consistent ................................................................................................ 160
4.9 Conclusion .............................................................................................................. 161
126
4 REQUIREMENTS OF A GLOBAL CFfFR
127
4.1 Introduction
In Chapter 2, the historical development of the CFfFR is described as an

uncompleted evolutionary process (Camfferman & Zeff, 2009; Riahi-Belkaoui, 2004;
Stamp, 1980; Stamp, 1970). From the literature review, the main DSR Cycle’s
awareness was identified as the need for a global CFfFR (Figure 3.13) (section
3.6.1). The Awareness Step resulted in the formulation of the main research question
as: how can a CFfFR consisting of logically formalised fundamental concepts be
developed, which could function as a sound foundation for accounting standards that
are principle-based, internally consistent and internationally converged? An overview
of the structure of Chapter 4 is provided in Figure 4.3.
Figure 4.3: Structure of Chapter 4
The research strategy followed to answer the main research question to build a
formal domain ontology of the CFfFR which adheres to more requirements of a global
CFfFR than the current CFfFR, was a Design Science Research Strategy (DSR
strategy), based on the discussion by Vaishnavi and Kuechler (2013) (Peffers et al.,
2007; March & Storey, 2008). In the main DSR Cycle, it was suggested to develop a
method to build a formal domain ontology of the CFfFR that adheres to the
requirements of a global CFfFR (Figure 3.13) (section 3.6.1).
128
The first step (DSR Cycle 1, Figure 4.2) in the Development Step of the main DSR
Cycle was to determine the requirements that a CFfFR have to adhere to in order to
be globally acceptable. The need to determine the requirements of a global CFfFR is
the Awareness Step of DSR Cycle 1 (Figure 4.2). DSR Cycle 1 partially 69 answers
SRQ 1 formulated as: what are the role, definition and requirements of a global
CFfFR consisting of fundamental concepts, which could function as a sound
and internationally converged? The Awareness Step for DSR Cycle 1 links to the first
Phase of the OLC (Figure 3.8) in which the requirements of the ontology should be
developed (Vaishnavi & Kuechler, 2013).
In DSR Cycle 1, it was suggested to investigate literature regarding conceptual

frameworks in accounting to identify requirements for a global CFfFR in order to
partially answer SRQ 1. The purpose of Chapter 4, during the Development Step of
DSR 1, is to determine the requirements that the CFfFR should comply with to be
globally acceptable. As none of the standard setting bodies have formally formulated
such requirements, the literature dealing with conceptual frameworks in accounting
were analysed by performing a systematic review (section 4.2) according to the
systematic review protocol (Table 4.1) to determine the requirements for a global
CFfFR (section 4.6). The IASB could not provide a formal definition for the CFfFR. 70
From the literature analysed and based on the requirements identified, a proposed
definition was formulated to define a global CFfFR (section 4.7).
Chapter 4, based on the execution of the systematic review protocol (Table 3.3), is
structured in two Phases (Figure 4.3). During Part A, data was collected in the
execution stage from the searches done according the keywords and synonyms
provided in section 1.2 of the systematic review protocol (Table 3.3) and reported in
sections 4.3 and 4.5. 71 During the result analysis stage of the systematic review
process, different need categories and the purpose of conceptual frameworks for
financial reporting were identified (section 4.3). Once the data related to the need and
purpose (section 4.3) and objective of a conceptual framework (section 4.5) was
collected in Part A, the data was investigated to derive the requirements and
definition of a global CFfFR from the data in Part B.
In Part B of Chapter 4, the outputs of the Development Step from DSR Cycle 1 are
the requirements and a proposed definition of a global CFfFR (section 4.5) (or ideal
CFfFR, section 5.2.4). The requirements and proposed definition are based on the
need and purpose (section 4.3) and the objective (section 4.5) of a conceptual
framework. The construct artefact (Table 3.1) forms part of the first evaluation step in
the FEDS Human Risk & Effectiveness verification strategy.
69
The role of a global CFfFR, also part of SRQ 1, is answered during DSR Cycle 2 (Table 3.6).
70
The IASB was requested by email to provide a formal definition for the CFfFR. The IASB’s response was to refer to
the purpose of the CFfFR as formulated in the CFfFR document.
71
Chapter 4 links with Chapter 2 as it also refers to most of the material used to describe the historical development
of the CFfFR, but Chapter 4 approaches the material from a different perspective. Section 4.3 is not a chronological
description of the historical development of the CFfFR, but a thematic approach based on the systematic review
protocol to identify the requirements and definition of a globally acceptable CFfFR.
129
Figure 4.4 provides a graphic illustration of the function of the first artefact developed
in the FEDS Human Risk & Effectiveness verification strategy.
Figure 4.4: FEDS Strategy - DSR Cycle 1
In section 4.8 compliance of the CFfFR with the requirements and definition of a
global CFfFR as determined in section 4.5, was evaluated. Once the CFfFR was
tested against the output of the Development Step the Evaluation Step was
completed and with the new knowledge obtained, the study moved over to DSR 2 in
Chapter 5 (Figure 3.13 and Figure 5.2). The systematic review protocol is provided in
section 4.2.
4.2 Data Collection Method: Systematic Review Protocol
In this study the systematic review protocol template suggested by Mian et al. (2005)
was adopted and adapted to partially answer SRQ 1. The systematic review protocol
provided in Table 4.1 was performed to determine the requirements and a proposed
definition for a global CFfFR.
Table 4.1: Systematic review protocol

CONTROL PROTOCOL
PLANNING STAGE
3. Question formularisation:
Stating the research
objectives
1.1 Question focus: The research objective is to determine a definition and
2.2 Question quality and In a global economy the accounting community is in need of a
amplitude: global CFfFR to guide the setting of globally acceptable accounting
• Research problem: standards.
• Research question: What are the role, definition and requirements of a global CFfFR
consisting of fundamental concepts, which could function as a
sound foundation for accounting standards that are principle-based,
The systematic review is focussed on answering SRQ 1 and
applied during DSR Cycle 1.
• Keywords and • Requirements of a conceptual framework;
130
CONTROL PROTOCOL
synonyms: • Definition of a conceptual framework;
• Reasons and motivation for a conceptual framework
• Intervention: Publications discussing the definition, need, objectives and
requirements of a global CFfFR to be identified.
• Control: During the literature review on the historical development of the
CFfFR some resources dealing with the requirements and needs for
a global CFfFR were identified. These resources formed a basis to
start the systematic review.
• Effect: It is expected that discussions in the literature will be found
indicating the requirements, needs, role, and definition of a global
CFfFR.
• Outcome measure: No metrics will be applied. Sources with relevant information are
studied and documented.
• Population: The population is observed until a stage saturation is reached.
• Application: Some clarity will be provided to the accounting community
regarding what are perceived as the need and requirements of a
global CFfFR. A definition for a global CFfFR is derived from the
literature reviewed.
• Experimental design: No statistical analysis is applied as the information obtained is not
in a statistical format. Trends in concepts and ideas regarding the
need and requirements of a global CFfFR are identified and
summarised.
4. Sources Selection:
Sources for primary
studies searches
2.5 Sources selection criteria Conceptual frameworks and notes published by the FASB and
definition: IASB are considered to be primary sources.
Important studies that preceded the development of conceptual

frameworks by the FASB and the IASB are also considered but not
viewed as primary sources.
• Studies languages: Primary studies are mainly obtained in English. Other languages
also considered are Afrikaans, Dutch and German.
2.6 Sources identification:
• Sources search Primary documents are obtained from the websites of the FASB
methods: and the IASB.
The team revising the CFfFR at the IASB is contacted via email.
• Search string: See keywords and synonyms above.
• Sources list: The following data basis and search engines are used:
• University of Pretoria library e-resources and e-journals;
• ProQuest, Accounting & Tax, Accounting; EbscoHost; Science
Direct; JStor; Wiley Online Library and Google Scholar.
2.7 Sources selection after • Information regarding the function and criteria regarding a
evaluation: global CFfFR are evaluated.
2.8 References checking References are checked by study supervisors when the results are
presented in a written document.
3. Studies selection:
5.7 Studies definition: Studies dealing directly with the drafting, purpose and criteria of a
conceptual framework for accounting.
• Studies inclusion and Inclusions:
exclusion criteria • Studies dealing with the theory behind and need for a global
definition: CFfFR.
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CONTROL PROTOCOL
• Studies dealing with critique on and problems with conceptual
frameworks.
• Studies discussing the purpose of conceptual frameworks in
accounting.
• Studies dealing with the motivation to draft a conceptual
framework for accounting.
• Important studies preceding the development of the FASB and
IASB conceptual frameworks.
Exclusions:
• Studies dealing with detail on the content of conceptual
frameworks for accounting.
• Studies not related to the conceptual framework for
accounting.
• Study types definition: Primary sources are:
• The respective conceptual frameworks published by the FASB
and the IASB;
• Documents published by professional bodies influencing the
CFfFR of the IASB (see the literature review).
• Secondary sources dealing directly with the drafting, need and
requirements of a conceptual framework or postulates and
principles as it was known during the 1960s.
• These studies include books, e-books, peer reviewed journal
papers, dissertations, reports, minutes of meetings, and web
pages of organisations.
• Selection is a qualitative observation, based on the judgement
of the researcher regarding relevance to the study and
information needed at that stage.
• Procedures for study Selection procedure for studies:
selection: • Primary resources are obtained from the different standard
setting bodies.
• A web search is done using the keywords and search strings
on the different sources identified.
• A first selection on web searches is done by evaluating the
titles of studies.
• A second selection is made from the first selection judged on
information in the abstract.
• A third selection is made from the second selection: Studies
selected during the second selection stage are downloaded
and evaluated by reading the introduction and conclusions of
the study.
• Studies selected during the third selection stage are studied
and relevant information is captured.
• Further selections based on the third and final selection. The
selection cycle is repeated from the first to the third selection
stages:
o The references of selected studies are scrutinised for
possible relevant studies.
o Documents citing the selected studies are scrutinised for
possible relevant additional studies.
• The searching cycle is repeated if new information becomes
available regarding certain aspects of the study. Based on the
newly required information, new search strings are developed
and refined until relevant information is found.
• Studies selected are included in a Mendeley database.
EXECUTION STAGE
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CONTROL PROTOCOL
5.8 Selection execution:
• Initial studies selection: 556 documents, studies, reports, dissertations and web pages were
initially selected and included in the Mendeley data base program.
• Studies quality The quality of the studies are evaluated and selected based on the
evaluation: criteria to provide information on the need, purpose and
• Selection review: The final selection of 45 documents, studies, reports, dissertations
and web pages is included in the references list at the end of the
document.
6. Information extraction:
6.1 Information inclusion and The information is selected based on the contribution towards the
exclusion criteria clarification of the need, purpose and requirements of a global
definition: CFfFR.
6.2 Data extraction forms: No forms are used. Information is documented and sorted as it is
extracted.
6.3 Extraction execution:
• Objective results Not applicable as this is an interpretive study - extraction is
extraction subjective based on the judgement of the researcher.
o Study identification
o Study methodology
o Study results
o Study problems
• Subjective results The relevant information is selected by judgement, documented and
extraction roughly sorted according to the election criteria.
o Information through
authors
o General
impressions and
abstractions
6.4 Resolution of Does not form part of this study.
divergences among
reviewers:
RESULT ANALYSIS
7. Results Summarisation:
7.1 Results statistical Not applicable
calculus:
7.2 Results presentation in The documents, studies, reports, dissertations and web pages are
tables: inspected for the following categories and grouped accordingly:
• Need for a global CFfFR;
• The objective of a conceptual framework;
• Requirements of a global CFfFR;
• Information that can contribute towards a definition for a global
CFfFR.
The categories identified above are grouped together and then

analysed for similar and conflicting trends and arguments. The
different trends and arguments are colour coded and summarised
to provide a summary of the arguments and trends.
7.3 Sensitivity analysis: Not applicable in this qualitative study.
7.4 Plotting: Not applicable in this qualitative study.
7.5 Final comments
• Number of studies: A total of 45 documents, studies, reports, dissertations and web
pages are used to provide the information.
• Search, selection and As the researcher is involved in the selection, analysis and
extraction bias: evaluation of the information the selection process can be viewed
as biased. Another researcher may identify more or different needs,
requirements and definitions.
• Publication bias: The results need to be evaluated by a peer review process of
publication.
133
CONTROL PROTOCOL
• Inter-reviewers The study supervisors review the results before submission for
variation: examination.
• Results application: Should the results be published via a peer review process it could
contribute towards the drafting of a global CFfFR for Financial
Reporting?
7.6 Recommendations It is not possible to confirm the role of a global CFfFR towards the
setting of financial accounting standards from the systematic
review. In the next section, the role of a conceptual framework is
investigated using modeling theories from philosophy of science
and computing. The two disciplines have progressed on the
utilization of models for scientific research.
Further studies are needed to either confirm or adjust the proposed

definition and requirements for a global CFfFR.
According to the OLC Model (section 3.8.3, Figure 3.8) the first step (Phase 1,
section 3.8.3a)) in building an ontology is to develop the requirements of the
ontology. The requirements for a global CFfFR should serve as a basis for Phase 1
of the OLC Model. As the requirements and a formal definition for a global CFfFR is
not available, a systematic review was performed on literature related to accounting
conceptual frameworks in an attempt to identify requirements for a globally
acceptable CFfFR. These requirements could also serve as a measurement tool to
evaluate the CFfFR.
The following search strings were used on the data basis indicated in section 2.2 of
the systematic review protocol (Table 4.1):
• Requirements of a conceptual framework;
• Definition of a conceptual framework;
• Reasons and motivation for a conceptual framework;
During the initial selection of studies 556 documents, studies, reports, dissertations
and web pages were selected. A circular procedure was followed in selecting the
studies. The selection process went through three selection stages. Once the
selected works were scrutinised the relevant material were selected. As the works
were studied and new information became available, a new search cycle was done to
explore the possibilities of the new information. After a review of these documents, 45
documents were used to identify the requirements.
The information obtained from the documents were categorised and grouped
according to themes. The themes were chosen based on the possibility to identify
134
requirements for a global CFfFR. The information contributing towards identifying
requirements for a globally acceptable CFfFR were grouped under the following
themes:
• The need of a conceptual framework;
• The purpose of a conceptual framework;
• The objective of a conceptual framework.
Although in principle the need for a conceptual framework was indicated during the
discussion on the evolutionary development of the CFfFR in Chapter 2, the
foundation for the development of a conceptual framework was laid during an active
search for the basic postulates and principles for accounting in the 1960s (Zeff,
1982). Some of the most basic requirements were developed during this period. Two
broad themes arguing around the reasons for a conceptual framework for accounting
were identified. For the purpose of this study they are classified under practical and
political reasons (section 4.3.2) and functional and technical reasons (section 4.3.3).
Two other themes related to the identification and motivation of some requirements
for a global CFfFR are the teleological principles (section 4.3.4) used in the CFfFR
and discussions regarding the pedagogic, provision of information and justification
function of a conceptual framework (section 4.3.5). After the general literature was
analysed, the focus of the search of requirements shifted to two influential conceptual
frameworks, the FASB conceptual framework and the IASB CFfFR. The need for a
FASB according to the FASB conceptual framework itself was analysed (section
4.3.6). The purpose of conceptual frameworks was obtained directly from the FASB
conceptual framework (section 4.4.1) and the IASB CFfFR (section 4.4.2).
Some requirements, needed to build the formal domain ontology of the CFfFR, were
identified during the investigation of the objective for a conceptual framework (section
4.5). The objective of the CFfFR was identified as the main competency question to
be answered by the formal domain ontology of the CFfFR.
Based on the analysis of the data gathered during Phase A of Chapter 4, the
requirements for global CFfFR were formulated in Phase B of Chapter 4.
4.3 The Need for a Conceptual Framework in a Global Economy
The economic globalisation can be viewed as the main stimulus for the search for
one set of global financial standards. This was confirmed by Mackintosh (2014:5)
during his address as Vice-Chairman of the IASB at a function of SAICA on 13
August 2014 when he concluded with “I have offered my views on how economic
globalisation created the need for global accounting standards. How the continued
melding of national capital markets into one big, globally interconnected market
presents a compelling case for a global language of financial reporting”. The need for
a global CFfFR is closely linked to the need for global accounting standards. This link
and the need for a global CFfFR are provided in sections 4.3.1- 4.3.6.
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4.3.1 Foundation for the Development of the CFfFR – 1960s
From the discussion on the history of the development of the CFfFR (Chapter 2) the
conclusion can be made that accounting as discipline has mainly developed from the
early ages as a “response to practical needs rather than by deliberate and systematic
thinking” (Chambers, 1963:3). The idea of a conceptual framework in accounting
evolved through a needs system of stimulus and response (Salvary, 1979). The first
efforts to systematise accounting were documented in the 13th century with the works
of Benedetto Cortrugili – Della Mercatura e del Mircanti Perfectto Della Mercautra in
1458 and Luca Pacioli – Summa de Arithmetica, Geometrica, Proportioni et
Proportinalita in 1494 (Table 2.3).
According to Zeff (1999) the monograph of Paton and Littleton in 1940, An

Introduction to Corporate Accounting Standards (Table 2.1), influenced by A
Tentative Statement of Accounting Principles Underlying Corporate Financial
Statements of the AAA, was the first institutional effort in the U.S. to develop a
conceptual framework for business enterprises. The search for accounting postulates
and principles during the 1960s (Zeff, 1982) laid the foundation for the development
of conceptual frameworks after the formation of the FASB and the IASB in 1973.
The need for a globally acceptable conceptual framework and global accounting
standards increased as the global markets developed (Zeff, 2012). Commissioner
Stein (Stein, 2015) of the SEC confirms the ideal of a single set of globally-
recognized, high-quality accounting standards. During the systematic review of
literature regarding the development of conceptual frameworks in accounting, the
focus was to determine why conceptual frameworks are demanded by the accounting
community and then in reaction to the demand, drafted by standard setting bodies.
4.3.2 Practical and Political Reasons
The various needs for a conceptual framework for accounting as identified in the
literature can be classified into mainly two categories. The first need category can be
described as practical and political reasons to legitimise accounting standards
(Alexander, Le Manh-Béna, & Ramond, 2013; Hines, 1989). The second need
category can be classified as functional and technical reasons (Moonitz, 1963;
Chambers, 1963) based on a theoretical perspective for setting a conceptual
framework.
The practical and political category relates to the response of the accounting
profession to financial disasters on the economic front (the Great Depression of
1929) and the drive to obtain credibility from the accounting profession (Alexander et
al., 2013; Hines, 1989). The drive to obtain credibility can be linked to the introduction
of regulation by means of legislation (section 2.6).
136
a) Financial disasters
In reaction to economic disasters and enforced legislation, the accounting profession

formulated rules and recommendations on an ad hoc basis to provide guidance to
accountants (Storey & Storey, 1998). 72 The emergence of principle based accounting
can be attributed to the economic crises between 1844 -1937 (Hoffmann & Detzen,
2013).
The Railway Mania during 1845 -1847 stimulated an improvement in the disclosure
levels of the financial reports (McCartney & Arnold, 2003; Odlyzko, 2012; Bryer,
1991; McCartney & Arnold, 2010; Arnold & McCartney, 2002) (section 2.5.1). Both
the quantity and quality of the information disclosed improved. The conceptual basis
of reporting changed “from a cash to an accrual basis” (McCartney & Arnold,
2010:401) and the standardisation of depreciation treatment was developed. These
changes still happened in what is called a laissez-faire (unregulated) system of
financial regulation (Hoffmann & Detzen, 2013).
The Great Depression, starting with the Wall Street Crash on 24 October 1929
ending in 1933, introduced the beginning of a more regulated system with the
establishment of the SEC in 1934. These financial disasters directly caused the
search for accounting theories. In reaction to the Great Depression two important
documents regarding accounting principles were published, “A Tentative Statement
of Accounting Principles Underlying Corporate Financial Statements” (American
Accounting Association, 1936) and the “Statement of Accounting Principles” by
Sanders, Hatfield and Moore (Gaffikin, 2008; Storey & Storey, 1998). From 1938 to
1973, professional bodies mainly summarised accounting practices without a
theoretical basis and reacted on an ad hoc basis to the requirements of the SEC
(section 2.5.2, Table 2.3). The importance of a theoretical basis is emphasised by the
replacement of the APB due to the lack of developing accounting principles. From
1960 to 1973 a lot of discussion on accounting postulates and principles were
conducted (Zeff, 1982).
Since 1973, one of the most prominent financial crises was what is today known as
the subprime loan crisis. On September 26, 2008, failures of large financial
institutions in the U.S. developed into a global crisis resulting in bank failures and
sharp reductions in equity values in Europe (Appendix C). This crisis started in the
summer of 2007 when U.S. subprime losses triggered disruption in the global
financial system (Deloitte., 2015). The subprime loan crisis emphasised the
interconnected nature of capital markets (Mackintosh, 2014) and underlined the need
for global accounting standards. The importance of the financial crises for accounting
standard setting is emphasised by a hit of 2 400 results when a search for the term
“financial crisis” is conducted on the IASB web site (IASB, 2015a). A Financial Crisis
Advisory Group (FCAG) was formed to “consider how improvements in financial
reporting could help enhance investor confidence in financial markets” (IASB,
72
Alexander et al. (2013:3–6) provides a short description of the emergence of a conceptual framework in the United
States and conceptual framework projects in countries with an Anglo-American accounting tradition.
137
2015b:1) after the subprime crisis. The following are some of the issues dealt with by
the FCAG:
• “Areas where financial reporting helped identify issues of concern,
or created unnecessary concerns, during the credit crisis.
• Areas where financial reporting standards could have provided

more transparency to help either anticipate the crisis or respond to
the crisis more quickly.
• Whether priorities for the IASB and the FASB should be

reconsidered in light of the credit crisis.
• Potential areas that require future attention of the IASB and the
FASB in order to avoid future market disruption.
• The implications of the credit crisis for the interaction between

general-purpose financial reporting requirements for capital
markets and the regulatory reporting, particularly for financial
institutions.
• The relationship between fair value and off-balance sheet

accounting and the current crisis, both during and leading up to
the crisis.
• The findings and relevance of conclusions of various studies

underway, including the US Securities and Exchange Commission
study under the Emergency Economic Stabilization Act of 2008.
• The need for a due process for accounting standard-setters and

its implications on resolving emergency issues on a timely and
inclusive basis.
• The independence of accounting standard-setters and

governmental actions to the global financial crisis” (IASB,
2015b:1).
Three round tables (Asia, Europe and North America) were organised by the IASB
and the FASB on the global crisis. 73 A direct result of the subprime crisis was the
elevation of the revision of IAS 39 being replaced by IFRS 9 Financial Instruments
(IASB, 2015c). IFRS 9 is described by the IASB (2015c:1) as a “comprehensive
response to the financial crisis”.
It is difficult to prove a direct link between the effect of the subprime loan crisis and
the development of the CFfFR. The development of the CFfFR is influenced by the
subprime loan crisis in two possible ways. Firstly, the subprime crisis could indirectly
73
On November 14 2008, the first round-table was held in London.
138
be responsible for the suspension of the joint conceptual framework project between
the FASB and the IASB. Both the IASB and the FASB had financial reporting crises
on hand to manage as is evident from the steps implemented by the IASB (and the
FASB) to manage the crisis. On a Joint Board Meeting of the FASB and the IASB on
November 19, 2010 regarding the Conceptual Framework project, “because of the
priority placed on other projects, the Boards concluded that they cannot devote the
time necessary to properly address those issues in the near future” (FASB and IASB,
2010:1). Secondly, the developments on individual standards after the subprime
crises feed back into the revision of the CFfFR as it has been taken into account as
the CFfFR is being revised (IASB, 2013a).
The subprime crisis could be seen as a stimulus in the stimulus/response process of

the development of the CFfFR, which corresponds with the effect of the previous
major crisis, the Great Depression, which served as a major stimulus to search for
accounting postulates and principles.
b) Legitimacy and credibility
According to Hines (1989), perceived from a social constructivist perspective the

major reason for the development of conceptual framework projects by standard
setting bodies is to provide legitimacy to their accounting standards and not due to
functional or technical considerations. The discussion on the history of the CFfFR
supports the social constructivist theory of Hines (1989) (see sections 2.6, 2.7 and
2.8). In support of Hines’ (1989) perspective, the IASC only started its conceptual
framework project after it was criticized for not having an explicit or implicit framework
of objectives for setting accounting standards (Alexander et al., 2013; Zeff, 2012). In
the case of the AICPA it was a survival strategy not to let the SEC take over the
standard setting process (Alexander et al., 2013).
Alexander et al. (2013:7) agrees in principle with Hines (1989) stating the motives of
privately regulated standard-setting bodies to develop a conceptual framework “is not
necessarily intended to have operating effects but is rather crucial, from a political
stand point”. The motive for a private standard-setter is to maintain professional
power when its legitimacy is questioned (Power, 1992) or “when the credibility of
financial reporting standards are in doubt” (Alexander et al., 2013:7).
Legitimacy and credibility can be obtained by various means. An important aspect in

the acceptance of a conceptual framework and accounting standards is the degree of
representativeness when a conceptual framework or an accounting standard is
drafted (Alexander et al., 2013; Hines, 1988; Peasnell, 1982; Power, 1992; Stamp,
1980). According to Peasnell (1982:254) for a standard setting body to obtain
credibility it needs “to demonstrate that it is trying by logical means to develop
accounting standards based on principles of general appeal”.
The degree of credibility required by a standard setting body differs depending on its
level of independent status. In cases where accounting standards do not have to be
approved by a statutory body, that standard setting body needs a higher degree of
credibility to obtain legitimacy (Alexander et al., 2013). When both the responsibility
139
and power of developing accounting standards are situated within one body, the
need for a conceptual framework by that body is essential in order to obtain credibility
(Alexander et al., 2013; Peasnell, 1982). In the case of the FASB, the approval by the
SEC of the accounting standards set by the FASB provides credibility to the
In the case of the IASB, there is no statutory body approving its accounting
standards. Because of its independence, the IASB’s political credibility is weak and a
conceptual framework is the best way to show that its accounting standards are
developed “in a fair, logical and highly professional manner” (Alexander et al.,
2013:8). According to Burlaud and Colasse (2011:23) the credibility of the IASB’s
accounting standards are founded on procedural and substantial legitimacies.
The search for procedural legitimacy and credibility involves the composition of the
IASB members and the members’ independence, competencies and transparency
regarding the due process to draw accounting standards. The due process followed
by the IASB to draw up financial statements intends to enhance transparency and to
ensure that parties concerned can be involved in the standard setting process and
have an opportunity to make their views clear (Burlaud & Colasse, 2011).
The due process is published on the IASB’s website in a document entitled “How we
consult: Encouraging broad participation in the development of IFRS” signed by Sir
David Tweedie (IASB, 2010c:3). See Figure 4.5: IASB Due process to develop
below for a schematic illustration of the due process. Apart from publishing the due
process and inviting interested parties to participate in the accounting setting
process, the IASB also uses advisory bodies to strengthen its procedural legitimacy
(IASB, 2012c).
140
Figure 4.5: IASB Due process to develop IFRS’s (Copied from the IASB document:
“How we consult: Encouraging broad participation in the development of IFRS”)
The IASB’s search for substantial legitimacy is linked to its use of the CFfFR (Burlaud
& Colasse, 2011), using technical teams to perform research on topics, having
outreach programmes, round tables and discussion forums as well as consultation
with the IFRS Advisory Council (IASB, 2010c).
c) Rational ground for a conceptual framework
The rational ground of drafting a conceptual framework according to Alexander et al.

(2013) is that a conceptual framework would assist in the internal consistency of
accounting standards based on the conceptual framework. In reality, conceptual
frameworks were created in respect to technical failures and shortcomings in the
standard setting process. Practical and institutional aspects often played a decisive
role and it comes down to a trade-off between politics and practical considerations
when the decision is made to draft a conceptual framework (Alexander et al., 2013).
The discussion above related to the practical and political category clearly states that
the accounting profession and legal authorities accept that a conceptual framework
contributes towards the acceptance of accounting standards, hence the need for a
conceptual framework. However, the discussion does not answer why the
phenomenon of a conceptual framework contributes towards the acceptance of
accounting standards. Regardless of the reasons why the accounting profession
drafted various conceptual frameworks since the first attempt by the AAA in 1936, the
actions taken by the FASB and the IASB confirm that there is a definite, more
theoretically motivated need for a globally acceptable conceptual framework in the
accounting profession.
141
4.3.3 Functional and Technical Reasons
The functional and technical needs category provides some answers as to why a
conceptual framework is needed, other than just to provide practical or political
legitimacy to a standard setting board. The functional and technical need relates to
dissatisfaction within the accounting community (standard setters, academics and
practitioners). According to Persson and Napier (2013) and Storey and Storey (1998)
the accounting community were dissatisfied with the piecemeal approach of setting
accounting standards in the late 1950’s without a frame of reference. Chambers
(1963:4) stated in 1963 that the rules and recommendations formulated until that
stage “exhibit indeterminacies, divergences and inconsistencies” and that some
“rigorous and extensive examination of accounting is necessary”. Stamp (1970;
1980) confirms that empirical research is necessary and that a conceptual framework
should be constructed for the establishment of accounting principles.
A direct result of the dissatisfaction of the piecemeal approach by the AICPA was the
establishment of the ARD to research the establishment of accounting postulates and
principles (Storey & Storey, 1998; Wolk et al., 2013). The result of the research
conducted by the ARD was the publication of ARS 1 (Moonitz, 1982) and ARS 3
(Sprouse & Moonitz, 1982) in 1961 and 1962 respectively. The purpose of ARS 1
was to provide basic accounting postulates and ARS 3 had to derive accounting
principles from these postulates. According to Persson and Napier (2013) the
reaction on ARS 1 and ARS 3 was negative as it was perceived to be too divergent
from the accounting practices at that time.
The need for postulates and principles as a basis of reference for setting accounting
standards was, amongst others, argued from a functional and technical perspective
by two respectable accounting thinkers during the 1960s, i.e. Maurice Moonitz (1963)
and Raymond J. Chambers (1963).
a) Technical and theoretical reasons by Moonitz
According to Moonitz (1963:46) postulates and principles are needed for the following
technical and theoretical reasons:
1. Postulates and principles provide accounting with a frame of reference for
solving issues in specific problems. The notion of a “consistent framework of
standards … as basis for judgement in constructing and interpreting financial
statements” was already mentioned by Vance (1944:231).
2. With the help from logic, postulates and principles help to explain why certain
procedures are acceptable and others are not.
3. Postulates and principles provide a “basis for extensions into new and untried
areas with assurance that extensions are sensible and in harmony with the larger
framework of accounting” (Moonitz, 1963:46).
4. Postulates and principles should narrow the areas of difference and
inconsistencies in practice.
5. Postulates and principles help to form a consistent whole.
6. Postulates and principles form part of the process of knowledge development in
accounting.
142
b) Epistemological perspective by Chambers
Chambers (1963) argues for the setting of accounting postulates and principles from
a more epistemological perspective. According to Chambers (1963:15) accounting
needs postulates because:
1. “Every deliberate action of reasonable men, … is based on some postulates and
reasonable men always want to be sure of their ground”;
2. To re-examine the foundation of one’s practices is common wisdom because
practices may become habitual and conventional trappings and loose its original
purpose. Gore and Zimmerman (2007:30) agree with Chambers when they state
that the revision of the conceptual framework “will involve the examination of the
foundations of financial reporting and, indeed, accounting itself.”
3. “A man’s postulates are the substance of his understanding of the world” and a
person’s practices loose merit from his fellows if his postulates are irrelevant of
inconsistent;
4. The examination of one’s postulates and principles are the “simplest and most
effective way” to improve and innovate practices;
5. “Man’s reasoned judgement is his only protection against self-delusion, cant and
deceit.”
The motivations from Moonitz (1963) and Chambers (1963) to search for accounting
postulates and principles were part of the motivation and drive in the 1960s to search
for accounting postulates and principles. Although the accounting profession did not
accept the postulates and principles presented in ARS 1 and ARS 3 as being useful
for financial reporting practices, the need for a basis of reference for setting
accounting standards was still alive.
The need for a conceptual framework is evident from the publication of numerous
conceptual frameworks or frames of reference from different constituencies from the
1960s onwards. Following is a list of frames of references as provided by Zeff (2013)
in his presentation to the ICAEW in December 2012.
From the U.S.:

• 1966 – ASOBAT by the AAA
• 1970 – Statement No. 4 by the APB
• 1973 – Trueblood Report by AICPA
• 1978 – Statement of Financial Accounting Concepts No. 1 by the FASB
From Great Britain:

• 1975 - The Corporate Report by the ASSC
• 1988 – Making Corporate Reports Valuable by the ICAS
• 1989 – Guidelines for Financial Reporting Standards by David Solomon
• 1999 – Statement of Principles for Financial Reporting by the ASB
From Canada:
• 1980 – Corporate Reporting: Its Future Evolution by Edward Stamp (1980)
• 1987 – Conceptual framework by the ASAC
• 1988 – Financial accounting concepts by the AcSC
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From Australia:
• 1990 – Statement of Accounting Concepts 2
After the various attempts listed above, the next step was to search for a conceptual
framework that was globally acceptable. With the globalisation of the economy, the
need for a globally acceptable basis for setting accounting standards was formalised
with the Norwalk Agreement (FASB and IASB, 2002).
Whittington (2008b:498) formulated the need for a globally acceptable conceptual

framework as follows: “Clearly, a globally acceptable conceptual framework is a
necessary pre-requisite for globally acceptable standards”. The implication of the
remark is that a conceptual framework should serve as a basis of agreed upon
shared knowledge to set accounting standards and is in agreement with reason No. 1
of Moonitz above.
The results of the search for a globally acceptable conceptual framework and on an
international level are (Zeff et al., 2013):
• 1989 – Framework by the IASC;
• 2010 – Objective of General Purpose Financial Reporting jointly by the IASB and
FASB.
4.3.4 Teleological Principle
Another important principle contributing to the need for a conceptual framework is

based on the teleological principle 74 fundamental to the Roman law system
(Alexander et al., 2013). According to Alexander et al. (2013) the relationship of the
CFfFR to the IFRS standards is in accordance with the teleological principle. The
Greek noun Τέλος is used in Koine Greek 75 in the following semantic domains (Louw,
Nida, Smith, & Munson, 1989):
• Semantic domain 67.66 - end, “time a point of time marking the end of a
duration” (Louw et al., 1989:638);
• Semantic domain 89.40 - result, “the result of an event or process, with special
focus upon the final state or condition; relationships” (Louw et al., 1989:782);
• Semantic domain 89.55 - purpose, “the purpose of an event or state, viewed in
terms of its result” (Louw et al., 1989:784);
• Semantic domain 78.47 - completely, “a degree of completeness, with the
possible implication of purpose or result” (Louw et al., 1989:692);
• Semantic domain 57.179 – tax, “payments customarily due a governmental
authority” (Louw et al., 1989:578).
The teleological principle referred to by Alexander et al. (2013) falls within the use of
Τέλος as indicated in semantic domain 89.55. The teleological relationship between
74
Teleology, (from Greek telos, “end” and logos, “reason”), explanation by reference to some purpose, end, goal or
function. Traditionally, it was also described as final causality, in contrast with explanation solely in terms of efficient
causes (the origin of a change or a state of rest in something) (Abdullah, Anderson, Anderson, Augustyn, Barton, et
al., 2015).
75
Also known as Hellenistic Greek or the Alexandrian dialect of Greek spoken during Hellenistic and Roman
antiquity.
144
the CFfFR and IFRS’s is that the CFfFR has the purpose of an event or state (the
provision of guidelines) is viewed in terms of its result (decision-useful information).
The purpose of the CFfFR is the provision of fundamental concepts and relationships
guiding the IFRS standards. According to the purpose and status of the CFfFR
(IASB, 2010a:A19) the “Conceptual Framework sets out the concepts that underlie
the preparation and presentation of financial statements for external users”. Another
implication of the teleological principle is that the CFfFR is considered as extraneous
material to the IFRS’s to interpret the IFRS’s whenever there is any ambiguity in the
IFRS’s (Alexander et al., 2013). According to the intended use of the CFfFR as
indicated in section 4.3.3b) as well as the purpose and status of the CFfFR, the
teleological relationship between the CFfFR and the IFRS’s is confirmed.
A consequence of the teleological relationship between the CFfFR and the IFRS’s is
that the CFfFR should be unambiguous (without unintended meanings) in order to
clarify ambiguities in the IFRS’s. If the CFfFR is to serve as extraneous material to
clarify ambiguities in the IFRS’s, then the CFfFR itself should be without ambiguities.
Apart from the teleological relationship between the CFfFR and the IFRS’s, the
following three functions of accounting theories also contributes towards motivating
the requirements for a global CFfFR.
4.3.5 Pedagogic, Information and Justification Functions
Watts and Zimmerman (1979) summarizes the demand of accounting theories in an

unregulated economy according into three functions i.e. a pedagogic function,
information function and a justification function.
The justification function is formulated by Watts and Zimmerman (1979:285) as

follows: “...accounting theory should be used to determine accounting practice and
standards”. It provides the theoretical framework and guidance to distinguish
between different accounting practices and interpretations (DePree, 1989). A
conceptual framework also serves as a body of shared knowledge bringing together
the results of research and experience at a specific time i.e. the information function.
A conceptual framework should also serve as basis for further research to enhance
the field of accounting i.e. the pedagogic function.
Considering the pedagogic function, information function and a justification function

of Watts and Zimmerman (1979) and the teleological principle described by
Alexander et al. (2013) the theoretical motivation by Moonitz (1963) and Chambers
(1963) for drafting postulates and principles in the 1960s are still valid for drafting a
conceptual framework. The demand for accounting theories for a conceptual
framework according to Watts and Zimmerman (1979) is not limited only to
accounting standard bodies providing support in setting accounting standards.
The practical and political needs for a conceptual framework to support the
legitimising efforts of standard setters are rooted in the theoretical, functional and
technical reasons for a conceptual framework. The implication is that the more
theoretically and technically sound a conceptual framework is, the easier the
legitimising process is.
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4.3.6 Need According to FASB
When the focus is shifted to the standard setting bodies themselves it is clear that
they value the need and purpose of a conceptual framework as more than only a
legitimising function.
The FASAC (2004:2) motivated the need for a conceptual framework as follows:
“The FASB developed its conceptual framework because it concluded
that its decisions should be soundly grounded in a unified set of concepts.
The board’s mission cannot be fulfilled without a conceptual underpinning
that provides direction and the means for deciding whether one solution
to a financial reporting issue is better than the others. A conceptual
framework provides the unity that is required, and with that, the direction
and means to help in making those decisions. Without a set of unified
concepts, standard setters are like a ship in a storm without an anchor.”
The FASAC (2004) noted the following reasons in 2004 to revisit the Framework:
• The current framework is out-dated. At the time when it was decided to revise
the FASB framework, it was already more than 20 years old. The dynamic
nature of accounting was illustrated in the stimulus/response pattern of
development of accounting in sections 2.2 to 2;
• Inconsistencies in the framework need to be eliminated;
• Some planned parts were not completed. There is a lack of guidance in these
areas;
o The result of the lack of guidance is:
 Board members use their own internal conceptual frameworks.
 Decisions are not durable and are susceptible to change with the
change of board members.
o The framework is becoming less helpful in providing guidance to board
members.
• The board’s decision to produce principles-based standards added to the need
to revisit the framework;
o Principles-based standards by nature should be based on a coherent and
cohesive set of concepts i.e. a conceptual framework that is;
 up to date,
 internally consistent and,
 comprehensive.
• The SEC supports principles-based standards that are drafted “in accordance
with the objectives set by an overarching, coherent framework meant to unify
the accounting system as a whole” (FASAC, 2004:7).
The purpose of a conceptual framework for financial reporting as formulated in the

FASB conceptual framework and the IASB CFfFR provide clarity on some
146
4.4 The Purpose of a Conceptual Framework for Financial Reporting
4.4.1 The Purpose According to the FASB Conceptual Framework
The purpose of the FASB conceptual framework is to formulate the objectives and
fundamental concepts forming the basis for the development of financial accounting
standards (FASAC, 2004; FASB, 2010a). Other concepts flow from the fundamental
concepts and refer to them (FASB, 2010a). In order to achieve the purpose of the
conceptual framework forming the basis for the development of financial accounting
standards, the fundamental concepts formulated in the conceptual framework should
adhere to at least the following:
• the fundamental concepts should be clearly formulated and inherently consistent
(FASAC, 2004);
• the level of abstraction should cover all known transactions, events and
conditions i.e. it should be complete (FASB, 2010a);
• selection criteria should be formulated (qualitative criteria) unambiguously
(FASAC, 2004; FASB, 2010a);
• the fundamental concepts should enable the selection of transactions, events
and conditions to be reported (FASB, 2010a);
• the fundamental concepts should enable the recognition and measurement of
the selected transaction (FASB, 2010a);
• the fundamental concepts should guide the summary and communication of
selected transactions (FASB, 2010a).
According to the FASB the purpose of a conceptual framework is to provide

consistent guidance to standard setters and provide “structure and direction to
financial accounting and reporting to facilitate the provision of unbiased financial and
related information” (FASB, 2010a:iv).
4.4.2 The Purpose of the CFfFR According to IASB
The purpose of the CFfFR refers to six users and seven uses of the CFfFR (IASB,
2010a). The intended users are the Board of the IASB, national standard setters,
preparers of financial statements, auditors, users of financial statements and any
other interested parties. 76 The IASB had a very broad audience in mind as the
intended users of the CFfFR, contributing to the substantial legitimacy of the
According to the CFfFR, it is intended to be used:

a) “to assist the board in the development of future IFRS’s and in its review of
existing IFRS’s;
76
During the revision process of the CFfFR the staff of the IASB recommends that the purpose of the CFfFR should
identify the concepts that:
“(a) assist the IASB to develop and revise ’FRS's;
(b) assist preparers to develop accounting policies when no IFRS applies to a particular transaction, event or
condition.
(c) assist all parties to understand and interpret IFRS's (IASB, 2014b).
147
b) to assist the board in promoting harmonisation of regulations, accounting
standards and procedures relating to the presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by IFRS’s;
c) to assist national standard-setting bodies in developing national standards;
d) to assist preparers of financial statements in applying IFRS’s and in dealing with
topics that have yet to form the subject of an IFRS;
e) to assist auditors in forming an opinion on whether financial statements comply
with IFRS’s;
f) to assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRS’s; and
g) to provide those who are interested in the work of the IASB with information
about its approach to the formulation of IFRS’s” (IASB, 2010a:A19).
As with the users, the intended use of the CFfFR is also comprehensive. The
intended use of the CFfFR in setting new accounting standards can be summarised
as a “meta-accounting standard providing theoretical grounds in order to make newly
created accounting standards coherent between one another” (Alexander et al.,
2013:9). According to Burlaud and Colasse (2011:28) by using the CFfFR as a
“theoretical charter” the IASB “intended to give its standards a quasi-scientific
content”. The use of the CFfFR as a theoretical charter of a meta-accounting
standard 77 is important when the requirements of a conceptual framework that serves
as a theoretical charter or meta-accounting standard, are considered.
The IASB is in agreement with the FASB that the purpose of the CFfFR is to define
“the concepts that underlie the preparation and presentation of financial statements”
(IASB, 2014a:1). The CFfFR is perceived as a “practical tool that assists the IASB
when developing and revising IFRS’s” (IASB, 2014a:1). The main purpose of a
conceptual framework stated by both the FASB and the IASB is to assist or provide
guidance to the standard setting body with the development or revising accounting
standards.
The importance of a conceptual framework resides in its role to provide structure to

the standard setting process and to provide fundamental concepts and a common set
of terms and premises that standards could be based upon (Gore & Zimmerman,
2007). The purpose of a conceptual framework is to ensure that the standards are
“consistent with a unified theory of accounting” (Gore & Zimmerman, 2007:30).
4.5 The Objective of a Conceptual Framework in Accounting
Although the objective of the CFfFR is used in this study as the main competency
question (section 7.2.1) of the formal domain ontology of the CFfFR, different
objective approaches were identified in the literature. The objective of the CFfFR is
already included in the title of the CFfFR. It is a conceptual framework for “Financial
77
A meta-accounting standard is on a higher level of abstraction than an accounting standard providing broader
principles and postulates than what is presented in the accounting standards.
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Reporting” (IASB, 2010a). The title commits the CFfFR to deal only with financial
information included in financial statements of reporting entities. According to the
IASB’s website for the conceptual framework project (IASB, 2014a:1) “the objective
of the Conceptual Framework project is to improve financial reporting by providing
the IASB with a complete and updated set of concepts to use when it develops or
revises standards”.
It is important to note that the CFfFR does not intend to be a theoretical base for
accounting in general. It also does not propose to be a theoretical base to provide
information “for monitoring and rewarding managers’ performance” (Macve,
2010:303). The different objective approaches (section 4.5.1) provide some clarity on
the objective adopted in the CFfFR.
4.5.1 Objective Approaches
According Alexander et al. (2013:14) the objectives of conceptual frameworks can be

considered from “the classical approach, the decision-usefulness approach and the
information economics based approach.”
a) The information economics based approach
Under the information economics based approach a conceptual framework “is

supposed to enable accounting information to be competitive” (Alexander et al.,
2013:15) and is viewed as a commodity like any other in the economy.
b) The classical approach
The objectives of the classical approach are the description of existing practice,
prescription of future practice and the definition of terms (Alexander et al., 2013). The
description of existing practice relates to the inductive research approach to construct
a theory of accounting and the prescription of future practice approach relates to the
deductive research approach to construct a theory of accounting (Riahi-Belkaoui,
2004).
The joint conceptual framework between the FASB and IASB follows a combination
of the classical and decision-usefulness approaches. The classical approach is
followed by considering inputs from the accounting community regarding existing
practices during the process of setting or revising the conceptual framework for
incorporation in the final document (Figure 4.5). The conceptual framework team
members (IASB staff) conduct research on proposals received in comment letters by
the accounting community and formulate recommendations to the board for
consideration. The implication of the process is that the final document based on the
existing practices (inductive approach) and research will provide definitions and
guidance for future practice (deductive approach).
Although Alexander et al. (2013) state that the description of existing practice and the
prescription of future practice cannot not be served together, both practices were
used during the historical evolutionary development process of the current
conceptual frameworks. Taking the documents and authors that had an influence on
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the historical development of the CFfFR into consideration, the result is a hybrid
(Riahi-Belkaoui, 2004) between the deductive and inductive approaches to build the
CFfFR.
The current process of revising the CFfFR allows a hybrid approach (deductive and
inductive) during the different Phases of compiling the document resulting in a
compromise between the two approaches (Figure 4.5). 78
c) The decision-usefulness approach
The decision-usefulness approach is evident from the CFfFR when it states that “the
objective of general purpose reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other
creditors” (IASB, 2010a:OB2). The criteria to be used when deciding when
information is useful for users are the qualitative characteristics provided in Chapter 3
of the CFfFR (IASB, 2010a). 79 According to Mumford (1993:27), Stamp advocated
that “it was necessary to establish a single, dominant theoretical paradigm to use in
setting standards”. Based on the objective of the joint conceptual framework (IASB,
2010a), it can be concluded that decision-usefulness has been established as the
dominant, theoretical paradigm in setting accounting standards by both the FASB
and the IASB (Whittington, 2008a). Lee (2015) discusses decision-usefulness as
basis for financial reporting and the dominance of research on decision-usefulness
from a capital market perspective. 80
In section 4.6, the requirements for a theoretical and technical sound conceptual
framework to comply with the needs and purpose, definition, and objective and theory
of a conceptual framework for financial accounting reporting stated above, is
provided.
78
The FASAC (2004) also expressed preference for a hybrid approach to revisit their conceptual framework.
79
See Mumford (1993:20–26) for a discussion on qualitative criteria as a basis to determine decision-usefulness of
financial information.
80
This study is not concerned with the benefits or limitations of the decision-useful objective of the CFfFR. For the
purpose of this study, it is sufficient to indicate that decision-usefulness is established as the dominant theoretical
paradigm for financial reporting.
150
In order to understand the characteristics and requirements of a Global CFfFR the

system is illustrated in Figure 4.6, starting with the economic and other activities
(instances) and ending in the financial report. Within a reporting entity there are
numerous activities (all activities) of which not all are reported in a financial report.
Some of these activities are selected to be reported (indicated as reportable
activities). The selection process are determined by asking the questions what should
be reported, when should it be reported and how should it be reported? The manner
in which the selections are made are decided on by applying financial accounting
standards on the economic activities. In Figure 4.6, IAS 16 and IAS 2 are used as
examples to indicate how economic activities are selected by way of financial
accounting standards. The fundamental principles regarding the WHAT, WHEN and
HOW questions guide financial accounting standards are contained in the
Conceptual Framework for Financial Reporting (CFfFR).
Figure 4.6: Requirements of a conceptual framework
151
4.6 Characteristics and Requirements of a Global CFfFR
The requirements and characteristics of a global CFfFR are derived from the
discussions on the needs (section 4.3,), purposes (section 4.4) and the objective
(section 4.5).
The requirements and characteristics can broadly be categorised into two categories.
The first category comprises of requirements related to the characteristics and
perceptions regarding the standard setting bodies, its processes and the products.
The second category comprises of requirements related to the content of the CFfFR
document. The two categories are related in that perceptions regarding the one
category influence perceptions regarding the other category. Due to the mutual
influence of the two categories on each other, an improvement related to the
requirements in Category 2 may also cause an improvement in perceptions regarding
Category 1. Although the requirements are divided in two categories, some of the
requirements in Category 2 flow from the requirements listed under Category 1. This
study is focused on testing and evaluating requirements identified under Category 2.
The requirements of a CFfFR are illustrated in Figure 4.6.
4.6.1 Category 1: Characteristics and Perceptions
a) Credibility and Legitimacy
The purpose and need of the conceptual framework is to provide credibility and
legitimacy to standard setters (Alexander et al., 2013; Hines, 1989). The functional
and technical reasons for a conceptual framework provide the perception of
credibility. Legitimacy is founded on procedural and substantial legitimacies (Burlaud
& Colasse, 2011).
The IASB mainly obtains procedural legitimacy through its due process,
representation on the board and technical staff. The IASB’s due process is
representative, inclusive and uses a hybrid method of developing and revising
accounting standards and the CFfFR (Figure 4.5). The hybrid method of building a
conceptual framework (inductive and deductive) (FASAC, 2004; Riahi-Belkaoui,
2004) (Figure 4.6) includes both experience from practice and research from experts
in the field and contributes to the substantial legitimacy of the IASB. The research
component demonstrates that the IASB develops and revises accounting standards
and the conceptual framework in a fair, logical and professional manner (Alexander
et al., 2013; Peasnell, 1982). During revision of the CFfFR the foundations of the
fundamental concepts are re-examined using new knowledge and evidence
(Chambers, 1996; IASB, 2013a).
b) CFfFR as a body of shared knowledge
According to the information demand, a conceptual framework serves as a body of

shared knowledge (Watts & Zimmerman, 1979) and as basis for agreed upon
knowledge at a specific time (Moonitz, 1963; Whittington, 2008b). When the CFfFR is
used to serve as basis for further research and training it adheres to the pedagogic
demand (Watts & Zimmerman, 1979). The CFfFR represents, in a condensed form, a
152
culmination of shared knowledge regarding financial reporting at a specific time in
history (Figure 4.6). The body of shared knowledge as characteristic of the CFfFR
provides the vocabulary for the CFfFR ontology motivates and justifies the use of the
CFfFR as a basis for the CFfFR ontology.
c) Objective of the CFfFR: Improve the Financial Report
The objective of the CFfFR “is to improve financial reporting by providing the IASB
with a complete and updated set of concepts to use when it develops or revises
standards” (IASB, 2014a:1). The set of fundamental concepts provide guidance to
select and disclose transactions and other events and conditions (economic
activities) about a reporting entity that is useful to users of financial reports in making
investment and other decisions (FASB, 2010a; Whittington, 2008a). The objective of
the CFfFR as stated above requires that the CFfFR should provide the fundamental
concepts on an abstract level to ensure that decision-useful information is provided to
the users of financial reports (Figure 4.6). As it is required that the CFfFR should
provide fundamental concepts regarding financial reporting, it justifies the use of the
CFfFR as basis for the ontology developed in this study.
d) Agreed paradigm: Decision-useful Financial Information
The objective of the CFfFR is in accordance with decision-usefulness (Figure 4.6) as

the dominant and established theoretical paradigm in setting accounting standards
(FASB, 2010a; IASB, 2010a). The CFfFR serves as a meta-accounting standard to
provide guidance to board members of standard setting bodies (Alexander et al.,
2013; Whittington, 2008a). Decision-usefulness as the dominant and established
theoretical paradigm in standard setting was determined to be the main competency
question and objective of the CFfFR ontology (section 7.2.1, Figure 4.6).
4.6.2 Category 2: Content Requirements of a Global CFfFR
Figure 4.6 provides an illustration on how the characteristics and requirements for a
Global CFfFR functions within the financial reporting domain to ensure that the
objective of providing decision-useful financial information to the users of financial
reports are achieved. The content of financial reports are determined by asking what
economic activities should be reported, when should the activities be reported and
how these activities should be reported? The CFfFR should contain the fundamental
concepts regarding the what, when and how of economic activities. In order for the
CFfFR to be globally acceptable the what, when and how content should be
complete and comprehensive, internally coherent, clear and unambiguous
(without unintended meanings), and logically consistent.
a) Content Requirements of a global CFfFR: Structure of the CFfFR: What?,

When?, and How?
Figure 4.6 demonstrates how the CFfFR contributes towards decision-usefulness as

the objective of financial reporting, thus enhancing the requirements of a global
CFfFR. The current content of the CFfFR is organised according to a decision matrix
based on three basic questions (Deegan, 2014). The three questions are based on
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the FASB conceptual framework, Statement of Financial Accounting Concepts No.
8. 81 According to the FASB (2010a:iv) the concepts forming the basis for the
development of financial accounting and reporting guidance are the fundamental
“concepts that guide the selection of transactions and other events and conditions to
be accounted for; their recognition and measurement; and the means of summarising
and communicating them to interested parties”.
The three questions of the decision matrix are what, when and how:
1. What? – The fundamental “concepts that guide the selection of transactions and
other events and conditions to be accounted for”. The first question is what
transactions and other events and conditions (economic activities) should be
selected to be reported? To be able to select the economic activities the
reporting entity should firstly be identified. The concept of capital and capital
maintenance should be adopted by the reporting entity. The elements of the
financial statements should be defined. The definitions should be at such a level
of abstraction that it can function inductively and deductively regarding all
economic activities. It should be able to test all economic activities against a
definition and the definitions should provide enough guidance to set standards
that cover all economic activities.
2. When? – “Their recognition and measurement”. The second question is when

should the economic activities be reported? The second question is answered by
ensuring that the reporting entity adheres to the underlying assumption of going
concern. Once the economic activities have been identified by answering the
“what” question, the selected transactions should adhere to the qualitative
characteristics of useful financial information and the recognition criteria. The
economic activities to be reported are identified by answering the when question.
3. How? – “The means of summarizing and communicating them to interested

parties.” The third question is how should the economic activities be reported to
be useful to the identified users of the financial statements? Guidance regarding
measurement and valuation of the economic activities should be provided.
Criteria regarding the disclosure of the economic activities should guide the
information to be reported. The last fundamental concept to be reported is the
cash flow effect of the economic activities.
The schematic presentation uses the asset element to illustrate the process of
abstraction according to the hybrid methodology of research, from the economic
activities in the reporting entity to the definition of asset in the CFfFR. The importance
of the CFfFR to comply with the requirements is that it should comply with the
requirements in order to fulfil the needs and purpose, objective and be true to the
definition of a global CFfFR.
81
As the CFfFR is structurally based on the Statement of Financial Accounting Concepts by the FASB, the same
structure applies to the CFfFR.
154
b) Content Requirements of a global CFfFR: Complete and Comprehensive
A global CFfFR should be complete to cover all possible economic activities to be

reported (Clark, 2008; Whittington, 2008a). If it is accepted that the CFfFR should
provide the fundamental concepts of the shared knowledge regarding decision-useful
information, then the content of a global CFfFR should cover all possible economic
activities in the fundamental concepts. The notion of completeness is confirmed in
Chapter 5 where the role of the CFfFR is determined to be that of a meta-metamodel
within the financial reporting domain (Figure 5.12). Completeness is described as
“the economic phenomena that are relevant to investors, creditors, and other users
making investment, credit and similar decisions” (FASAC, 2004:8). Completeness is
directly related to the objective of the CFfFR as the information that is useful to the
primary users of the CFfFR (Whittington, 2008a).
The level of abstraction in the CFfFR should be sufficient to provide a comprehensive

summary of the fundamental concepts from which other concepts can be derived.
The fundamental concepts should be able to serve as a basis to draft and revise
principle-based accounting standards (FASAC, 2004; IASB, 2010a). The importance
of comprehensiveness for the purpose of abstraction is emphasised by
the conform_to relationship between models in Chapter 5 (Figure 5.12).
c) Content Requirements of a global CFfFR: Internally Coherent
A global CFfFR should be internally coherent to provide consistent guidance to

standard setters (Clark, 2008; Whittington, 2008a). The function of the CFfFR to
provide guidance to standard setters emphasises the requirement of coherence.
Clark (2008) emphasises the importance of coherence and that inconsistencies exist
in the FASB and IASB conceptual frameworks. Clark (2008:60) states that “if an
accounting framework is to set out the concepts and principles that underlie the
preparation and presentation of financial statements designed to meet the needs of
the user of those statements, the concepts and principles contained within it need to
be sound, comprehensive and internally coherent. When they decided to revise the
FASB’s framework, the SEC staff stated that in order to set principles-based
standards, each standard should be “drafted in accordance with the objectives set by
an overarching, coherent conceptual framework meant to unify the accounting
system as a whole” (FASAC, 2004:7). The two requirements by the SEC staff are
completeness (overarching and accounting system as a whole) and internal
coherency.
d) Content Requirements of a global CFfFR: Clear and Unambiguous
The fundamental concepts in a global CFfFR should be formulated clearly and

unambiguously with no unintended meanings to provide guidance in the selection
between alternative interpretations of financial standards and to eliminate conflicting
interpretations of the fundamental concepts (FASAC, 2004; FASB, 2010a). This
requirement is rooted in the teleological principle fundamental to the Roman law
system (section 4.3.4) (Alexander et al., 2013). According to the teleological principle,
the CFfFR is the basis to interpret IFRS’s when there are ambiguities in the IFRS’s
155
and provides a theoretical framework to distinguish between different accounting
practices and interpretations (DePree, 1989). The CFfFR serves as a frame of
reference to narrow down areas of differences and eliminate indeterminacies,
divergences and inconsistencies in accounting standards (Chambers, 1963). In order
for a global CFfFR to fulfil this role, the content of the global CFfFR should be
formulated clearly and unambiguously to eliminate misunderstandings and divergent
interpretations.
e) Content Requirements of a global CFfFR: Logically Consistent
A global CFfFR should be logically consistent to achieve scientific credibility in the

accounting community. The importance of consistency of accounting standards is
emphasised by Wüstemann and Wüstemann (2010) and Clark (2008). According to
Pike and Chui (2012:78) the FASB noted that “certain aspects of the conceptual
framework are incomplete, internally inconsistent, and ambiguous”. This means that
the FASB requires a conceptual framework that is complete, internally consistent and
unambiguous. The FASAC (2004) stated that a common framework between the
FASB and the IASB should be internally consistent and complete in order to help the
board to issue principles-based standards. As the IASB and the FASB jointly decided
to initially revise their respective conceptual frameworks, it can be assumed that the
IASB also values the requirements of completeness, logical consistency and
unambiguity of the CFfFR.
4.7 A Proposed Definition for a Global CFfFR
The requirements for a global CFfFR identified in section 4.6 was used as a guide in
the proposed definition for a Global CFfFR. Based on the joint conceptual framework
project between the IASB and the FASB, the FASB’s Statement of Financial
Accounting Concepts No. 8 (FASB, 2010a) is used as source to obtain a definition for
a conceptual framework from both the FASB and the IASB. 82
Although the FASB does not explicitly specify a definition, the following serves as a
working definition for a conceptual framework: “The Conceptual Framework is a
coherent system of interrelated objectives and fundamental concepts that prescribes
the nature, function, and limits of financial accounting and reporting” (FASB,
2010a:iv). The wording of the definition by the FASB (2010a) was mainly copied from
the FASB’s discussion memorandum on the conceptual framework where it was
stated that a conceptual framework is a constitution, a coherent system of
interrelated objectives and fundamentals. A conceptual framework with these
characteristics can lead to consistent standards that prescribes the nature, function,
and limits of financial accounting and financial statements (FASB, 2010b).
82
As this study is concerned with the Conceptual Framework published by the IASB (2010a), the IASB’s definition of
a conceptual framework would be the logical starting point. However, the IABS’s web page does not provide a
definition of a conceptual framework and neither does it provide a definition of a conceptual framework in the CFfFR
(IASB, 2010a).
156
The most important difference between the two definitions of a conceptual framework
provided by the FASB is the omission of “constitution” in the 2010a definition. The
omission is an indication that the FASB moved away from the idea that the
conceptual framework serves as a constitution. A conceptual framework is viewed by
some scholars as a constitution to guide standard setters with setting accounting
standards (DePree, 1989; Gore & Zimmerman, 2007). Chambers (1996:119) also
mentions that the conceptual framework in accounting is “a constitution prescribing
the nature of accounting and its products”. The function of a constitution is that it
serves as the highest law, that all other laws are subordinate to the constitution and
that they should be in agreement with the constitution (Chambers, 1996).
If the CFfFR is defined as a constitution, the implication is that all accounting

standards are subordinate to the CFfFR and that accounting standards may not
deviate from the principles provided in the CFfFR. The IASB (2010a:A25) however,
states that “this Conceptual Framework is not an IFRS and hence does not define
standards for any particular measurement or disclosure issue. Nothing in this
Conceptual Framework overrides any specific IFRS”. It is evident from this statement
that the CFfFR of the IASB cannot function as a constitution for IFRS’s. This is
consistent with the omission of the word “constitution” in the FASB 2010a joint
conceptual framework. The FASB (2010a:v) declares that “Concepts Statements are
not part of the FASB Accounting Standards Codification” and “that in certain respects
current generally accepted accounting principles may be inconsistent with those that
may derive from the objectives and fundamental concepts set forth in Concepts
Statements”. The FASB conceptual framework cannot be a constitution for U.S.
GAAP. It is concluded that, based on the functioning of the FASB and IASB
conceptual frameworks, the FASB and the IASB do not want their conceptual
frameworks to function as a constitution. Although the IASB does not intend the
CFfFR to function as a constitution, the role of the CFfFR as a meta-metamodel is
argued in Chapters 5 and 6.
The two other changes are the addition of “concepts” and the omission of “can lead
to consistent standards” in the CFfFR. The addition of “concepts” emphasises that
the conceptual framework is dealing with basic and fundamental concepts providing
an indication of a level of abstraction. The notion of abstraction plays an important
role in establishing the role of the CFfFR as a meta-metamodel in Chapters 5 and 6.
“Can lead to consistent standards” is replaced with “and that is expected to lead to
consistent guidance” providing the benefit of the conceptual framework to the
standard setting bodies by providing guidance. The benefit is focused on guidance to
the board in the CFfFR and does not claim that it could lead to consistent standards
as in the 1976 document. The expectation of the benefit regarding the accounting
standards is lowered in the CFfFR. Some other characteristics and requirements of a
conceptual framework for accounting are explored in other accounting literature.
Chambers (1996:124) agrees with Vatter (1947:1) that every science needs some
conceptual structure i.e. “a pattern of ideas brought together to form a consistent
whole or a frame of reference to which is related the operational output of that field”.
A conceptual structure implies a certain degree of abstraction from the reality.
157
Chambers (1996) borrowed from the natural sciences to define a conceptual
framework with reference to Bohr (1961:67) who defines a conceptual framework as
“the unambiguous logical representation of the relationships between experiences”.
Chambers (1996:124) defines a conceptual framework as “a body of propositions
describing ‘concepts’, ideas entertained about matters open to observation or
experience, and supposed or confirmed relationships between those matters.”
The requirements for a conceptual framework derived from the definitions and other
literature explored above are that a conceptual framework should be:
• a coherent and consistent representation (Chambers, 1996; Whittington, 2008a)

of
• fundamental concepts (FASB, 2010a) and
• the relationships between the concepts (Chambers, 1996)
• prescribing the nature, function, and limits of financial reporting (FASB, 2010a)
• in an unambiguous logical manner (Bohr, 1961).
Based on the needs and purpose of a conceptual framework for accounting, the
definitions obtained from literature and the working definition provided by the FASB,
the following is proposed as a possible definition for a conceptual framework that
complies with the needs and purpose of the CFfFR.
A conceptual framework for financial reporting is an internally coherent and logically

consistent representation of fundamental concepts that unambiguously prescribes
the nature, function and limits of financial reporting.
4.8 Evaluation of the CFfFR Against the Requirements of a Global CFfFR
The requirements for a global CFfFR represent the construct artefact as output of the
Development Step of DSR Cycle 1. The requirements as construct artefact functions
as the first evaluation step in the FEDS Human Risk & Effectiveness verification
strategy. By testing the CFfFR against the requirements and definition of a Global
CFfFR it was determined if the artefact could serve as discussion vocabulary to
contribute towards improving the CFfFR. Figure 4.7 provides a graphic illustration of
the function of the requirements and definitions in the FEDS verification strategy.
158
One objective of this study is to determine if and how the CFfFR complies with the
requirements as indicated in section 4.6. Section 4.8 is the Evaluation Step of DSR
Cycle 1 (Figure 4.2). In this study, the position is taken that the CFfFR does not
comply with the requirements and definitions of a global CFfFR as determined in
sections 4.6 and 4.7. Section 4.8 provides an overview of how the CFfFR aligns with
the requirements identified.
4.8.1 Complete and Comprehensive
The CFfFR is not complete as the chapters regarding the reporting entity is still
outstanding (IASB, 2010a) and provides little guidance on measurement,
presentation, and disclosure criteria (IASB, 2013a).
According to the IASB the CFfFR is outdated and should be updated to reflect the
current thinking of the IASB (IASB, 2013a). The IASB (2013a:5) acknowledges that
“guidance in some areas” of the CFfFR is unclear and that the “existing definitions of
assets and liabilities could be improved”.
4.8.2 Internally Coherent
The FASAC (2004:6) 83 acknowledged that “certain aspects of the framework are
inconsistent with others, and those inconsistencies need to be eliminated”. The
framework was also not complete and was “becoming less helpful in providing
guidance to the board for making standard-setting decisions”. The coherence of the
CFfFR are tested and reported on during the building of the formal domain ontology
of the CFfFR.
83
As the IASB and the FASB initially jointly decided to update their respective conceptual frameworks and the CFfFR
is based on the FASB conceptual framework it is assumed that both the FASB and IASB accept that there are
inconsistencies in their respective conceptual frameworks.
159
Neither the lASB's CFfFR nor the FASB’s existing framework meet these criteria.
Hoffmann and Detzen (2013) and Storey and Storey (1998) confirms Clark’s
statement that the IASB’s and the FASB’s frameworks are not internally coherent.
The result of the frameworks not being coherent is that some standards are
inconsistent with the guidelines offered by the framework (Booth, 2003; Nobes,
2005).
4.8.3 Clear and Unambiguous Formulation
As one of the requirements of a formal domain ontology is that the meaning should
be clear and exact. At this stage of the study it expected that there could be
unintended meanings (ambiguities) in the CFfFR. During the building process of the
formal domain ontology (DSR Cycle 4) the CFfFR was tested for unintended
meanings. The results indicating unintended meanings in the CFfFR are documented
in Chapter 7.
4.8.4 Logically Consistent
Although it is evident from the IASB, the FASB and other authors that the frameworks
are not internally coherent, it could not be confirmed from the literature if the
frameworks are logically consistent. The reason might be that it is not easy to test for
or prove logical consistency. Logic is a highly specified field in philosophy and
mathematics that is not accessible to the average accountant and user of the CFfFR.
One of the advantages of using ontology technologies to build a formal domain

ontology is that logical consistency can be tested. Reasoners are used to test the
logical consistency of concepts and relationships.
Once the requirements and definition for a global CFfFR was identified and it was
indicated that the CFfFR does not comply with these requirements, it is suggested
that the role of global CFfFR is determined. The identification of the role of the CFfFR
within the financial reporting domain is a refinement of the requirements and
contributes to determine the applicability of formal domain ontologies on the CFfFR.
160
4.9 Conclusion
During the literature review in Chapter 2 the overall awareness of a global CFfFR
was identified. It was then suggested that the main research question may be
answered by developing a method to build a CFfFR that adheres to the requirements
of a global CFfFR. The outcome of the overall tentative design of the Suggestion
Step was to develop a formal domain ontology of the CFfFR. In order to answer the
main research question, three sub-research questions were formulated. The three
sub-research questions were answered during the four sub-DSR Cycles.
The first cycle of the DSR strategy was to identify the requirements that a globally
acceptable CFfFR should adhere to. During DSR Cycle 1, a systematic review was
performed to partially answer the first sub-research question. In section 4.6, the
Evaluation Step of DSR Cycle 1, it was established that the CFfFR does not comply
with the requirements of a globally acceptable CFfFR.
In order to determine the importance and status of the CFfFR it was suggested at the
end of DSR Cycle 1 that the role of a global CFfFR within financial reporting should
be determined. This led to the awareness to be determined in DSR Cycle 2 and the
suggestion was to determine the role of a global CFfFR from a model perspective.
With the execution of the Development Step of DSR Cycle 2 the first sub-research
question was answered.
161
CHAPTER 5
TABLE OF CONTENT
5 THE ROLE OF A GLOBAL CFfFR AS A MODEL ................................................... 163

5.1 Introduction ............................................................................................................. 164
5.2 Models in Philosophy of Science ............................................................................ 166
5.2.1 Models as Isolations by Idealisation ........................................................................ 168
5.2.2 Models as Representations by Surrogate Systems ................................................. 169
5.2.3 Models as Truth Containers .................................................................................... 173
5.2.4 The Model Formula Applied to the CFfFR............................................................... 174
5.3 Models in Computing .............................................................................................. 176
5.3.1 Definitions and Characteristics of Models in Computing ......................................... 177
5.3.2 The Value of Models in Computing ......................................................................... 179
5.3.3 Computing Models Applied to Accounting............................................................... 180
5.3.4 Financial Reporting as Type and Token Models ..................................................... 181
5.3.5 Metamodels and Meta-metamodels Applied to the CFfFR ...................................... 185
Chapter 5................................................................................................................ 191
5.6 Conclusion .............................................................................................................. 192
162
5 THE ROLE OF A GLOBAL CFfFR AS A MODEL
163
5.1 Introduction
Chapter 5 is an interdisciplinary study adding to accounting some theoretical

background regarding the value and use of models from philosophy of science and
computing. 84 The role of a global CFfFR from a model perspective was determined
from a philosophy of science and computing perspective. In Chapter 4 the first sub-
research question (what is the role, definition and requirements of a global CFfFR
consisting of fundamental concepts, which could function as a sound foundation for
internationally converged?) was partially answered. An overview of the structure of
Chapter 5 is provided in Figure 5.3.
According to the DSR strategy (Figure 3.3 and Figure 5.2), the evaluation of the
requirements for a global CFfFR resulted in the awareness that the role of a global
84
Computing is used to refer to both Computer Sciences and Information Systems.
164
CFfFR within financial reporting should be investigated in order to determine the
value of a global CFfFR in the financial reporting domain. Based on the Awareness
Step it was suggested in Chapter 5 that the role of the CFfFR should be investigated
from a model perspective. The Suggestion Step entailed the investigation of the
functioning and role of models within other disciplines (i.e. philosophy of science and
computing) as no evidence could be obtained to explain the role of the CFfFR as a
model within financial reporting.
The investigation of the role of models from philosophy of science and computing
provides the theoretical motivation required by the second sub-research question
(how can model building assist to construct a global CFfFR consisting of fundamental
concepts, which could function as a sound foundation for accounting standards that
are principle-based, internally consistent and internationally converged?).
The suggestion to develop the role of the CFfFR within financial reporting from a
modeling perspective was taken from a publication by Ryan et al. (2002). According
to Ryan et al. (2002) the dominant methodology of research in the financial
disciplines (in 2002) was based upon models rather than theories. “It appears that the
notion of the ‘model’ as an abstraction of reality is a more meaningful concept for
practicing researchers to handle than the notion of theory” (Ryan et al., 2002:28).
An interdisciplinary study was used as research technique to determine the role of the
CFfFR and was adopted during the Development Step of DSR Cycle 2. The
interdisciplinary research involved the following steps:
1. Identify the knowledge need in the primary discipline.
2. Identify the potential secondary discipline(s) that could contribute to provide and
answer to the knowledge need in the primary discipline.
3. Identify complementary knowledge between the different disciplines.
4. Apply the complementary knowledge obtained from the secondary discipline(s) to
the knowledge need identified in the primary discipline.
5. Report on the findings and contribution of knowledge in the primary discipline.
Step 1 of the interdisciplinary study forms part of the Suggestion Step of DSR Cycle
2. In Step 2, the theory and functioning of models philosophy of science and
computing were identified as the possible secondary disciplines that could contribute
knowledge towards the primary discipline. During Step 3, it was identified that models
are used as representational tools (Grüne-Yanoff & Mäki, 2014). In this study, during
Step 4 and Step 5, techniques are adopted from philosophy of science and
computing to assist in determining the role and function of the CFfFR as a model
within the financial reporting domain.
During the Development Step of DSR Cycle 2 (sections 5.2, 5.3 and 5.4), the use and
value of models as truth containers as described by Mäki (2009) are applied to the
CFfFR to refine the role and requirements of the CFfFR (section 5.2) as described in
Chapter 4. The first output from the Development Step is a construct artefact. The
idea of an ideal CFfFR (sections 5.2.3 and 5.2.4) as construct artefact provides the
vocabulary and conceptualisation regarding the role of the CFfFR ontology bearing
truth regarding the CFfFR.
165
The use of models in computing is described in section 5.3 and provides the second
output, a model artefact, of the Development Step of DSR Cycle 2. The use of
models in computing was applied to the financial reporting domain in section 5.3.4. In
section 5.3.5, the role of the CFfFR as a meta-metamodel within financial reporting is
described.
Based on the discussion in sections 5.2 and 5.3, the third artefact of DSR Cycle 2 (a
construct artefact), the idealised assumptions regarding an ideal truth bearing CFfFR
model were developed to determine the ideal role of the CFfFR (section 5.4).
Chapters 2 and 4 were revisited in the light of the adoption of the ideal truth-bearing
model of Mäki (2011) and, based on the work done in Chapters 2 and 4, additional
idealised assumptions were identified and formulated and reported on in section 5.4.
The three artefacts developed during DSR Cycle 2 provided the knowledge to move
to DSR Cycle 3 and determine the applicability of ontology (from philosophy) and
ontology technologies (from computing) are applicable to the ideal and global CFfFR.
The three artefacts developed during DSR Cycle 2 answers SRQ 1 and SRQ 2
(Table 3.6). These three artefacts, the idea of an ideal CFfFR, the role of a global
CFfFR as a meta-metamodel and the ideal assumptions are evaluation Points 2, 3
and 4 on the Human Risk & Effectiveness evaluation strategy (Figure 5.13).
5.2 Models in Philosophy of Science
The value and use of models are not foreign to accounting research. Mathematical
models are highly valued in financial accounting research (Watts, 1982).
Mathematical models form part of quantitative studies. In section 5.2, the value of
models as truth bearers is explored from a more philosophical perspective applied in
a qualitative study. The value of models from a philosophy of science perspective is
that models can be true and that they function as truth bearers of target systems
(Mäki, 2008; Mäki, 2009; Mäki, 2011). According to Mäki (2009:37) “models function
as epistemic devices in that the modeller examines the properties and behaviour of a
model as a surrogate system in order to learn about the target system”.
In order to follow the explanation of the different qualities of a model, the following
formulation of a model is provided and depicted in Figure 5.4 (Mäki, 2009:32):
• “Agent A
• uses object M (a model) as
• a representative of some target system R
• for Purpose P,
• addressing Audience E,
• prompting genuine issues of resemblance to arise,
• and applies Commentary C to identify and align these components”
• all happening within the boundaries of Context X.
• The model can be Described (D) in various ways: verbal, mathematical,
diagrammatic, pictorial etc.
166
Mäki provided the unpublished schematic representation in Figure 5.4 of his model
formulation during a visit to the University of Pretoria in 2014 85:
Figure 5.4: Model formulation (Mäki, 2011)
Mäki (2009; 2011) proposes a three act technique in order for models to be truth
bearers namely, (a) models as isolations by idealisation (section 5.2.1), (b) models as
representations by surrogate systems (section 5.2.2), and (c) models as truth
containers (section 5.2.3).
Figure 4.6 is an example of a pictorial model isolating and representing the

characteristics and content requirements of a global CFfFR. In terms of Mäki (2009;
2011) the model can be explained as follows:
• “Agent A is the researcher of this study.

• Object M (Figure 4.6) is the graphic illustration as an imagined system
isolating and representing the role of the characteristics and requirements
of a global CFfFR. within the financial reporting domain.
• The target system R is the role and requirements of the CFfFR within the
financial reporting domain.
85
The context X and description D were provided by Mäki during a lecture at the University of Pretoria in 2014.
167
• The Purpose P of object M is to isolate and represent on an abstract and
conceptual level the characteristics and content requirements of a global
CFfFR.
• The primary audience E is the readers of this document.
• The model prompts the issues of resemblance of the role of the CFfFR
• The discussion in Chapter 4 serves as the Commentary C to identify and
align these components.
• This discussion is firstly happening within Context X, the boundaries
financial reporting as utilised in this thesis.
• The model is Described (D) as a pictorial model (Figure 4.6) of an abstract
concept – the characteristics and content requirements of the CFfFR
5.2.1 Models as Isolations by Idealisation
The first act technique of a model as isolation by idealisation is to imagine, isolate

and assume the ideal situation regarding the chosen semantic domain under
investigation. A very complex system or certain aspects of a complex system are
controlled by isolating some important fact, dependency relation, causal factor or
mechanism of the system under investigation (Mäki, 2009). Isolation is achieved by
making idealised assumptions regarding strategic aspects (Mäki, 2011). These
assumptions “are purposeful falsehoods that are strategically mobilized and
manipulated” (Mäki, 2011:51).
The modeller isolates what is to be investigated by assuming that “certain potentially

efficacious factors are absent, constant, or in normal or otherwise suitable states”
(Mäki, 2009:30). Isolation simplifies a complex system (target) in order to investigate
certain aspects of the target. The model is then an imagined system. “In building a
model one imagines a surrogate world, which involves an active process of
constructions whereby isolations are accomplished” (Mäki, 2009:32).
In this study, the surrogate world is a formal domain ontology of the CFfFR. The
purpose of the formal domain ontology is to serve as a model to investigate certain
aspects of the CFfFR. The formal ontology model is based on idealised, false
assumptions in order to isolate the aspects investigated.
The requirements and definition developed in Chapter 4 are based on the systematic
review of what are perceived, prescribed and argued to be the requirements of the
CFfFR by academics, practitioners and legislators. The results of Chapter 4 are used
as basis to formulate some of the idealised assumptions to achieve the drafting of a
global CFfFR. Some idealised assumptions provided in section 5.6 are based on the
literature review done in Chapter 2 and confirmed by the discussion in Chapter 4.
These assumptions are purposeful falsehoods and strategically manipulated to
isolate and investigate the role and requirements of a global CFfFR. The
requirements isolated are complete and comprehensive, internally coherent, logically
consistent, and clear and unambiguous (Figure 4.6).
168
5.2.2 Models as Representations by Surrogate Systems
The second act technique is to outline models as representations by surrogate

systems (Mäki, 2011). Mäki (2009) qualifies his account of models as representations
by surrogate systems in two ways. Mäki (2009) firstly, distinguishes between
representative quality aspects and resemblance quality aspects of representations,
and secondly embeds models in a pragmatic context. Modeling as representation
involves a subject, the agent A or modeller, and an object, the Target R, which is
modelled (Figure 5.4).
The representative quality aspect of representation is the result of a voluntary activity

of the agent A. It can be activities such as imagination of the ideal situation and
selective choices to isolate the aspect to be investigated. Regarding the
representative quality aspect of a model, the Model M should firstly represent some
target system R and stands as a surrogate for that target. Mäki (2009) explains the
epistemic function of models as surrogate in that one acquires information of the
Target R without examining R directly, but rather examines M directly. M is examined
by an inquiry into its properties and behaviour, acquiring information about R
indirectly.
The representative quality aspect is applied to the financial reporting domain in two
ways. Firstly, the fundamental concepts related to the “what”, “when” and “how” of
financial reporting are the Target R of the CFfFR M. Secondly, the CFfFR is the
Target R.
The resemblance quality aspect of representation involves an involuntary dimension

of the Target R. Resemblance is ontologically and pragmatically constrained (Mäki,
2009). “The ontological constraints are due to the objective properties of the target,
while the pragmatic constraints derive from the purposes and audiences of modeling”
(Mäki, 2009:33). Regarding resemblance as the second representation quality aspect
of a model, M should resemble or correspond to the Target R. Resemblance is
important in order to learn something about R by inquiring M. The resemblance
should be in suitable respects and in sufficient degrees (Mäki, 2009). Issues of
resemblance should be genuine in two ways: (1) “the model must have a likely
capacity to resemble” (Mäki, 2009:33), meaning resemblance must not be utopian or
beyond the reach of the modeller, and (2) resemblances must be relevant otherwise
resemblances do not count.
Within the context of financial reporting, resemblance between the semantic domain
of financial reporting and the CFfFR is achieved by the nature and process of drafting
the CFfFR. The due process of the IASB (see Figure 4.5) is a mechanism to involve
as many representatives of the domain as possible when drafting the CFfFR and
financial accounting standards. This process enhances the resemblance quality
between the CFfFR as Model M and the semantic domain of financial reporting,
Target R.
The representation act technique of models should be viewed within the context of
the different aspects forming part of the formulation of a model (Figure 5.4). The
169
pragmatic context X “includes the modeller’s purposes, audiences and commentary”
(Mäki, 2009:32). The pragmatic context of this study is to obtain a Ph.D. degree
(purpose) by reporting on a research project by way of writing a dissertation
(commentary) to be evaluated by supervisors and examiners (audience). The
research project is focussed on answering three sub-research questions and a main
research question by building a formal domain ontology of the CFfFR.
The Purpose P of representation can be either epistemic or non-epistemic. The

epistemic purpose can be to answer some limited and explanatory questions or
isolating an important mechanism or aspect of Target R. The non-epistemic purpose
involves the solving of some practical problem or helping in policy-making (Mäki,
2009).
The epistemic purpose of Model M in this study is to isolate and test internal
coherence, logical consistency, clarity of meaning and the role and definition of the
CFfFR. The non-epistemic purpose is to provide a model i.e. a formal domain
ontology of the CFfFR, that could provide a model and method that could assist
standard setters towards the setting of a global CFfFR.
The Audience E of the study is mainly academics with the possibility to reach experts
in practice on the CFfFR. From the perspective of the pragmatic context of the study,
the audience can be described as the supervisors and examiners of this research
project. Commentary C is provided by the modeller on modeling results and modeling
decisions made during the modeling process. The Commentary C includes the
method, process and requirements to build a formal domain ontology of the CFfFR as
well as the results of the study that are provided as the findings in Chapter 8.
The Description D of the formal domain ontology of the CFfFR is in a formal language
called Description Logics (DL). The model is also presented in a graphic format,
prepared by the software program Protégé. Table 5.1 provides a summary of
modeling as representation.
Table 5.1: Modeling as representation

REPRESENTATION QUALITIES
Representative quality Resemblance quality
Voluntary action by agent A. Involuntary dimension of Target R.
• Imagination of ideal situation • Real world Target R to “decide” on
• Selective choices decided by modeller. properties.
Model M stands as surrogate for Target R. Constraints:
• ontologically – properties of the target;
• pragmatically – purposes and audiences
of modeling.
Model M must correspond to Target R in
suitable respects and in sufficient degrees.
Examine Target R indirectly by examining Resemblance must be genuine in two ways:
properties and behaviour of Model M. • Model M must have a likely capacity to
resemble,
• resemblances must be relevant.
REPRESENTATION
Pragmatic context X
Modeller’s purpose, audiences and commentary
Purpose P:
Epistemic or non-epistemic
170
Epistemic function: Non-epistemic
• Acquires information of Target R without • Solving a practical problem.
examining Target R directly. • Helping in policy-making.
• Acquires information of Target R by
examining Model M directly.
Audience E
Users of the model.
Commentary C
• Modeling results
• Modeling decisions
Description D
Ways in which a model represent the Target R. Verbal, mathematical, diagrammatic, pictorial.
Target R
An actual or possible system.
171
Table 5.2, Table 5.3 and Table 5.4 provide summaries of modeling as representation
as utilised in this study:
Table 5.2: Modeling as representation - Representative quality

Representative quality applied to
Representative quality
CFfFR
The researcher is the voluntary agent A in this
study.
Voluntary action by agent A. • The ideal CFfFR and idealised
assumptions
• Imagination of ideal situation. • Selective choices were made during the
• Selective choices decided by modeller. formulation of the idealised assumptions
and the four Iterations of the CFfFR
ontology.
The final model after Iteration 4 is the CFfFR
ontology as a surrogate for the Target R, the
Model M stands as surrogate for Target R.
classes and relationships of the financial
reporting domain.
The Target R is the classes and relationships
of the financial reporting domain. The Target R
Examine Target R indirectly by examining
was indirectly examined through the
properties and behaviour of Model M.
formalisation process consisting of four
Iterations.
Table 5.3: Modeling as representation - Resemblance quality

Resemblance quality applied to
Resemblance quality
CFfFR
The real world targets in this study are the
Involuntary dimension of Target R.
classes and relationships of the financial
• Real world Target R to “decide” on properties.
reporting domain and the CFfFR itself.
• The first constraint is that the study deals
with a social reality that cannot be
Constraints:
inspected such as a physical reality.
• ontologically – properties of the target;
Domain constraints are the properties of
the targets. The classes and relationships
of the financial reporting domain and the
CFfFR as a social construct. During the
modeling process some incompleteness
and implied domain knowledge were
detected in these properties.
• The practical purpose is that the model

should have a resemblance with the
• pragmatically – purposes and audiences of
Target R in such a manner that the model
modeling.
would contribute knowledge to the
audience regarding the Target R.
The formal domain ontology of the CFfFR must
Model M must correspond to Target R in suitable
correspond to the Target R sufficiently for
respects and in sufficient degrees.
domain experts to accept the resemblance.
• The resemblance of the formal domain
ontology CFfFR is likely as it is based on
Resemblance must be genuine in two ways:
the CFfFR.
• Model M must have a likely capacity to
• The resemblance is relevant as it is
resemble,
analysing and indicating some problems
with a document that is used
• resemblances must be relevant.
internationally in the financial reporting
domain.
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Table 5.4: Modeling as representation
REPRESENTATION
Representation Representation applied to CFfFR
The pragmatic context is the drafting of the
dissertation for evaluation by supervisors and
examiners.
Pragmatic context X
The real world context is the financial reporting
Modeller's purpose, audiences and commentary
domain in which a global acceptable CFfFR is
needed. The context of the IASB setting and
revising the CFfFR.
Purpose P:
Epistemic or non-epistemic
• By examining the CFfFR the information
Epistemic function:
are obtained of the financial reporting
• Acquires information of Target R without
domain without examining the actual
examining Target R directly.
transactions that should be reported in
financial reports.
• Knowledge are acquired regarding the
• Acquires information of Target R by examining
CFfFR by examining the formal domain
Model M directly.
ontology of the CFfFR.
• By building the formal domain ontology of
Non-epistemic
the CFfFR a contribution is made towards
• Solving a practical problem.
solving a practical problem as some
elements prohibiting the global acceptance
of the CFfFR are indicated.
• The model could help policy-making to
• Helping in policy-making.
improve the CFfFR.
The model has different intended audiences
Audience E
i.e. academics, standard setters, supervisors
Users of the model.
and examiners.
Commentary C
The modeling results and modeling decisions
• Modeling results
are reported in Chapters 7-9.
• Modeling decisions
Description D The model is represented verbally,
Ways in which a model represent the Target R. diagrammatic, pictorial and by way of a
Verbal, mathematical, diagrammatic, pictorial. computer programme.
The Target R is the classes and relationships
of the financial reporting domain. The Target R
Target R
was indirectly examined through the
An actual or possible system.
formalisation process consisting of four
Iterations.
5.2.3 Models as Truth Containers
The third act technique is models and truth. It is best explained by the following
questions (Mäki, 2011:58): “What should it be for a model to be true or to contain
truths? What is the locus of truth in relationship to models? Where should we look to
find it?” In order to find truth in a model the previous two acts techniques of a model,
isolation by idealization and models as representations, should be adhered to.
According to Mäki (2011) truth can be found in models by adopting a certain
pragmatic concept of truth. Two pragmatic properties of truth is proposed by Mäki
(2011:58): “...usefulness in regard to a purpose, and persuasiveness in regard to an
audience”. An important aspect of models and truth according to Mäki (2011) is that
“models themselves are not true or false, nor do they contain truths, but true claims
can be made about models.”
How and where will we find truth in the formal domain ontology of the CFfFR? In
section 5.2.2, the purpose of the formal domain ontology model of the CFfFR is
provided. The purpose of the model is to answer and test the stated research
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questions (section 1.3) in order answer the main research question. Should the model
contribute towards answering the sub-research questions, the model is useful
towards the Purpose P, and consequently according to the pragmatic concept of
truth, the formal domain ontology of the CFfFR can be viewed as a truth container.
The formal domain ontology model can be used to make true claims about the
research objectives of this study.
Regarding the second pragmatic property of truth, the persuasiveness of the formal
domain ontology in the accounting community is not tested in this study. A concept of
proof of Iterations 1, 2, and 3 of the model was accepted for publication in a peer
reviewed journal and presented at international accounting conferences (Gerber et
al., 2014; Gerber & Gerber, 2011; Gerber, Gerber, & Van der Merwe, 2015). An
academic audience can view these two publications as a first step towards
persuasiveness of the model. The truth claims of the formal, semantic ontological
representation of the CFfFR are indicated during the verification process of the model
building process. The third act forms part of the verification stage of the research
design.
5.2.4 The Model Formula Applied to the CFfFR
Considering the purpose of the study, the model formula can be applied to the CFfFR
from two perspectives. The first perspective is where the CFfFR is the Model M and
the second is where CFfFR serves as the Target R.
In the scenario where the CFfFR is the Model M, the model formula could be
formulated as follows (Figure 5.5):
Agent A is the standard setting body, the IASB, which uses Object M, the CFfFR, as
a representative of the Target system R, the definitions and other fundamental
concepts for financial reporting. The Purpose P of the CFfFR is to serve as a sound
foundation for the development of financial accounting standards that are principle-
based, internally consistent and internationally converged. The Agent A uses the
Model M, the CFfFR, to address the Audience E that are standard setting bodies,
academics and users of financial reports. The CFfFR as Model M is prompting
genuine issues of resemblance with economic activities of the reporting entity to arise
in general purpose financial statements. The IASB applies Commentary C on the
setting of and explanation of the CFfFR to identify and align these components, all
happening within the boundaries of pragmatic Context X of the CFfFR’s purposes,
audiences and the commentary. The CFfFR is primarily described (D) by the IASB
(agent A) in writing in the English language.
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Schematically the model formula of the CFfFR can be portrayed as follows:
Figure 5.5: Model formula of the CFfFR
Figure 5.6 is a graphic illustration to view the CFfFR as the Target R for the formal
domain ontology of the CFfFR. The model formula for the second perspective could
be formulated as follows:
Agent A is the researcher, which uses Object M, the imagined formal domain
ontology of the CFfFR, as a representative of the Target system R, the CFfFR
published by the IASB (Figure 5.6). The Purpose P of the formal domain ontology is
firstly to draft idealised assumptions for a globally accepted CFfFR and secondly to
test and report on the role, definition and requirements of the CFfFR. The Agent A
uses the Model M, the formal domain ontology, to address the Audience E, mainly
academics and perhaps other possible audiences such as standard setters, users of
financial statements and legislators. The formal domain ontology as Model M is
prompting genuine issues of resemblance with CFfFR by translating the written
English language into a formal language called Description Logics (DL) and more
specific OWL. The researcher applies Commentary C when explaining the modeling
method, making and explaining modeling decisions and reporting on modeling results
and findings. The modeling process is all happening within the boundaries of the
pragmatic context X of the study’s purposes, audiences and commentary. The formal
domain ontology is primarily described (D) in OWL, which forms part of Description
Logic’s. The formal domain ontology is also presented in a graphic form using
Protégé (Figure 7.30):
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Figure 5.6: Model formula of the formal domain ontology
From the discussion above, using the three act technique and model formula of Mäki
(2008; 2009; 2011) and Grüne-Yanoff and Mäki (2014) the value regarding the use of
models as truth containers using idealised assumptions for an imagined system to
serve as a surrogate for the CFfFR was indicated. In section 5.3, the use of models in
computing is firstly explored to determine the idealised role of the CFfFR as a model.
Secondly, the applicability of the use of models in computing on accounting is
indicated. The model artefact identified in section 5.2 is the identification of an ideal
CFfFR as a truth-bearing model of the financial reporting domain.
5.3 Models in Computing
During the 1960s, faulty requirements were identified as a major reason for computer
project failures. Information systems developers believed that high-quality conceptual
models would detect and correct errors at an early stage. Early detection of errors
would avoid the high cost of fixing errors at a later stage (Wand & Weber, 2002). The
use of models and metamodels in computing gained credence and are adopted in
software engineering standards from the OMG (Object Management Group (OMG,
2014)) and the ISO (International Organization for Standardization (ISO, 2014))
(Henderson-Sellers, 2007). According to Wand and Weber (2002) conceptual
modeling involves building a representation of selected phenomena in some domain.
When a model is represented as a concrete artefact “it can support communication,
learning and analysis about relevant aspects of the underlying domain” (Guizzardi,
2005:XI).
176
As the purpose of this study is to build a computer readable artefact (formal domain
ontology) of the CFfFR, the study adopts the use of the term “model” from software
engineering in which “model” refers to an artefact formulated in a modeling language
(Kühne, 2005). The underlying domain of this study is the reportable economic
activities 86 of a reporting entity as provided in the CFfFR (see R in Figure 5.6). The
applicability of the use of “model” from computing is indicated in the statement by
Kühne (2005:1) that “all our models are linguistic in nature”. The model artefact of this
study is also linguistic in nature as it is presented in OWL, which is a more formal
language than natural language.
5.3.1 Definitions and Characteristics of Models in Computing
In section 5.3.1, it is argued that the general ledger, trial balance and financial report
of a reporting entity as well as financial accounting standards comply with the
definitions and characteristics of models as used in computing. According to
Henderson-Sellers (2011b:301) “a model is an abstraction that represents some view
on reality, necessarily omitting details, and for a specific purpose.” Kühne
(2006b:370) defines a model as “an abstraction of a (real or language-based) system
allowing predictions or inferences to be made”.
Ryan et al. (2002), Henderson-Sellers (2011b) and Kühne (2006b) depicts a model
as an abstraction of a system or reality. Although abstraction implies the omission of
details, it emphasises the characteristic that a model is not a copy 87 of the reality or
the system it represents. Kühne (2006b) describes the reality wider than Henderson-
Sellers (2011b) as a system (or original or subject (Kühne, 2006a)) and it can be
either a real system (reality 88 according to Henderson-Sellers (2011b)) or a language-
based system. Gonazalez-Perez and Henderson-Sellers (2007:1779) defines a
model as “a statement about a given subject under study (SUS), expressed in a given
language” and that models represent SUS’s. The SUS refers to the specific domain
or system / original / subject (Kühne, 2006a). Apart from the definitions, some
characteristics or features of suitable models are provided in the literature regarding
models in computing.
For a model to be suitable in computing the abstraction of a given SUS needs to be

homomorphic with the SUS and have a specific purpose or usage (Gonzalez-Perez &
Henderson-Sellers, 2007; Kühne, 2005). This corresponds with the three features of
models according to Stachowiak as presented in Kühne (2005:2):
• “mapping feature: A model is based on an original.
• reduction feature: A model only reflects a (relevant) selection of the original’s
properties.
86
In the CFfFR, the terms transactions and events are used. For the purpose of this study, a more comprehensive
term is adopted, as it is perceived that the term economic activities are covering all possible activities that could be
reported in a financial report. Transactions and events assume some domain knowledge that needs some
clarification.
87
The difference between a copy and a model is that a copy agrees with an original system / reality in every detail
(Kühne, 2005; Kühne, 2006b).
88
See the discussion in Gonzalez-Perez and Henderson-Sellers (2007) regarding the difference between a positivistic
and relativistic (less positivistic) stance regarding the representation of the structure of reality.
177
• pragmatic feature: A model needs to be usable in place of the original with
respect to some purpose.”
From an accounting perspective Ryan et al. (2002:28) states that for a model to
succeed in a research programme it should possess the following characteristics:
• “It must be possible to generate theoretical implications from which
observational predictions can be drawn.
• The assumptions within the model should be internally consistent in the

logical sense and as simple as the logical integrity of the model will permit.
• The model should be theoretically commensurate with any known

empirical facts within its domain.
• The model’s theoretical scope is defined by the model and its attendant
set of explanatory and predictive implications.
• The combination of a set of related models (related in the sense that they
cover the same empirical domain) form, with the relevant observation
reports, the literary domain of a particular research programme.”
The characteristic of abstraction or the reduction feature, contributes to the value in

the use of a model to enable the users of the model to comprehend and
conceptualise a complex system of a specific domain prescribed as the SUS. In
financial reporting the specific domain or SUS is the complex system of economic
activities to be reported. In order to provide a useful report, an abstraction and
aggregation of economic activities are made. As a financial report is a reduction or
abstraction of the economic activities of a reporting entity, it complies with the
characteristic of abstraction or the reduction feature of a model.
Models must be homomorphic (mapping feature) with the SUS in that the structure of
the model should coincide to some degree with the structure of the SUS (Gonzalez-
Perez & Henderson-Sellers, 2007). The model should reflect a relevant abstraction of
the SUS. This means that the model of a car must resemble the structure of the real
car otherwise the model cannot be used to comprehend or communicate information
regarding the actual real car.
In the financial reporting SUS, the financial report should reflect a relevant abstraction
of the economic activities of a reporting entity to be useful to the users of the financial
report. The economic activities are first captured in the general ledger via journals
and subsidiary journals and are then summarised in the trial balance. The content of
the trial balance is used to compile a financial report. In the end, the financial report
should be homomorphic with the economic activities of the reporting entity via the
general ledger and trial balance. The general ledger can be viewed as a first model of
the economic activities and the trial balance as a second model based on the general
ledger, with the financial report a third model based on the previous two. It can thus
be concluded that a financial report should be homomorphic with the economic
activities of a reporting entity to be useful for the users of the financial report.
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The usage of a model is linked to the communicative purpose of a model (pragmatic
feature). Guizzardi (2005:XI) links a model to a conceptualisation of a specific domain
and states that a represented model “is a medium to preserve and communicate a
certain view of the world”.
The definition of Kühne (2006b) allows for the model being used to make predictions
or inferences based on a specific model, thus communicating a certain view of the
specified domain or SUS. Models are used in a descriptive mode to document
existing situations or in a prescriptive mode to document situations that yet have to
eventuate (Henderson-Sellers, 2011b; Kühne, 2006b). The descriptive and
prescriptive modes of models respectively correspond with what Gonzalez-Perez and
Henderson-Sellers (2007) call backward-looking models and forward-looking models
of SUS’s. A training flight simulator is an example of a backward-looking model of the
real airplane and a blueprint of a building is an example of a forward-looking model.
The descriptive and prescriptive use of models do not express properties of models
and in computing they “are not exclusive and can be combined in different
proportions” (Gonzalez-Perez & Henderson-Sellers, 2007:1780).
Apart from the nature of representation (forward or backward-looking) discussed

above, Gonzalez-Perez and Henderson-Sellers (2007) discusses which kind of
entities are the model and the SUS. Gonzalez-Perez and Henderson-Sellers
(2007:1780) conclude that “anything that can be observed can be a SUS, and that a
model, once created, becomes part of reality and, therefore, is a potential SUS for
further models”.
5.3.2 The Value of Models in Computing
The value of a model is that it enables the users of the model to reason about the
SUS (or Target R) by looking at the model only (Gonzalez-Perez & Henderson-
Sellers, 2007) made possible by the characteristics of abstraction and
homomorphism of a model. A represented model “can serve as a vehicle for
reasoning and problem solving, and for acquiring new knowledge about this view of
the world” (Guizzardi, 2005:XI). The reasoning about the System Under Study (SUS)
is made easier because the model is an abstraction of the SUS, performed to fight
complexity. Gonazalez-Perez and Henderson-Sellers (2007:1779) summarises the
reason for the use of models as follows: “...the major reason that we need models is
to reason about the complexity of the SUS without having to deal with it directly”.
According to Wand and Weber (2002) models called conceptual models are used
during information systems’ requirements analysis development. In information
systems, conceptual modeling is modeling applied to cognitive artefacts and designs
for software systems (Henderson-Sellers, 2011a). Conceptual models “are used to
represent both static phenomena (e.g., things and their properties) and dynamic
phenomena (e.g., events and processes) in some domain” (Wand & Weber,
2002:363) and uses graphical representations (Henderson-Sellers, 2011a). Graphical
representations serve to simplify and standardise complex SUS’s in order to enhance
the communication ability of a model to different users. Wand and Weber (2002)
stated that conceptual models in computing serve at least four purposes:
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(1) communication between developers and users, (2) assist analysts to understand
the domain, (3) provide input in the design process, and (4) document requirements
for future reference. According to the pragmatic feature, a model provides information
on something (content of the SUS), created by someone (the sender), for somebody
(the users) for a purpose (certain use within the domain context) (Kühne, 2005).
Considering the pragmatic feature of models, the effective and unambiguous
communication ability of the model regarding the SUS, it determines the value of the
model to the various users of the model.
5.3.3 Computing Models Applied to Accounting
In terms of accounting, it means that economic activities serves as the SUS for the
general ledger and the general ledger serves as a System Under Study (SUS) for the
trial balance and the trial balance serves as a SUS for the financial report. If we
consider the financial report of a reporting entity as a model representing a certain
perspective of the economic activities of the reporting entity (SUS), the financial
report can then serve as a SUS of a further model. As a financial report of a reporting
entity is used to describe the economic activities of an entity, it serves to analyse and
predict (prescribe) future economic activities to make economic decisions. It can thus
be concluded that a financial report as a model has a descriptive and prescriptive
use.
As the “objective of general purpose financial reporting is to provide financial

information about the reporting entity that is useful to existing and potential users”
(IASB, 2010a:OB2), the informative function of a financial report seems to be of great
importance. If we apply the informative function according to the pragmatic feature of
a model on the financial report of a reporting entity, it can be stated that a financial
report complies with the pragmatic feature of a model in that a financial report:
• provides information on the economic activities of a reporting entity (content of
the SUS);
• is created by the directors of the reporting entity (the senders), and verified by
external auditors;
• provides financial information about the reporting entity to “existing and potential
investors, lenders and other creditors” (IASB, 2010a:OB2) (the users);
• provides financial information that is useful for decision making by the users of
the financial report (certain use within the domain context).
From the discussion above it can be concluded that a general purpose financial
report adheres to the definitions, characteristics and features of models as utilised in
computing.
In general, a distinction is made between non-linguistic or iconic and linguistic models

(Henderson-Sellers, 2011b). Linguistic models, based on a language-based system,
are more commonly used in computing. Linguistic models are models made up of
words providing semantic meaning. A financial report will classify as a linguistic
model. Kühne (2005:1) differentiates between “two fundamentally different kinds of
models, i.e. ‘type model’ versus ‘token model’”.
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5.3.4 Financial Reporting as Type and Token Models
Token models are used for capturing system configurations and are used as the
basis for simulations. Examples of token models are maps and building plans for
houses. Singular aspects of the original’s elements are captured with a token model.
Token models are also referred to as snapshot models as they capture only a single
configuration of a complex system (Kühne, 2005). The building plan of the northern
face or foundations of a building provide a snapshot of specific elements of the
planned building. When the “represented_By” relationship between the original
and the model is transitive, then the model is a token model (Kühne, 2005).
Type models collect concepts and their universal object properties to classify objects
and draw conclusions based on the collection. The universal aspects of an original’s
(SUS) elements are captured in a type model (Kühne, 2005). The difference between
a type model and a token model is that a type model only shows the types of interest
while the token model shows all the particular elements and their relationships. A type
model is also called a “schema model” or a “classification model”. In terms of
accounting, a general ledger is showing all the particular elements of the financial
transactions (not all the economic activities) of an entity and their relationships
grouped together, thus making it a token model. The relationship between a type
model and the SUS is described as a “classified_By” relation (Figure 5.7).
A trial balance is also a token model as it is only a “map” with less detail of the
original financial transactions, a summary of the general ledger. Financial reports are
type models as they provide a classification of the universal properties of the
economic activities (original elements) of the reporting entity based on certain
guidelines provided in financial accounting standards. Financial reports are more than
just a summary of transactions like for example a trial balance, they provide more
information than a pure summary of the transactions. Financial reports contain a lot
more additional information regarding the economic activities of a reporting entity
than only a summary representing the basic accounting transactions. One example of
such a conclusion in a financial report is a statement of cash flows.
At this stage, it might be tempting to call a trial balance a metamodel of the general
ledger making the financial report a meta-metamodel. According to Kühne (2005:6) “a
token model of a token model is not its metamodel” as the second token model is still
a representation, a map derived from a finer map of the original elements. A financial
report (type model) is also not a metamodel of a trial balance (token model), as the
financial report is the first type model of the original elements (economic activities).
Kühne (2005:7) states clearly that when a type model is a model of a token model it is
“inappropriate to call it a metamodel since both are models of the original”.
181
A schematic illustration of the model relationships between the SUS, general ledger,
trial balance and financial statement is provided in Figure 5.7:
Figure 5.7: Financial reporting basic token, type model relationship
182
It can be argued that financial accounting standards can also be viewed as models if
the requirements of the definition, features and characteristics of a model in
computing are applied to financial accounting standards. A financial accounting
standard provides the principles and rules of what, when and how to recognise,
classify, measure and disclose economic information. In terms of the model definition,
the principles and rules are a description of the object properties of the original reality
(SUS) (Kühne, 2005) for example universal object properties of all fixed asset
transactions, or the accounting treatment of all financial instrument transactions
documented in the respective accounting standards. The universal properties
(principles and rules) provide an abstraction and classification of the object properties
that represent a specific view (standardised by a standard setting body) of how the
original system e.g. fixed asset transactions should be communicated. The
abstraction (financial accounting standard) allows for predictions or inferences to be
made (Kühne, 2005) as the purpose of financial accounting standards is to guide the
recognition, classification, measurement and disclosure of economic activities.
As a financial accounting standard complies with the definition of a model, it can be

argued that a financial accounting standard is suitable to function as a model in
computing. It can also be argued that a financial accounting standard also adheres to
the three characteristics and features of a model in computing (abstraction and
reduction, homomorphic and mapping, purpose and pragmatic) (Gonzalez-Perez &
Henderson-Sellers, 2007; Kühne, 2005). A financial accounting standard is an
abstraction of the universal object properties of the original economic activities, thus
complying with the reduction feature of a model. A financial accounting standard only
reflects a relevant selection of the object properties.
As a financial accounting standard provides the universal object properties of a

specific class of economic activities e.g. fixed assets (IAS16), that specific accounting
standard (IAS16) is homomorphic with the SUS (fixed asset economic activities). It
can then for example be argued that IAS16 complies with the mapping feature of the
original SUS. Financial accounting standards complies with the pragmatic feature of a
model in that their purpose is to communicate the principles and rules regarding the
recognition, classification, measurement and disclosure of the economic activities of a
reporting entity. It can be concluded that financial accounting standards comply with
the definition(s), characteristics and features of a model as provided by computing.
Comparing the characteristics and features of financial accounting standards viewed

as models to Kühne’s (2005) two types of models it can be argued that financial
accounting standards are type models based on their relationship to the original
system (SUS). A type model, and in this case financial accounting standards,
captures the universal aspects of the original system (SUS) (Kühne, 2005) i.e. the
economic activities of a reporting entity. The object properties of the original
economic activities are “classified_By” 89 financial accounting standards Figure
5.8.
89
“classifiedBy” is used by Kühne (2005) to describe the relationship between the original and a type model.
183
According to Kühne (2005:7) it is also possible “to model the properties of a token
model itself instead of its content”. Based on this possibility it can be argued that
financial accounting standards can be classified as a type model of the properties of
the other two token models in the system i.e. the general ledger and the trial balance.
When Figure 5.7 is expanded to accommodate financial accounting standards in the

model relationship it can schematically be portrayed as follows in Figure 5.8:
Figure 5.8: Financial reporting token, type model relationship including financial
accounting standards
Figure 5.8 illustrates the model relationship role of financial accounting standards
towards economic activities as classified_By. Financial accounting standards
also have a classified_By relationship towards trial balance and general ledger,
as both the trial balance and the general ledger are token models.
In section 5.3.5, the use of metamodels and meta-metamodels in computing and its
application in accounting is discussed.
184
5.3.5 Metamodels and Meta-metamodels Applied to the CFfFR
According to Henderson-Sellers (2007) a metamodel is a model of a set of models.

This means that a model is an instance of a metamodel (Kühne, 2006b). According to
the homomorphic characteristic of models there is “a one-to-many relationship
between any element in a metamodel to corresponding elements in the model”
(Henderson-Sellers, 2011b:302). The implication of the homomorphic characteristic of
models is that “a model is said to conform to its metamodel when each element in the
model maps to a corresponding and definitional element in the metamodel”
(Henderson-Sellers, 2011b:302). Regarding the abstraction characteristic of models,
“a metamodel describes a domain that is representative of more than one instance in
a less abstract domain (i.e. it is a model of models) and, at the same time, it is the
core of a modeling language used to describe those instances” (Henderson-Sellers,
2011b:302).
Regarding the relationship between metamodels, classes and SUS’s “a metamodel is

a specification model for a class of SUS where each SUS in the class is itself a valid
model expressed in a certain modeling language” (Henderson-Sellers, 2007:3).
Gonzalez-Perez and Henderson-Sellers (2007:1780) conclude that “anything that can
be observed can be a SUS, and that a model, once created, becomes part of reality
and, therefore is potential a SUS for further models”. A true metamodel is created
when a classification of the same SUS are repeated twice i.e. a type model is
produced from a type model (Kühne, 2005) (Figure 5.9). “Metaness” involves a
detachment from the original. It is a two level detachment of the original (Kühne,
2006b).
Henderson-Sellers (2011b) provides a four level hierarchy of the OMG architecture

regarding the relationship between data, models, metamodels and meta-metamodels.
The four level hierarchy of the OMG is adopted and adjusted from Henderson-Sellers
(2011b) as Figure 5.9.
Figure 5.9: OMG four level hierarchy adjusted
185
It can be argued that, in connection to general purpose financial reports, financial
accounting standards has a “classified_By” relationship in that it is prescriptive in
terms of principles and rules on what, when and how to recognise, classify, measure
and disclose economic information in the financial report (Figure 5.10). A
conformance relationship exists between the different model levels. According to
Henderson-Sellers (2011b:302) “a model is said to conform to its metamodel when
each element in the model maps to a corresponding and definitional element in the
metamodel.” According to the four level hierarchy, it can be argued that general-
purpose financial reports (M1) “conform_to” financial accounting standards (M2)
and the economic activities (M0) are an “instance_of” of general-purpose financial
reports. A general purpose financial report (M1) serves as a SUS for financial
accounting standards in that it is a model and forms part of the reality of the financial
reporting domain (Gonzalez-Perez & Henderson-Sellers, 2007). The relationship
between financial accounting standards and a general-purpose financial report is a
type model of a type model thus making the financial accounting standards a
metamodel (M2) of a general-purpose financial report. In order for a general-purpose
financial report (M1) and financial accounting standards (M2) to have a metamodel
relation, each element in the general-purpose financial report must “conform_to” a
corresponding and definitional element in the accounting standards.
If the four level hierarchy of the OMG is applied to the schematic model relationship
between the economic activities (Figure 5.8), a general-purpose financial report and
financial accounting standards can be presented in Figure 5.10.
186
Figure 5.10: OMG four level hierarchy combined with financial reporting token and
type model relationships
In Figure 5.10 the OMG four level hierarchy is combined with the type and token
model relationships. The purpose of the combination is to illustrate the metamodel
relationship (M2) of financial accounting standards towards financial reports (M1).
Financial accounting standards are in a model (M1) relationship towards economic
activities (M0) if the relationship is not tracked via the general ledger and the trial
balance.
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Figure 5.11 illustrates the model relationships if the CFfFR is added.
Figure 5.11: CFfFR as meta-metamodel in the four level hierarchy
It can be argued that the relationship of the CFfFR towards the economic activities via
financial accounting standards is a type model classified_By a type model
making the CFfFR a metamodel in relationship to the economic activities (Kühne,
2005; Kühne, 2006b). If it is accepted that financial accounting standards (M1)
represent more than one instance (economic activities (M0)) in a less abstract
domain and the CFfFR describes the financial accounting standards (SUS) domain in
a less abstract domain (a model of a model), then the CFfFR can be classified as
metamodel (M2) in relationship to financial accounting standards (Gonzalez-Perez &
Henderson-Sellers, 2007; Henderson-Sellers, 2011b) (Figure 5.11).
In can also be argued that the relationship of the CFfFR towards the economic
activities, via financial accounting standards and via a set of general-purpose
financial statements, is a meta-metamodel relation. The economic data SUS (M0,
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data and 2 token models) is an instance_of the general-purpose financial
statements SUS (M1, type model). The general purpose financial statements SUS
(M1, type model) is an instance_of the financial accounting standards SUS (M2,
type metamodel). Lastly financial accounting standards SUS (M2, type metamodel) is
an instance_of the CFfFR (M3 Meta-metamodel) (Gonzalez-Perez & Henderson-
Sellers, 2007; Henderson-Sellers, 2011b).
It was argued in section 5.3.5 that the CFfFR adheres to the definition and
characteristics of a token metamodel and token meta-metamodel of the SUS of
economic activities in the financial accounting reporting domain.
The three characteristics and features of a model in computing (abstraction and

reduction, homomorphic and mapping, purpose and pragmatic) (Gonzalez-Perez &
Henderson-Sellers, 2007; Kühne, 2005) corresponds with the requirements and
characteristics of a conceptual framework for accounting as described in section 4.6
and as illustrated in Figure 4.6. A conceptual framework is by nature an abstraction or
reduction of the reality it is representing and describing. The complete,
comprehensive and logically consistent requirements of a conceptual framework
correspond with the homomorphic and mapping characteristic of a model.
Figure 5.12 provides a schematic illustration of the OMG four level hierarchy applied
to the model relationships in financial reporting.
Figure 5.12: OMG four level hierarchy applied to financial reporting models
Using the example of a specific building at Erf X registered in the name of a reporting
entity, the relationships can be explained as follow: The specific building at Erf X
forms part of the economic activities of the reporting entity and can be classified at
level (M0). The building (a specific individual occurrence) is an instance_of the
category fixed assets, sub category buildings in the financial report (Model M1) of the
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reporting entity. The fixed assets, sub category buildings conform_to the
prescriptive specifications in accounting standard IAS16 at metamodel level (M2).
The specific building at Erf X conform_to the concept resource at the meta-
metamodel level (M3) via levels (M1) and (M2). IAS16 at metamodel level (M2)
must conform_to the concept resource a corresponding and definitional element at
the meta-metamodel (M3) to have a homomorphism relationship with level (M3). If
that relationship is true, then the CFfFR is successful in its purpose to provide
postulates and principles ensuring useful information to the users of financial reports.
The purpose or pragmatic characteristic of a model is to communicate information,

which corresponds with the objective of the CFfFR to provide guidance for decision-
useful financial information. The success of the pragmatic characteristic of the ideal
or global CFfFR as a meta-metamodel to communicate information depends on the
requirement to be clear and unambiguous.
By determining the ideal role of the ideal or global CFfFR as a meta-metamodel

within the financial reporting domain, SRQ 1 is answered (Table 3.2). The ideal role
of the ideal and global CFfFR as a meta-metamodel justifies the use of ontology
technologies in building a CFfFR ontology and contributes towards answering SRQ
2. 90 Figure 5.12 is a schematic illustration of the model artefact of the ideal CFfFR.
The role CFfFR as a meta-metamodel serves as an evaluation point in the FEDS
Human Risk & Effectiveness evaluation strategy (Figure 3.11).
In computing, ontologies are used as a tool to formalise models to test the internal
coherency, logical consistency and clear communication of models. In section 5.4,
some idealised assumptions for the CFfFR are derived from the application of model
theories to isolate the ideal imagined CFfFR.
5.4 Idealised Assumptions
A result of DSR Cycle 2 was to view the CFfFR as a truth bearing ideal model for
financial reporting (Mäki, 2011) (Figure 5.6). Chapters 2 and 4 were revised for
idealised assumptions after the truth bearing ideal model was accepted in Chapter 5.
The following preliminary idealised assumptions are assumed in order to create a
truth bearing formal ontological domain model of the ideal CFfFR.
5.4.1 Idealised Assumptions Identified in Chapter 2
The following idealised assumptions regarding the ideal CFfFR were identified in
Chapter 2 after adopting the truth bearing model theory of Mäki (2011).
1. A globally accepted conceptual framework for financial reporting is possible.
2. The semantic domain modelled in this study is the definitions and other
fundamental concepts providing guidance for globally acceptable financial
reporting.
90
How can model building assist to construct a global CFfFR consisting of fundamental concepts, which could
function as a sound foundation for accounting standards that are principle-based, internally consistent and
190
3. The ideal CFfFR provides all the definitions and other fundamental concepts
needed to guide standard setters to set high quality principle-based globally
acceptable accounting standards.
4. The ideal CFfFR is not the result of responses to economic, technological,
political or legislative stimuli.
5.4.2 Idealised Assumptions Identified in Chapter 4
5. Existing accounting standards do not influence the formulation of definitions and
other fundamental concepts in the conceptual framework.
6. There are no political influences and regulatory prescriptions on creating the
ideal CFfFR.
7. The ideal CFfFR satisfies the needs of practitioners, requirements of legislators,
and theories of academics.
8. The ideal CFfFR is internally coherent and logically consistent.
9. The conceptual framework is free of unintended meanings. The ideal CFfFR is
clearly formulated and can communicate across cultures (section 6.2.3).

Chapter 5
10. The definitions and other fundamental concepts in the conceptual framework are
limited to the definitions and other fundamental concepts to guide the setting of
principles to provide information needed by primary users of general-purpose
financial statements to make decisions.
11. The ideal CFfFR serves as a meta-metamodel, has a deductive role towards
accounting standards and consequently, has a strictly prescriptive status
towards accounting standards.
12. Definitions of the elements of financial statements and other fundamental
concepts are applied both inductively and deductively to economic instances.
Regardless of the direction of application of the definitions and fundamental
concepts, the same results are arrived at.
13. Given the deductive role of the ideal conceptual framework, accounting
standards are logically and internally consistent with the ideal conceptual
framework.
The idealised assumptions provide the vocabulary and conceptualisation of the

characteristics and assumptions of a CFfFR that could be globally acceptable. These
assumptions serve as a construct artefact of DSR Cycle 2. By formulating the ideal
assumptions of an ideal and global CFfFR, SRQ 2 is answered as it is indicated how
model building could contribute towards constructing a global CFfFR consisting of
fundamental concepts, which could function as a sound foundation for accounting
standards that are principle-based, internally consistent and internationally converged
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5.5 Knowledge Contribution
The strategy towards building the formal domain ontology of the CFfFR as the main
artefact in DSR Cycle 4 was advanced during DSR Cycle 2 with the addition of three
more artefacts (Table 3.1). The three artefacts, the notion of an ideal CFfFR, the role
of the ideal CFfFR as a meta-metamodel, and the ideal assumptions of an ideal
CFfFR are contributing towards knowledge on how to build a CFfFR that could be
globally acceptable. These artefacts represent evaluation markers on the FEDS
Human Risk & Effectiveness evaluation strategy. The progress on the FEDS Human
Risk & Effectiveness evaluation strategy is schematically illustrated in Figure 5.13.
5.6 Conclusion
During DSR Cycle 2 the role of the CFfFR as an unrealistic ideal truth-bearing model
was established (Figure 5.6) using a model theory from philosophy of science as
explained by Mäki (2009; 2011). The first artefact of the Development Step was to
define the role of the ideal CFfFR as a truth-bearing model, thus answering the first
sub-research question.
From a model perspective in computing the OMG four level hierarchy (OMG, 2008;
OMG, 2014) was adopted and adapted and applied to the financial reporting domain
(Figure 5.12) to determine the ideal role of the CFfFR as a meta-meta type model for
the financial reporting domain (Figure 5.10) as described by Kühne (2005; 2006b;
2006a). The argument to view the ideal CFfFR as a meta-metamodel is the second
artefact of DSR Cycle 2 and provides the theoretical background to answer the
second sub-research question.
Based on the model theory of Mäki (2009; 2011) Chapters 2, 4 and 5 were
investigated to develop the third artefact of DSR Cycle 2 i.e. to develop the ideal
assumptions regarding the ideal CFfFR that would be globally acceptable. The
idealised assumptions provided in section 5.4 contribute towards the requirements of
a global CFfFR adding to the requirements determined in Chapter 4.
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The knowledge contributions of DSR Cycle 2 stimulated the need to investigate the
use of ontologies in other disciplines and apply that knowledge to the ideal CFfFR as
a meta-metamodel.
In Chapter 6, (section 6.2) the philosophical background of ontology(ies) is discussed

and the applicability of ontologies as used in computing on the financial reporting
domain (section 6.3) is explored. In Chapter 6, the theoretical motivation to build a
formal upper domain ontology of the CFfFR is completed and the second sub-
research question answered.
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CHAPTER 6
TABLE OF CONTENT
6 ONTOLOGIES AND FINANCIAL REPORTING ...................................................... 195

6.1 Introduction ............................................................................................................. 196
6.2 Ontology in Philosophy ........................................................................................... 198
6.2.1 Background on Ontology in Philosophy .................................................................. 198
a) Philosophical definition of ontology applied to financial reporting ...................... 198
b) Historical development of ontology in philosophy ............................................. 200
c) Influence of philosophy on Computing .............................................................. 202
d) Logic and ontology ........................................................................................... 203
6.2.2 Formal Language and Ontology ............................................................................. 205
6.2.3 Logical Consistency as Pre-requisite for Cross-cultural Acceptance of Theories .... 207
6.3 Ontologies: Computing and Financial Reporting ..................................................... 208
6.3.1 Background on Ontologies in Computing ................................................................ 209
a) Formal and unambiguous representation of primitive terms ............................. 210
b) Computational formal logic and ontologies ....................................................... 211
6.3.2 Ontologies, Models and Metamodels ...................................................................... 212
a) Conceptual modeling and the CFfFR................................................................ 213
b) The CFfFR as a digital domain ......................................................................... 214
c) Ontologies, models and metamodels................................................................ 215
d) Formal languages and computability of formal ontologies ................................ 216
6.4 Formal Domain Ontologies and Financial Reporting ............................................... 217
6.4.1 Related Work on Ontologies in Financial Reporting ................................................ 218
6.4.2 Model and Ontology Hierarchy of the CFfFR .......................................................... 222
6.4.3 How Ontologies in Computing Help to Answer the Research Questions ................. 223
6.7 Conclusion .............................................................................................................. 228
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6 ONTOLOGIES AND FINANCIAL REPORTING
195
6.1 Introduction
The purpose of Chapter 6 is to argue the relevance of ontology from a philosophical

perspective and the use of formal domain ontology technologies in computing 91 for
this study. Chapter 6 reports on the third DSR Cycle (Figure 3.3 and Figure 6.2). The
Awareness Step of DSR Cycle 3 flows directly from the knowledge contribution of
DSR Cycle 2.The ideal role of the CFfFR as a meta-meta token model based on the
idealised assumptions stimulated the need to determine the possibilities provided by
ontologies. An overview of the structure of Chapter 6 is provided in Figure 6.3.
91
196
In the Suggestion Step of DSR Cycle 3, it was proposed to conduct an
interdisciplinary investigation into the applicability of ontologies from a philosophical
and a computing perspective to the ideal CFfFR. The applicability of ontology as
discipline was firstly argued from a philosophical perspective. During the
Development Step of DSR Cycle 3, the discussion on the applicability of ontology
from a philosophical perspective involved a short background on ontology as
discipline (section 6.2.1), the use of formal language (section 6.2.2) in ontology and
the importance of logical consistency for the acceptance of theories across different
cultures (section 6.2.3).
Secondly, formal domain ontologies as utilised in computing were explored for

applicability in this study. The use of ontologies in computing forms the background
of section 6.3. Related work on ontologies in financial reporting is discussed in
section 6.4.1 in order to position the research conducted in this study. Before the
possible application of formal ontology technologies on the CFfFR (Target domain R,
Figure 5.6), is explored, the link between ontologies, models and meta-models is
discussed in section 6.4.2. Section 6.4.2 serves as the link between section 5.3 and
Chapters 6 and 7. The first output (a model artefact, Table 3.1) of the Development
Step of DSR Cycle 3 is the role of the ideal CFfFR as formal domain ontology based
on the OMG four level hierarchy (Figure 6.6). In section 6.4.3 formal domain
ontologies as utilised in computing is applied to the financial reporting domain. The
second artefact is a construct on how a CFfFR ontology could contribute towards
answering SRQ 3.
Thirdly, an overview on accounting ontologies related to this work is provided in

section 6.4. In section 6.4 it is indicated that at the time this study was conducted no
other work was identified building a formal domain ontology of the CFfFR. In the
related work section, the need for a formal domain ontology of the CFfFR was
confirmed. In section 6.6, the role of the output artefacts in DSR Cycles 1, 2, and 3 in
the FEDS Human Risk & Effectiveness evaluation strategy is discussed. Chapter 6
concludes with a summary of idealised assumptions for a global CFfFR derived from
Chapters 4, 5 and 6.
With the execution of DSR Cycle 3, the third sub-research question of how the
formalisation the CFfFR could assist in constructing a CFfFR that logically formalise
standards that are principle-based, internally consistent and internationally
converged, is answered.
In Chapter 7, the formal domain ontology of the CFfFR is constructed using the
background information provided in Chapters 4, 5, and 6, thus answering the main
research question during the execution of DSR Cycle 4.
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6.2 Ontology in Philosophy
6.2.1 Background on Ontology in Philosophy
Ontology is an interdisciplinary study involving philosophy and science (Grenon &

Smith, 2009; Losee, 2001; Zúñiga, 2001). Ontology as discipline does not exist
independently from other scientific disciplines, it obtains the structure of the world as
it really is from knowledge embodied in other disciplines and depends on the
language of other disciplines (Corazzon, 2013; Smith, 2003). In applying ontology
one selects the most important and most general laws from the various disciplines at
a specific time (Corazzon, 2013; Corazzon, 2010; Smith & Ceusters, 2005). The
ontologist interprets and generalises the most fundamental and general structures of
a discipline (Wolterstorff, 1970).
Ontology 92 is defined in the Mirriam-Webster Dictionary (2014) from a philosophical

perspective as:
1: “a branch of metaphysics concerned with the nature and relationships of being;
2: a particular theory about the nature of being or the kinds of things that have
existence”.
According to Smith (2003:155) “ontology as a branch of philosophy is the science of

what is, of the kinds and structures of objects, properties, events, processes and
relationships in every area of reality” and is often used as a synonym for
metaphysics. Wolterstroff (1970) describes ontology from a philosophical perspective
as “a description of the most general structure of what there is. It is a description of a
structure so general that every other discipline will deal with some detail of the
structure.” According to Gruber (2002) “ontology is a systematic account of
Existence.”
a) Philosophical definition of ontology applied to financial reporting
In this study, the ontology of financial reporting proposes to interpret and generalise
the most fundamental and general structure of financial reporting as documented in
the CFfFR. It explores the nature of being of financial reporting in order to formally
describe the general structure, the being, of financial reporting. The structure of the
“financial reporting being” is obtained from the knowledge of financial reporting as
officially accumulated and accepted by the accounting discipline in the CFfFR. In this
study the most fundamental and general structures of financial reporting as provided
in the CFfFR, were interpreted and generalised.
92
The following is a concise description of ontology by the Mirriam-Webster Dictionary (2014):
“Theory of being as such". It was originally called “first philosophy” by Aristotle. In the 18th century, Christian Wolff
contrasted ontology, or general metaphysics, with special metaphysical theories of souls, bodies, or God, claiming
that ontology could be a deductive discipline revealing the essences of things. This view was later strongly criticized
by David Hume and Immanuel Kant. Ontology was revived in the early 20th century by practitioners of
phenomenology and existentialism, notably Edmund Husserl and his student Martin Heidegger. In the English-
speaking world, interest in ontology was renewed in the mid-20th century by W.V.O. Quine; by the end of the century
it had become a central discipline of analytic philosophy.”
198
Based on the definition of ontology provided by the Mirram-Webster Dictionary (2014)
the ontology of financial reporting can be defined as “a particular theory about the
nature of being or kinds of things that have existence in financial reporting”. Based on
Smith’s (2003) description of ontology as a branch of philosophy, the ontology of
financial reporting can be described as “the science of what financial reporting is, the
kinds and structures of objects, properties, events, processes and relationships in
every area of financial reporting”. The ontology of financial reporting is a description
of the most general structure of what there is in financial reporting (Wolterstorff,
1970). The definition of Gruber (2002) adds the element of “a systematic account of”
to the definition of ontology. The systematic component of the definition is provided
by the formalisation of the ontology using a formal language.
The ontology of financial reporting can be described as “a theory of the most general
structure in the form of a systematic account of the nature of being, kinds of things
and structures of objects, properties, events, processes and relationships in every
area that have existence in financial reporting”.
The ontology of financial reporting can be described as an interdisciplinary study

between philosophy, computing and accounting with specific focus on financial
reporting (Figure 6.4).
Figure 6.4: Interdisciplinary nature of the formal ontology of financial reporting
From philosophy the theoretical background regarding the use and terminologies
used in the ontology are obtained. Computing provides the technologies to formalise
the CFfFR in a digital format. The general structure of the objects, properties, events,
processes and relationships are provided in the natural text of the CFfFR.
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b) Historical development of ontology in philosophy
The concept of ontology originated with Aristotle, who made the distinction between
physics and metaphysics (Guizzardi, 2007; Losee, 2001). Physics deals with material
entities and metaphysics with immaterial entities, which are behind the physical
world. Aristotle did not use the term “metaphysics”, he called the discipline “first
philosophy” (Smith, 2003; Dancy, 2001) or theology and was the first to create a
system of an ontology of substances. Through a cognitive process, Aristotle
searched for the general properties of things that constitute their invariant form
(Losee, 2001; Dancy, 2001) 93. These general properties are universal structures of
patterns (universals) (Patterson, 2011) to be defined and axiomatized through first-
order logic (Corazzon, 2013; Dancy, 2001). The quest to determine the very nature of
universals occupied philosophy and the sciences since the introduction by Aristotle
(Corazzon, 2013; Losee, 2001).
Although Aristotle introduced the quest for universals and the study of ontologies, the
word “ontologia” was first introduced in the 17th century (Guizzardi, 2007). In some
scholarly works it is stated that Rudolf Göckel (or in Latin Rudolf Goclenius)
introduced the term “ontologia” in 1613 when he included the term in his lexicon
philosphicum quo tanquam clave philosphiae fores aperiuntur, informatum opera et
studio Rodolphi Goclenii” (Guizzardi, 2007). According to Corazzon (2013) Jacob
Lorhard already used the term ontologiae in 1606 in the complete title of his book
Ogdoas, Scholastica continens Diagraphen Typicam artium: Grammatices (Latinae,
Graecae), Logices, Rhetorices, Astronomices, thices, Physices, Metaphysices, seu
Ontologiae 94. It was Johannes Heinrich Alsted who identified ontology with
metaphysics or first philosophy as general discipline of being (Corazzon, 2013).
Johann Micraelius initially made a distinction in 1653 between metaphysica generalis

and metaphysica specialis. Metaphysica generalis presupposes the science of
thinkable things (Corazzon, 2013). Formal ontology, as it is used in this study, relates
to metaphysica generalis. Metaphysica specialis is concerned with special
metaphysics such as psychology, pneumatology, cosmology and theology.
Christian Wolff (1679-1754), a determinist and rationalist (Hettche, 2014), and

Gottfried Leibniz (1646-1716), a co-inventor of calculus, had an important influence in
the history of ontology. Knowledge, according to Wolff, is obtained from the principles
of logic provided by Leibniz and divided philosophy into a theoretical and practical
part (Hettche, 2014). For Wolff the principle of non-contradiction and the principle of
sufficient reason are valid in “all merely possible worlds in addition to the real world”
(Corazzon, 2013:68.11). Although logic and ontology are two different disciplines in
philosophy, Wolff connected the disciplines of ontology and logic using the principles
of logic in his quest for knowledge. Logic and the principle of non-contradiction linked
to ontology are important in this study in order to answer the research questions.
93
See the discussion on Aristotle’s inductive-deductive method in Losee (2001).
94
Corazzon (2013) provides a list of the texts with the term ontologia from Lorhard to Clauberg (1606-1664).
200
Immanuel Kant (1724–1804), historically one of the most influential philosophers,
rejected Wolff’s logic and his ontology as metaphysical and Platonistic (Corazzon,
2013). Although Kant introduced his own transcendental logic (Meerbote, 2001) he
adopted Aristotle’s logic for his system of categories to define all concepts (Sowa &
Search, 2010). Kant’s ontology is based on Newton’s physics of natural laws
(Meerbote, 2001; Förster, 2011). According to Kant, if one wants to gain knowledge,
only those categories which fulfil certain spatio-temporal conditions may be used
(Corazzon, 2013). It is not the world of things-in-themselves, but the spatio-temporal
categorical system of relationships of the phenomena that determines the ontology
(Corazzon, 2013). Kant’s ontology derives from natural laws, which are supported by
empirical evidence of the general structures of the physical world (Förster, 2011;
Meerbote, 2001). With Kant, ontology became interdisciplinary. According to
Corazzon (2013:68.13) it is “the first time in the history of philosophy and science that
scientific results were thoroughly (philosophically) generalized”. The ontology of
sciences progressed in the twentieth century after Kant with many scientific theories
with specialized cognitively languages and mathematical methods. This study links
with the interdisciplinary nature of ontology as introduced by Kant (Figure 6.4).
The ontology of sciences developed after Kant in Neo-Kantianism, Positivism and

Neo-Positivism, the philosophy of the Vienna Circle and in contemporary philosophy
of science (Corazzon, 2013). Phenomenological ontology expanded Kant’s
phenomenological reduction of the world and climaxed with Edmund Husserl (1859-
1938) who established the school of phenomenology (Corazzon, 2013) and broke
with the positivist orientation of the science and philosophy. According to Guizzardi
(2007:18) “Edmund Husserl coined the term Formal ontology as an analogy to
Formal Logic.” The aim of Formal ontology as philosophical discipline is to develop a
system of general categories and their ties. Such a system can then assist “in the
development of scientific theories and domain-specific common sense theories of
reality” (Guizzardi, 2007:19). This study is presented as a formal ontology because it
is using formal logic that forms the basis of DL, the language in which the domain-
specific ontology of the CFfFR as reality is provided.
Another big influence on the study of ontology is Martin Heidegger’s (1889-1976)

fundamental ontology (Heidegger, 1999). Heidegger was a student and successor of
Edmund Husserl at Freiburg (Corazzon, 2013). The phenomenologist Franz
Brentano (1878-1917), who had a special interest in Aristotle and lectured at the
University of Würzburg and the University of Vienna, influenced Husserl. Amongst
Brentano’s students were Edmund Husserl, Alexius Meinong, Sigmund Freud and
Kazimierz Twardowski. A big influence on Husserl and Twardowski was Bernard
Bolzano (1781-1848). Husserl and Twardowski rediscovered Bolzano’s work on
phenomenology and analytic philosophy.
Bolzano was a Bohemian mathematician, logician, philosopher, theologian and

Catholic priest and one of the greatest logicians who lived between Leibniz and
Frege (Edgar, 2013). He was a professor of the science of religions at the University
201
of Prague. In 1837, Bolzano published his Wissenschaftlehere 95 explaining the
theory of science and the relationship between knowledge, truths and science
(Edgar, 2013). In the Wissenschaftlehere, Bolzano is concerned with (1) the realms
of language, (words and sentences), (2) the realm of thought (subjective ideas and
judgements) and (3) the realm of logic (objective ideas and propositions). According
to Sebestik (2014) “the main innovations of Bolzano’s logic consist in the definitions
of validity, analyticity and logical truth, and the creation of a complete system of
extensional relationships between propositions, the most important of these being
compatibility, deducibility (= consequence), and equivalence”. This study links with
the logic of Bolzano as it used formal logical to analyse and provide the relationships
between the most basic concepts of financial reporting as formulated in the CFfFR.
c) Influence of philosophy on computing
The philosophical concept of ontology from the tradition of Husserl, Twardowski,

Meinong Hartmann and Heidegger forms the background of its adoption and use in
computing, and more specifically within Artificial Intelligence (AI) (Corazzon, 2013).
The third discipline therefore influencing this study via computing is philosophy. In
order to identify the aspects adopted by AI from the philosophical concept of
ontology, a short description of relevant aspects in the philosophical concept of
ontology is provided.
According to Heidegger (1999:1) “ontology means doctrine of being” and “ontology” is

used as a formal theory of objects and coincides with the ancient ontology or
“metaphysics” (Heidegger, 1999). Heidegger emphasises that ontology is not isolated
but connected to other disciplines like ontology of nature, ontology of culture, and
material ontologies. Heidegger called the other disciplines the “field of being” which is
to guide the treatment of problems in that ontology. In Heidegger’s phenomenology, a
“concept” is not a schema but a possibility of being, of how matters look in the
moment. It is “a meaning drawn out of something, it transports us into a fundamental
experience” (Heidegger, 1999:12).
The aim of a philosophical ontology is to seek truth, to discover the natural joints
separating distinct material spheres of reality of domains of objects (Zúñiga, 2001).
The concern is to obtain new knowledge and to discover what exists in any domain of
objects and this knowledge must not be entirely dependent on our knowledge of
things in the world. In the words of Heidegger, it is to draw meaning out of something.
A philosophical ontology provides an objective description of any domain of objects.
The focus of computing ontologies is not primarily to obtain or discover new
knowledge although computing ontologies provide tools with which new knowledge
can be obtained. Computing adopted the concept of ontology to describe and
understand a specific domain of objects in an unambiguous manner (Zúñiga, 2001).
95
Wissenschaftslehre. Versuch einer ausführlichen und grösstentheils neuen Darstellung der Logik mit steter
Rücksicht auf deren bisherige Bearbeiter, 4 volumes, Sulzbach: J. E. v. Seidel; 2nd improved edition: Leipsic: Felix
Meiner, 1929, 1929, 1930, and 1931; reprints: Aalen: Scientia, 1970 and 1981; BGA I, 11–14; E of selected
parts: Theory of Science, ed. by Rolf George, Oxford: Oxford University Press, and Berkeley-Los Angeles: University
of California Press, 1972; and: Theory of Science, ed. by Jan Berg, Dordrecht: D. Reidel, 1973.
202
Computing depends on the use of formal logic to describe its ontologies in an
unambiguous manner.
d) Logic and ontology
In philosophy, logic and ontology are diverse fields, but they overlap in the field of
formal languages (Hofweber, 2013). Hofweber (2013) identifies four notions of logic
in philosophy:
• L1: The first notion is the study of certain mathematical properties of artificial,
formal languages concerned with first or second order predicate calculus, modal
logics, the lambda calculus and categorical grammars. This logic is relevant in
the philosophy of mathematics, and its application to natural languages.
• L2: The second notion is the logic that deals with valid inferences and good
reasoning based on them. This logic is concerned with formal validity. According
to Hofweber (2013:2) “to call an inference formally valid is to assume that certain
words have their meaning fixed, that we are within a fixed set of representations,
and that we can ignore the meaning of the other words”. The notion of logical
consequence is central to this logic.
• L3: The third notion is the study of the logical truths or facts, and is often
associated with Frege. This logic is seen as a science that describes truths or
facts just as other sciences describe truths. “A logical truth is one whose truth is
guaranteed as long as the meaning of the logical constants is fixed, no matter
what the meanings of the other parts in a representation are” (Hofweber,
2013:3).
• L4: A fourth notion associated with Kant is no longer prominent but of historic
importance. It is the study of most general features of thoughts or judgements. It
is mostly concerned with thoughts, and not directly with linguistic
representations.96
Hofweber (2013:4) summarises the four notions of logic as follows:

• “(L1) the study of artificial formal languages
• (L2) the study of formally valid inferences and logical consequence
• (L3) the study of logical truths
• (L4) the study of the general features, or form, of judgements.”
Hofweber (2013:8) furthermore divides the discipline of ontology in philosophy into

the following four parts:
• “(O1) the study of ontological commitment, i.e. what we or others are committed
to,
• (O2) the study of what there is,
96
Hofweber (2013) discusses how the different conceptions of logic are related to each other.
203
• (O3) the study of the most general features of what there is, and how the things
there are relate to each other in the metaphysically most general ways,
• (O4) the study of meta-ontology, i.e. saying what task it is that the discipline of
ontology should aim to accomplish, if any, how the questions it aims to answer
should be understood, and with what methodology they can be answered.”
Based on the four notions of logic and the four parts of ontology, Hofweber (2013:8–
18) provides six areas of overlap between logic and ontology, namely:
1. Formal languages and ontological commitment. (L1) meets (O1) and (O4).
2. Is logic neutral about what there is? (L2) meets (O2).
3. Formal ontology. (L1) meets (O2) and (O3).
4. Carnap’s rejection of ontology. (L1) meets (O4) and (the end of?) (O2).
5. The fundamental language. (L1) meets (O4) and (the new beginning of?) (O2).
6. The structure of thought and the structure of reality. (L4) meets (O3).
In this study, areas of overlap numbers 1 (formal languages and ontological

commitment) and 3 (formal ontology) above are both valid. Regarding the overlap of
formal languages and ontological commitment, the notion of logic as described in L1
is valid as the formal ontology of the CFfFR is based on a formal language DL
(Description Logics). The formal language or ontolingua of the ontology in this study
is computer readable (Gruber, 1992). The O1 part of ontology is applicable as the
study is committed to the formalisation of the most basic postulates and principles of
financial reporting. Based on the results of section 5.3.4, where the role of the CFfFR
towards accounting standards was determined to be a meta-metamodel, it can be
concluded that the O4 part of ontology is also applicable.
Overlap number 3 (formal ontology) is also applicable in this study. Formal ontology
(L1) meets (O2) and (O3). The use and application of formal ontologies in computing
is related to the characteristics that formal ontologies attempt to give precise
mathematical formulations of the most general features the of concepts (properties)
and the relationships of these concepts in some formal language based on a system
of formal logic. It is assumed that the ideal CFfFR contains the most general
concepts and relationships of these concepts of the semantic domain of financial
reporting.
In this study, accounting with specific reference to financial reporting is the third
discipline connected to ontology. The CFfFR serves as the field in which to search for
truth regarding the role and requirements of an ideal and global CFfFR. Although
notions L2 and L3 of logic, as typified by Hofweber (2013), are not included in the
overlaps, they are both applicable in this study. L2 is applicable as the reasoner
linked to Protégé used in this study to test the validity of inferences and the reasoning
behind them. The ontology as model of the CFfFR is a truth container indicating
logical truths regarding the internal coherence and logical consistency of the CFfFR,
making L3 valid also. In section 5.2.3, it was established that the ontology of the
CFfFR is a model containing truth.
In section 6.2.2 the value and use of formal language and ontology and the areas of
application to this study is indicated.
204
6.2.2 Formal Language and Ontology
“Logic” and “ontology” are important areas in philosophy, and different philosophers
have used them in different ways (Hofweber, 2013). The basis for formal principles of
reasoning and correct inference is situated in the science of logic (Simpson, 2000). In
order to build a formal ontology within computing, a formal language (or
computational logic) with well-defined semantics and powerful reasoning tools are
required (Gerber & Gerber, 2011).
According to Hofweber (2009), formal tools like artificial languages, formal logic
expressed in such languages and mathematical proves were developed in
philosophy under the heading philosophy of mathematics over 100 years ago. In
terms of the value of the use of formal tools Hofweber (2009) has indicated that the
use of formal tools such as formal languages are limited in that they can be a source
of error. According to Wang and Schagrin (2014:1) “a formal language usually
requires a set of formation rules - i.e., a complete specification of the kinds of
expressions that shall count as well-formed formulas (sentences or meaningful
expressions), applicable mechanically, in the sense that a machine could check
whether a candidate satisfies the requirements”. The complete specification contains
three parts: (1) a list of primitive symbols, (2) combinations of these symbols, and (3)
a set of inductive clauses (Wang & Schagrin, 2014). Several different logical
formalisms were developed through the ages, of which First-Order Logic (FOL) is
noteworthy.
The limitations of logic are also indicated by Hintikka (2014). However, the value in
the use of a formal language is that formal tools “are at best used to represent results
established by other means” (Hofweber, 2009:217). This study profits from the value
in the use of formal tools as it uses a formal language to represent the CFfFR,
established by the IASB, using recognised ontology technologies.
205
In Figure 6.5 provided by Guarino et al. (2009), languages are sorted into informal
natural languages such as textual terms and definitions to formal approaches such as
first-order, higher-order, modal logic.
Figure 6.5: Types of languages, sorted from informal to formal
The languages on the informal side of the figure are less exact and have a higher
potential for ambiguous meanings. The languages on the formal side of the figure are
more exact as they are based on formal logic, thus reducing the possibility for
ambiguous meanings. Formal approaches or logical languages allow specifying
rigorously formalised logical theories (Guarino et al., 2009). The use of a formal
(logical) language contributes to the rigor and exactness in the communication
process. Another benefit of using a formal language is that a computer can read and
“understand” the formal language. With the help of formal tools available in
computing, a computer can make logical inferences based on the formal language.
The reasoner (a computer program) tests the logical consistency of what is
communicated in the formal language – i.e. the formal ontology of the CFfFR.
The summary provided by Guarino et al. (2009) and Uschold and Gruninger (2004)
puts Description Logics (DL) 97 used in this study, in perspective. Description Logics
is a decidable fragment of Formal Ontology Languages (FOL) (Nardi & Brachman,
2007) as the logic to formalise the CFfFR by building a formal ontology of the CFfFR.
Calvanese and De Giacomo (2003:185) provides the following characteristics of
expressive description logics:
97
See an extensive discussion on DL in Baader, Calvanese, McGuinness, Nardi, and Patel-Schneider (2007) and in
Calvanese and Giacomo (2003).
206
“(i) The language used for building concepts and roles comprises all
classical concept forming constructs, plus several role forming constructs
such as inverse roles, and reflexive-transitive closure.
(ii) No restriction is posed on the axioms in the TBox.”
Apart from the benefit of testing the logical consistency of the formal ontology of the
CFfFR, the importance of logical consistency is argued to be a pre-requisite for
cross-cultural acceptance of theories.
6.2.3 Logical Consistency as Pre-requisite for Cross-cultural Acceptance of Theories
One of the problems with harmonisation and the global acceptance of the CFfFR and
financial standards is the barrier of cultural differences. An example of such a cultural
barrier is the publication of the Stamp Report by CICA after the release of the FASB
conceptual framework (Stamp, 1980). It contains contradicting opinions due to the
effect of cultural differences on financial reporting.
Social, cultural and political differences as stumbling blocks are confirmed by

Hussein (1996:95) when he states that “the original idea of harmonization as moving
towards uniformity in accounting standards across countries may not be achieved as
long as social, cultural, and political differences exist across countries”. According to
Hofstede (1985) there is limited convergence between cultures and cultural
differences are substantial and require the attention of those dealing with cross
cultural activities.
On the contrary, there are claims that culture does not have an influence on financial
reporting from common law countries. Jaggi and Low (2000) examined the impact of
legal systems on financial disclosures by firms from different countries. Jaggi and
Low (2000) noticed that firms from common law countries have a higher degree of
commonality in financial disclosures than firms from code law countries. The cultural
impact on financial disclosure by firms from common law countries was insignificant
and the results by firms from code law countries were mixed.
Hussein (1996) proposed a reconciliation strategy where an agreement is reached on

basic recognition and measurement criteria and on a framework that enables users to
reconcile financial statements from different countries while it also satisfies those
countries’ regulatory requirements as a solution for cultural differences. The solution
proposed by Hussein (1996) seems practical, but it still does not bring us closer to a
global CFfFR. In this study, logic is proposed as part of the solution to draft a global
CFfFR. From the field of semantics and translation, the principle is accepted that
words do not have meanings, meanings have words and all meanings can be clearly
expressed in all languages (Louw et al., 1989; Nida, 1981; Nida & Taber, 2003; Nida,
1969; Nida, 1991). What should be made clear in translation is not the words or even
the structure of the words, but the intended meanings of the words within the context
the specific words are used in. The implication of this principle is that exact meanings
can be clearly communicated across different cultures if the intended meanings are
translated into the cultural context of the target language.
207
Antonites (2006) noted that certain values and theories in science are accepted
across cultures and over historical periods. Even thinkers from postmodern and
modernistic paradigms argue with each other and agree on contradictions. It
assumes something universal. According to Antonites (2006) Aristotle, Newton,
Einstein, Max Weber, Gadamer and Habermas use the same logic. Nobody,
regardless of their cultural orientation, accepts inherently contradictory statements.
The value of logic is that it transcends cultures and takes time to form an underlying
coherence and common ground shared between the participants in a discussion
(Antonites, 2006).
The value of logic to the global acceptance of the CFfFR is emphasised by Malinvaud
(1995:211) when he states the importance of a conceptual framework for accounting
to build a macro-economic theory as follows: “A system of rigorously defined
concepts and measures is required for any body of scientific knowledge”. “Rigor”,
implies that the definitions in the conceptual framework should be able to withstand
the onslaughts of logical testing to provide reliable micro data sets. At the end, it is
not only the accountants and investors all over the world that would benefit from a
global CFfFR, but also the economists.
We are in the fortunate position to witness the value and power of logic in successful
and cross-cultural acceptance of multi-national and multi-disciplinary projects such as
SNOMED CT and the Gene ontology (Smith, 1989; Smith, 2003). This study takes
advantage of the value of logic by using Description Logics (DL), a language based
on logic, to build a formal domain ontology of the CFfFR. In this study formal logic,
the underlying basis of DL, is presented as the bridge to cross the cultural barrier to a
global CFfFR.
Based on this background of ontology in philosophy the transformation from ontology

in philosophy to ontologies in computing is provided.
6.3 Ontologies: Computing and Financial Reporting
In Chapter 2, the historical development of the CFfFR was described using a

stimulus/response system, indicating that the development of the CFfFR is the result
of a reaction to various external stimuli. The development of ontology technologies in
computing can be another external stimulus to the development of the CFfFR.
The literature on computing presents a couple of definitions for ontologies. As the

concept “ontology” originated in philosophy (see section 6.2), the meaning of
ontology in computing is linked to the philosophical meaning of ontology but with a
specific application in computing. The definition evolved with the development and
application of formal ontology technologies. In section 6.3.1, a short background on
the development and use of ontologies in computing is provided to argue the
applicability of ontologies for this study.
In section 6.3.2, the link between ontologies conceptual modeling, models and
metamodels are provided. In section 6.3.3, the interdisciplinary relationship between
accounting, philosophy and computing is concluded by motivating the benefits of
building a formal domain ontology of the CFfFR.
208
6.3.1 Background on Ontologies in Computing
Computing only recently adopted the concept of ontology from philosophy (Palmer
2001). Guan et al. (2013:21) summarises the differences between ontology in
philosophy and computing as follows:
“The targets for philosophical ontology are the things themselves and the
relationships existing among them. ontology research in the CS/IS
context is concerned with the study of a specific domain to tackle more
practical issues but CS/IS ontology research employs a similar approach
(as that in philosophical ontology research) and relies on theories from
philosophical ontology.”
This study is mainly concerned with ontologies as it is applied in computing but it also
employs theories from philosophical ontology, therefore the discussion on ontology in
philosophy in section 6.2.
Before the meaning and use of ontology in computing is discussed, the term
“ontology” as it is defined in computing is investigated. The term ontology is currently
popular and used to refer to anything from taxonomy, a domain vocabulary and a
conceptual model to a formal logic-based ontology (McGuinness 2003).
Figure 6.6 and Figure 6.7 are examples of the Gene Ontology (GO) as published by
the Gene Ontology Consortium. These figures illustrate the how very complex
domains can be formalised using ontology technologies. 98
Figure 6.6: Gene Ontology CytoScape EM (Source: (Gene Ontology Consortium,

2015))
98
The purpose of these figures is not to explain the Gene Ontology it only serves as examples on how a very
complex domain can be formalised.
209
Figure 6.7: Gene Ontology S Aureus Term Enrichment (Source: (Gene Ontology
Consortium, 2015))
Within computing, an ontology is defined as a shared, formal, explicit specification of

a domain, typically describing a hierarchy of concepts and associating each
concept’s crucial properties with it (Broekstra, Klein, Decker, Fensel, Harmelen, et al.,
2001). Gruber (1995) borrowed his definition from philosophy, and states that “an
ontology is a systematic account of Existence” and he then defines ontology as “an
explicit specification of a conceptualisation”. “Conceptualization” as used by Gruber,
is according to Zúñiga (2001) the objects, concepts and other entities that are
assumed to exist in some area of interest and the relationships that hold among
them. A conceptualisation is seen as an abstract, simplified view of the area of
interest that is to be represented. The CFfFR can be viewed as an abstract, simplified
view of financial reporting. This study provides an explicit specification of the CFfFR.
The “explicitness” in this study was obtained by using a formal language.
a) Formal and unambiguous representation of primitive terms
Gruber links ontologies in information systems (a sub domain of computing) with

philosophical formal ontologies 99 by stating: “...knowledge of a domain is represented
in a declarative formalism.” According to Mineau (1993:90) as stated on the first
International Conference on Conceptual Structures, “an ontology of domain can be
99
See the discussion in Hofweber (2013) regarding representational Formal ontologies.
210
described as the set of the basic elements pertaining to the description of the
domain. These basic elements are called primitive terms of the domain, and from
them, any other object in the domain can be described”. From the discussion on the
history of the CFfFR (see Chapter 2), it is clear that the CFfFR is the historical result
of the most basic postulates and principles accepted by a large part of the accounting
community of financial reporting. It can be expected that the CFfFR should provide
the primitive terms of financial reporting.
In Artificial Intelligence (AI) systems within computing, what “exists” is that which can
be represented (Gruber, 1993; Gruber, 1995). Computational ontologies formally
model the structure of a system (Guarino et al., 2009).
From the discussion above, it can be argued that the purpose of ontologies in
computing is to represent what exists (a specified system or domain). The computing
purpose of ontologies differs from the aim of ontologies in philosophy, which is to
seek or discover the truth. An ontology in computing can therefore be a
representational vocabulary that is used to describe the relationships between the set
of objects of a domain to represent the knowledge of a specified domain without
claiming to discover the truth or to obtain new knowledge.
The representational vocabulary must be based on logical principles to be able to

model relationships between concepts in an inherent logically consistent manner. At
the same time, the vocabulary must also be computer readable to build a
computational artefact of the relationships between the set of objects of the specified
system or domain. In order for the vocabulary to be computer readable, an ontology
must be semantically perfect with no ambiguous terms or notions (Flahive, Taniar,
Rahayu, & Apduhan, 2009). The requirement that an ontology must be semantically
perfect and unambiguous corresponds with the requirement of logical consistency for
the ideal CFfFR identified in Chapter 5.
b) Computational formal logic and ontologies
In essence, an ontology in computing is a special kind of information object or

computational artefact that captures the knowledge of a specified system or domain
in a computer readable form. Furthermore, if it is a formal ontology because the
model is constructed using a computation formal logic, it means that a computer can
not only read the ontology but also reason with the knowledge and draw logical
inferences from the assertions 100.
In order to formally model or capture the knowledge of a specified system, the

relevant entities and relationships of a system or domain the ontology engineer
analyses and organises the different entities of a system into its most basic concepts
(also known in philosophy as universals or primitives) and relationships between
100
If we assert that a) all birds can fly, b) all parrots are birds, and c) Polly is a parrot, an example of a logical
inference for the a, b and c assertions would be that Polly can fly.
211
those concepts (Guarino et al., 2009). 101 A taxonomy of the basic concepts of a
system or domain forms the backbone of an ontology (Guarino et al., 2009). The
basic concepts are organised according to a hierarchy of the relationships between
them.
An example from the financial reporting domain is to identify the concepts resource,
fixed asset and buildings. Resource is a super-concept of fixed asset and building. A
physical building owned by an entity (business) would be an instance of its
corresponding concept building. The relationship between the different concepts
should then be determined and the concepts then connected according to the
relationships. The reasoner is then able to test the logical consequences and
inferences of the concepts and their relationships. In this study, only the concepts
and their relationships as they are portrayed in the CFfFR are formalised.
Simon et al. (2006:224) confirmed the hypothesis that the “methodology and
conceptual rigor of a philosophically inspired formal ontology brings significant
benefits in the development and maintenance of application ontologies”. This study
intends to explore the significant benefits by developing a philosophically inspired
formal domain ontology of the CFfFR. In a pilot study building a small ontology of the
elements of the statement of financial position as defined in the CFfFR, Gerber et al.
(2014) demonstrated the applicability and documented some results of the
formalisation of the definitions for asset, liability and equity.
6.3.2 Ontologies, Models and Metamodels
In section 5.2, it was argued that an ideal CFfFR could serve as a truth bearing
model helping to construct a global CFfFR. In section 5.3, it was indicated that the
CFfFR can be typified as a type model and that the CFfFR serves as a metamodel
towards accounting standards and as a meta-metamodel towards financial
statements. In sections 6.2 and 6.3.1 the applicability of ontology in philosophy and
ontologies in computing to the CFfFR were argued. In section 6.3.2, the relationships
between ontologies in computing, models and metamodels are indicated in order to
justify the building of a formal domain ontology of the CFfFR in its role as a
metamodel and meta-metamodel. It is argued in section 6.3.2 that conceptual
modeling, as used in computing, provides the link between the ideal CFfFR as meta-
metamodel truth bearer, indicated in Chapter 5, and the building of a formal ontology
of the CFfFR.
101
Alternative terms for “concept” are “property” or the philosophical term “universal” which, in philosophy, are those
entities that can have instances. The term “property” are not be used in this study, as “property” can be confused with
the accounting concept “property”, which forms part of fixed assets. As it seems that computing standardised on the
use of the term “concept”, the term “concept” is used in this study.
212
a) Conceptual modeling and the CFfFR
Conceptual modeling is a well-researched and documented concept in computing

and started as a discipline in computer science in the 1970’s (Wieringa, 2011). 102
According to Wilmont et al. (2013:74) “Conceptual modeling is a core activity in
systems analysis, involving reasoning with concepts and the relationships between
them”. Conceptual modeling is used as a communication framework between
developers and users and it helps analysts to understand a domain (Wilmont et al.,
2013). According to Henderson-Sellers (2011a:104) it is accepted “that both models
and metamodels (and indeed metamodels) in Computing can be regarded as
conceptual models”.
The following definition of a model provided by Wilmont et al. (2013:75) contains all
the elements of the model theory used in this study: “A model is an abstract
unambiguous representation of a domain of interest, comprising concepts and
relationships, which illustrates the behaviour and structure of a real-world system”. In
Table 6.1 an application of the definition provided by Wilmont et al. (2013) to this
study is provided.
Table 6.1: Wilmont et al. (2013) model definition applied to financial reporting domain
Definition Application
A model is The formal ontology of the ideal CFfFR and the CFfFR are
models and metamodels (see Chapter 5).
an abstract (representation) The CFfFR and the formal ontology of the CFfFR are
abstract representations of the financial reporting domain.
unambiguous representation Although the CFfFR is not unambiguous, the formal

ontology is unambiguous due to the use of OWL DL, the
semantic reasoner and Protégé.
of a domain of interest The domain of interest is financial reporting as

conceptualised in the CFfFR.
comprising concepts and The most basic concepts and relationships as formulated in
relationships the CFfFR are identified and modelled in the ontology
which illustrates the The CFfFR provides the behaviour and structure of the
behaviour and structure of financial reporting domain as formulated by the IASB. The
behaviour and structure of the CFfFR are illustrated when
analysed with the reasoner and presented in graphic format
with the tools available in Protégé.
a real-world system The real world system for the CFfFR is the financial
reporting domain. The CFfFR is an abstraction of the real
world system providing the basic postulates and principles
of the financial reporting domain. The formal representation
of the CFfFR is an abstraction of the CFfFR, which serves
as the real world system for the formal ontology.
102
The following are some publications on conceptual modeling and ontologies (Borgida & Brachman, 2003;
Guizzardi, Herre, & Wagner, 2003; Wand, Storey, & Weber, 1999; Wieringa, 2011; Sugumaran & Storey, 2002;
Henderson-Sellers, 2011a; Guizzardi, 2006; Henderson-Sellers, 2011b; Wilmont et al., 2013).
213
From the application of the CFfFR and the formal ontology of the CFfFR to the
definition of a model above provided by Wilmont et al. (2013), it can be argued that
the CFfFR as model complies, with the exception of unambiguity, with the definition
of a model provided by Wilmont et al. (2013). The formal ontology of the CFfFR
complies with all the aspects of the definition of a model as it is used in computing.
b) The CFfFR as a digital domain
In order to understand the social impact of the formal ontology of the CFfFR as a
proposed automated solution for the real world problem domain, Wieringa (2011)
provides a distinction between three kinds of domains namely, physical domains,
social domains, and digital domains. A physical domain is described in terms of time,
space, energy and mass and borrows terms from the physical sciences (Wieringa,
2011).
The second domain is called a social domain. Wieringa (2011:13) describes a social
domain as follows:
“A social domain consists of social constructs such as money,
commercial transactions, value, business processes, goals, job roles,
responsibility, accountability, etc. The characteristic feature of a social
domain is that it contains people who have a shared conceptual model of
this domain. Many domain entities and events, such as organizations, job
roles and money, are social constructions that would not exist if there
were no people who share a conceptual model of these entities and
events.”
Examples of social domain entities in the accounting and finance environment would
be an organisation such as the IASB, an auditing firm, the SEC, the New York Stock
Exchange, a reporting entity or even the accounts department of a reporting entity.
The positions of the CEO or CFO of reporting entities are domain entities and the
activities of the CEO or CFO can be described as domain events. The CFfFR or the
annual financial statements of a reporting entity do not adhere to Wieringa’s (2011)
definition of a social domain.
Digital domains form the interface between physical and social domains (Wieringa,
2011) and consist of symbols and their physical occurrences. The physical
occurrences of digital domains are things like paper, ink, signals traveling through a
wire and magnetic disc spaces. The digital symbols have meanings for people,
defined by a convention chosen by a group of people (Wieringa, 2011). The
meanings are recorded in various physical occurrences and symbols like natural
language dictionaries, program languages and documents like legal acts,
constitutions and conceptual frameworks. According to Wieringa (2011:14) “the
relationship between a physical symbol occurrence and its meaning is a social
convention that from a physical point of view is arbitrary and could have been defined
differently”.
Based on the definition of a computer model by Wieringa (2011), the CFfFR and
financial reporting domains can be viewed as digital domains. A meaning of the
214
financial reporting domain is recorded on paper or in a digital document of the CFfFR.
The CFfFR as metamodel or meta-metamodel is a physical occurrence of the
financial reporting domain. The relationship between the CFfFR as physical symbol
occurrence and its meaning is a social convention that is arbitrary and could have
been defined differently by another community. In this study, the digital domain was
implemented in a software system to eliminate arbitrary interpretations of the physical
occurrence.
The effect of inserting the software system to the financial reporting domain has
created an effect domain (Wieringa, 2011) – another domain model of the CFfFR.
The effect domain model created new possibilities for action such as answering some
questions on internal coherence and logical consistency of the physical occurrence –
the CFfFR. The conceptual modeling activity applied in this study has created a truth
bearing model providing some information on the real-world digital domain (R) (see
section 5.2.4) (Mäki, 2011). The formal model created in this study can be typified as
a digital domain model of another digital domain model, the CFfFR, in its physical
occurrence.
Based on the discussion above, it can be concluded that conceptual modeling in

computing is applicable for this study. In order to achieve the effect of the new
domain model and create the new possibilities of actions mentioned above the new
domain model was formalised using ontology technologies.
c) Ontologies, models and metamodels
Ontologies as used in computing are a particular kind of model. Ontologies

developed in artificial intelligence thinking while metamodeling and conceptual
modeling were investigated in software engineering (Henderson-Sellers, 2011b).
Guarino (1998) distinguishes between four different kinds of ontologies in computing
according to their level of generality, or point of view. The four ontologies are top-
level ontologies, domain ontologies, task ontologies and application ontologies.
Top-level ontologies, also known as upper ontologies (Mascardi, Cordì, & Rosso,
2007) are independent of a particular problem or domain. Upper ontologies “describe
very general concepts like space, time, matter, object, event, action etc.” (Guarino,
1998:9) across all domains. Upper ontologies are used to integrate heterogeneous
knowledge from different sources (Mascardi et al., 2007). Upper ontologies provide
languages for the most basic concepts and relationships that are not domain
specific. 103 In this study, the basic concepts and relationships as specified in DOLCE
were used as basis to integrate knowledge from accounting, computing and
philosophy the three different disciplines in the study.
Domain ontologies are domain specific and provide a formalised vocabulary related
to a specified domain. Domain ontologies utilise the terms (concepts and
relationships) introduced in an upper ontology. A domain ontology serves as a
103
See the discussion by Mascardi et al (2007) for a comparison of different upper ontologies.
215
knowledge base for a specific domain. Task ontologies describe a specific task and
provide a formalised vocabulary related to a specific task.
According to Guarino (1998) concepts that depend on both a particular domain and a
task can be described as an application ontology. The concepts correspond to roles
they play in a domain while performing a certain activity. A replaceable unit or spare
components are examples.
It was already argued that the CFfFR could be described as a digital domain
metamodel. The specified domain within which the CFfFR functions is the domain of
financial reporting with the purpose to provide guidelines for the development of
internationally converged.
d) Formal languages and computability of formal ontologies
Ontologies has a strong resemblance to conceptual models and metamodels

(Guizzardi, 2005), with the difference that ontologies need an ontology representation
language. Ontology representation languages are based on formal logic. First-order-
logic languages provide the widest expressivity but are not computable. In order to
utilise the benefits of formal logic, the Web Ontology Languages (OWL) were
developed (Mcguinness & Van Harmelen, 2004). The Semantic Web vision by the
Web ontology Working Group required an ontology language that can formally
describe the meaning of terminology used in Web documents. The language had to
be able to perform useful reasoning tasks on web documents (Mcguinness & Van
Harmelen, 2004).
One of the sublanguages of OWL is OWL DL. McGuinness et al. (2004:6) describes
the use and characteristics of OWL DL as follows:
“OWL DL supports those users who want the maximum expressiveness
while retaining computational completeness (all conclusions are
guaranteed to be computable) and decidability (all computations will finish
in finite time). OWL DL includes all OWL language constructs, but they
can be used only under certain restrictions (for example, while a class
may be a subclass of many classes, a class cannot be an instance of
another class). OWL DL is so named due to its correspondence with
description logics, a field of research that has studied the logics that form
the formal foundation of OWL.”
This expressiveness, computational completeness and decidability of OWL DL were

utilised when the formal ontological representation of the CFfFR was created. In this
study, OWL DL was used with the semantic editor Protégé and the semantic
reasoner FaCT++.
Protégé is an open source ontology editor and knowledge acquisition system. It

includes deductive classifiers to validate if models are consistent. This feature is used
to test the inherent consistency of the CFfFR when it is rewritten as a formal
representative domain ontology. FaCT++, a semantic reasoner, is software able to
infer logical consequences from a set of asserted fact or axioms. The ontology
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language OWL DL specifies the inference rules used by FaCT++. The logical
consequences of the formal domain ontology of the CFfFR were tested using the
semantic reasoner.
Ontologies are conceptual models with the additional characteristic that they are
presented in a formal language based on formal logics. The benefits of using a formal
language such as OWL DL are that the formal language adds enhanced
expressiveness, computational capabilities and decidability to the model. Combined
with a semantic reasoner and a semantic editor the logical consequences and
inferences of the ontology can be tested by the software.
The intended purpose of ontologies, just as with models, determines if a specific

ontology functions on the model, metamodel or meta-metamodel level. An upper
ontology such as DOLCE functions on the metamodel and meta-metamodel level.
The function of an ontology within a specific domain determines the model function of
the domain within that specific domain.
Based on the discussion above, the third research question was answered by
building a formal representative domain ontology of the CFfFR. The application of
formal domain ontologies on accounting is explained in section 6.3.3.
6.4 Formal Domain Ontologies and Financial Reporting
The nature and characteristics of formal domain ontologies as utilised in computing

have potential to assist in building a global CFfFR. The third and main research
questions 104 were answered by building a formal domain ontology. The formal
domain ontology of the CFfFR indicated some unintended meanings and logical
inconsistencies in the CFfFR. The formal domain ontology of the CFfFR provides
some indicators on how to comply with the role, requirements and definition of an
ideal CFfFR that could be globally acceptable.
The building of the formal domain ontology of the CFfFR was the last activity (fourth
DSR Cycle) in the process to determine and test the requirements of a global CFfFR.
The purpose of the formal domain ontology of the CFfFR was an attempt to get
closer to the ideal CFfFR according to the ideal assumptions developed in Chapters
4 and 5.
The first activity (DSR Cycle 1) in Chapter 4 was to determine the definition and
requirements of the CFfFR. Idealised assumptions were derived in Chapter 4 from
existing publications on the CFfFR, using a systematic review. The Chapter 4
idealised assumptions and requirements were further refined in Chapter 5 (DSR
Cycle 2) using model theories to define the role of an ideal CFfFR. From philosophy,
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The main research question (MRQ) is: How can a CFfFR consisting of logically formalised fundamental concepts
be developed, which could function as a sound foundation for accounting standards that are principle-based,
Sub-research Question 3 (SRQ 3) is: How can the formalisation of the CFfFR using ontologies assist to construct a
CFfFR consisting of logically formalised fundamental concepts, which could function as a sound foundation for
accounting standards that are principle-based, internally consistent and internationally converged?
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it was determined that the formal domain ontology of the CFfFR, based on idealised
assumptions, is a model bearing truth of the reality (R), i.e. the CFfFR. From the
theory on models in computing it was determined that the CFfFR functions, according
to the OMG four level hierarchy of models, as a type model on a meta-metamodel
level (M3).
In order to exploit the benefits of viewing the role of the CFfFR as a meta-metamodel
within the financial reporting domain, the possible contributions of ontology in
philosophy and ontologies in computing were investigated in Chapter 6 (DSR Cycle
3). According to the study of ontology in philosophy, it was determined that the ideal
role of CFfFR is that it should function as an upper formal ontology for the financial
reporting domain. The benefits of an ontology are that it provides the most basic
concepts and relationships with another discipline to guide the treatment of problems
in that domain. In this study, the “field of being”, as the other discipline is called by
Heidegger (Heidegger, 1999), is the field of financial reporting. Ontology as
understood in philosophy, also contributed the use of a formal language based on
formal logic. The use of a formal language in an ontology assists to obtain logical
consistency in the specific ontology. Logical consistency is viewed as one aspect that
contributes to global acceptance of a theory (see section 6.2.3).
In this study, the benefits of the computability and expressivity of OWL DL as a

formal language were used to build a computer readable and logically consistent
ontology of the CFfFR. Formal domain ontologies are used in computing to build
ontologies of specific domains in order to understand and conceptualise the concepts
and relationships of a specific domain in a logically consistent manner. The CFfFR
can be viewed as a representation of the most basic postulates and principles of the
financial reporting domain, accepted by a large portion of the accounting community.
When the CFfFR and the formal domain ontology of the CFfFR are viewed as
models, the role function of these models can be explained from the perspective of
conceptual modeling in computing.
6.4.1 Related Work on Ontologies in Financial Reporting
An investigation of the literature indicated that formal ontologies as used in

computing have not readily been applied to the CFfFR. A summary of related and
prominent publications is provided below. The summary does not provide a complete
list of all the publications on ontology/ies and accounting. The selection of the
publications indicated below was based on its relevance to this study.
According to De Pree (1989:61) a rigorous procedure to evaluate a theory consists of

“two conceptually distinguishable but interrelated parts”. The evaluation procedure
was applied to the conceptual framework of the FASB. The sentences constituting
the logical structure of the theory and its inferences in the FASB conceptual
framework were tested by way of using mathematical or logical proves as well as “by
way of evidence, be it empirical, intuitive, or otherwise” (De Pree, 1989:61). The
study by De Pree (1989) tested the logical structure of the FASB conceptual
framework and demonstrated that the structure of the FASB conceptual framework is
indeed logically consistent. This study tested the natural language of the CFfFR for
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internal logical coherence by analysing the natural language sentences into its most
basic concepts and relationships contained within the sentences.
Carlson and Lamb (1981) applied an axiomatic formulation in predicate logic on

certain fundamental portions of accounting theory. Carlson and Lamb (1981)
constructed the basic vocabulary of accounting from a base of primitive terms,
introducing a set of axioms and rules of inference, and deriving theorems stating
certain characteristics of financial positions and income within the system. The
publication concludes with the following five beneficial qualities of the axiomatic
method for accounting research (Carlson & Lamb, 1981:569):
1. “It exhibits with precision the logical connections of the discipline.
2. It has a great unifying power capable of relating the various terms and
concepts of a field to all of the other terms and concepts.
3. Such an analysis may reveal unsuspected consequences in our existing

assumptions, leading to discoveries or at least to suggestions for profitable
research.
4. An axiomatic system provides a context, or manner of conceptualizing a

problem that, if adopted by all participants in a discussion, will greatly
facilitate communication between them.
5. The system may indicate the fruitlessness of certain controversies which

arise largely because of meta-physical or linguistic confusion.”
The formal domain ontology of the CFfFR benefits from the five qualities stated
above.
Partridge (2002a; 2002b) discussed some ontological choices necessary for the
development of a conceptual framework from a philosophical perspective. Partridge
(2002b:1) argues for a “shift in the foundations and framework of accounting’s
conceptual scheme”. The proposal is that the new foundation should be a reference
ontology. This study is in agreement with this discussion and the necessity to argue
the philosophical grounding of fundamental choices of accounting concepts as a topic
of further research.
Aparaschivei (2007) emphasises the importance and value of creating an accounting

ontology from a theoretical perspective. According to Aparaschivei (2007) an
accounting ontology building consists of two knowledge categories. The first category
involves factual domain knowledge about objects, relationships, events, states and
causal relationships. The second category involves problem-solving techniques on
how to achieve certain purposes. This study utilises both knowledge categories. The
formal domain ontology of the CFfFR consists of the knowledge categories and is
aimed at solving the problem to draft a global CFfFR.
Teller (2008) introduced a model to represent accounting standards and financial

information. Teller (2008) proposed the notion of syntactic and semantic modeling.
Although Teller (2008) also used Protégé to build the ontology, it differs from this
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study in that this study is concerned with the building of a formal domain ontology of
the CFfFR. Teller (2008) illustrated the value of ontology technologies by applying it
to case studies.
Chou et al. (2008) presents an ontological approach proposing knowledge

management via ontology development in accounting. ontology is used to “explain
the profit and loss account as a representation of the potential use of this
methodology” (Chou et al., 2008:36). According to Chou et al. (2008:36) the benefit
of the proposed ontology is that it “expands the researcher’s ability to generate
information by using search methods beyond simple keywords”. The benefit of having
a formal ontology of the CFfFR that is readable by a computer is that it creates
possibilities for researchers that are not possible on a text written in natural language.
Dahab et al. (2008) use TextOntoEx to extract candidate relationships and then maps
them into meaning representation to facilitate the constructing of an ontology. The
work by Dahab et al. (2008) supports the construction of domain relationships and
non-taxonomic conceptual relationships and applies it into a case study of the
agricultural domain. This study takes advantage of constructing domain relationships
as it is presented in the natural text of the CFfFR.
Chou and Chi (2010) proposes an ontological Event, Principle and Account (EPA)
model to describe accounting principles. An OWL-based ontology was used to
demonstrate some EPA examples. According to Chou and Chi (2010), in order to
build a domain-specific ontology the existing domain ontology must be examined. In
accounting, knowledge regarding the domain is in accounting standards, textbooks
and literatures coded in natural text. Chou and Chi (2010:2318) opted to utilise the
“reconstructed method” “to reconstruct accounting knowledge and transform it into
ontological artefacts”. Chou and Chi (2010) reconstructed the class hierarchy of
merchandise inventory with reference to accounting standards.
The study by Chou and Chi (2010) differs from this study in that this study built a
formal ontology of the CFfFR using the natural text as basis to identify the most basic
concepts and relationships on a conceptual basis. The work of Chou and Chi (2010)
proposes to link actual transactions (Event) with a reconstructed principle (Principle)
and general ledger accounts (Account). The purpose of the study by Chou and Chi
(2010) is to demonstrate the possibility of an ontology that could capture and classify
a cash sale transaction. According to Chou and Chi (2010:2322) the second
contribution of their study is that “the ontological Principle construct can be further
applied to validate the quality of existing accounting standards, for example to test for
inconsistency between those standards, and basic accounting concepts”.
The formal domain ontology of the CFfFR is the first step towards the second
contribution formulated by Chou and Chi (2010) as it provides the basic accounting
concepts in an inherently consistent manner. Similar formal ontologies of accounting
standards can then be tested for consistency against the formal ontology of the
CFfFR. The formal ontology of the CFfFR is also a step towards the third contribution
proposed by Chou and Chi (2010). The formal ontology of the CFfFR is the first step
towards creating an expert system containing full accounting knowledge, with the
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difference that it is based on the actual text accepted by the IASB. One of the
benefits of the formal ontology of the CFfFR is that it can act as an intelligent
facilitator to assist in setting accounting standards.
An ontology representation of business reporting data and metadata structures as

defined in the eXtensible business reporting language (XBRL) standard is provided
by Spies (2010). Spies (2010) applies the OMG four level hierarchy model on the
XBRL reporting structures. This differs from this study that applies the OMG four level
hierarchy on the financial reporting domain (section 6.3.3 and Figure 6.6). According
to Spies (2010) (M0) is an instance level and comprises the actual object of the
domain e.g. an XBRL reporting document. “The instance level (M1) comprises the
XBRL analytic taxonomies and calculation rules relevant for a reporting instance
document e.g. a balance sheet item” (Spies, 2010:407). On modeling language level
(M2) Spies (2010) positions the principles of defining analytic taxonomies and also
refers to it as the metamodel level. On modeling language definition level (M3) Spies
(2010:407) positions “the basic object modeling language or modeling elements in
terms of which the M2 level language (the metamodel) can be built”. Spies (2010)
also refers to this level as the meta-metamodel level. This study differs from Spies
(2010) in that it does not focus on the taxonomy XBRL level but on the actual natural
text of the CFfFR at a metamodel level.
Krahel (2012) submitted a Ph.D. dissertation to the Graduate School of Newark with
the title “On the formalization of Accounting Standards”. The study provides an
ontology serving as a framework for analysis of lease accounting standards
published by the FASB. Krahel (2012) did not create a computable ontology based
on a formal language. The study is limited to the illustration of lease transactions.
Litherland et al. (2013) explored how an ontology or conceptual map of introductory

financial accounting can be used to provide value and reliable marking of free-text
answers on an ontology-based e-assessment system. Although this study uses
ontology technologies it is not concerned with the formalisation of the CFfFR.
Wu (2013) submitted a study in partial fulfilment of the requirements of a Master of

Science (M.Sc.) in Computational Logic. The study by Wu (2013) is aimed at the
characterisation of concepts in the XBRL taxonomies in order to address the diversity
in the XBRL taxonomy comparability problem. The study attempts to solve the
taxonomy alignment problem by transforming it into an ontology-matching problem.
Mattessich (2013) published a book with the title “Reality and Accounting: Ontological
Explorations in the Economic and Social Sciences”. The publication is concerned
with general ontological questions. The publication does not propose to be an
accounting ontology or a domain ontology of accounting, but discusses ontological
questions from accounting theory. The publication differs from this study in that it
does not create an ontology of the CFfFR but rather discusses ontological concepts
from a theoretical perspective.
Based on the discussion above of related work, it can be concluded that at the time
that this study was conducted there were no other studies relating to the formalisation
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of the CFfFR. Taking the mapping of the financial reporting domain with the four level
hierarchy of the OMG into consideration, the studies by Chou and Chi (2010) and
Spies (2010) are the most closely related to this study and can be viewed as
complimentary to this study.
6.4.2 Model and Ontology Hierarchy of the CFfFR
Ontologies, as used in computing, overlap with conceptual modeling and links

modeling theories and ontologies in the computing discipline. The OMG four level
hierarchy provides an explanation of the role of the different models between data
(M0), models (M1), metamodels (M2) and meta-metamodels (M3) (Figure 6.6). The
role and function of the CFfFR can, according to the model theory of Kühne (2005;
2006b) and the OMG four level hierarchy, be classified as that of a meta-metamodel.
Models, metamodels and meta-metamodels should adhere to logical and relational
requirements and should represent their respective realities (R) in an acceptable and
truthful manner in order to be truth-bearing models. The OMG four level hierarchy
and model theory of Kühne (2005; 2006b) serve as theoretical background to
understand and refine the role and function of the CFfFR and formal domain ontology
of the CFfFR as metamodels.
The ontological relationship of upper ontologies and domain ontologies combined

with the OMG four level hierarchy (Henderson-Sellers, 2011b; OMG, 2014; OMG,
2008) applied to the model relationships according to Kühne (2005; 2006b) in the
financial reporting domain can schematically be illustrated as follows:
Figure 6.8: Ontology, OMG and model hierarchy of the financial reporting domain
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According to the OMG four level hierarchy, models and metamodels should be in a
one to many relationship providing a certain level of abstraction. The model should
cover all the instances in the domain reality in order to adhere to the requirement of
completeness and be a sound representative model of the reality. A model
should conform_to a metamodel on a higher level in order for the relationship
between the model and the metamodel to form a logically coherent and consistent
relation. If a metamodel and its related model on a lower level are both logically
consistent and all the concepts and relationships in the lower level model is
abstracted into the higher level metamodel, then a logically consistent relationship of
representation exists between the two models. This logically consistent
representative relationship makes it possible to understand and learn some truths of
the reality domain that is being modelled.
The implication of the relational characteristics between models and metamodels for
the ideal CFfFR is that the ideal CFfFR should in the first place be in itself logically
consistent. Secondly, there should be a one to many relationship between the ideal
CFfFR, the ideal accounting standards and evidently with the economic activities of a
reporting entity. The ideal CFfFR should cover all the concepts and relationships
within the ideal accounting standards and the instances in the reporting domain, on
an abstract level. Thirdly, the ideal accounting standards should also be logically
consistent. The ideal accounting standards should conform_to the ideal CFfFR in
order to provide a logically consistent, representative relationship between the ideal
CFfFR as meta-metamodel and the ideal accounting standards as metamodels. This
should result in a financial report of a reporting entity as model that conform_to its
metamodels to be a logically consistent representation of the reporting entity’s
economic activities that complies with the concepts and relationships as
conceptualised in the ideal CFfFR and in the ideal accounting standards. In this
scenario, the role and function of the ideal CFfFR are to serve as a role model (meta-
metamodel) from which the ideal accounting standards can be derived. This ideal
CFfFR should be a step closer towards a global CFfFR.
6.4.3 How Ontologies in Computing Help to Answer the Research Questions
The following is a list of characteristics of ontologies in computing and how they

contribute to answering the research questions in this study:
1) Ontologies in computing offer the possibility to build an ontology using a formal

language based on formal logic to ensure that the ontology is inherently logically
consistent. This study took advantage of the use of the formal language OWL DL
to test built a formal ontology of the CFfFR that is inherently logically consistent.
2) The formal language is computable making it possible to make computable
inferences and test a complex conceptual system for internal consistency. The
value of the formal domain ontology of the CFfFR is that it can draw inferences
from the written text based on formal logic and confirm problems like
inconsistencies and unintended meanings already suspected and indicate
additional inconsistencies and unintended meanings not previously noted. The
complex system of the formal domain ontology of the CFfFR was tested for
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internal consistency using the reasoner FACT++, making it possible to identify
internal logical inconsistencies in the natural language text of the CFfFR.
3) The computability of the formal ontology makes it reusable and easy to adjust
when changes occur. It also makes it easy to test alternative scenarios without
having to redevelop the entire ontology. It was possible to test alternatives during
the building process.
4) The use of a formal language forces the ontologist to use the most basic
concepts and relationships in an unambiguous manner. The meanings of the
concepts and relationships must be explicitly clear to avoid logical
inconsistencies. In order to build the formal domain ontology of the CFfFR it was
essential to identify the most basic concepts and relationships within the CFfFR.
It was also important to establish the exact and unambiguous meanings of the
identified concepts and relationships in order to avoid logical inconsistencies.
5) It offers upper ontologies based on sound philosophical assumptions to identify
concepts and relationships. The philosophical assumptions regarding the most
basic concepts and their relationships were used to build the formal domain
ontology of the CFfFR.
6) Ontologies in computing offer the possibility to build domain ontologies with the
added benefit of linking to upper ontologies and domain ontologies. The OMG
four level hierarchy, combined with the use of upper domain ontologies and
domain ontologies in computing were used to map the ontology of the CFfFR in
the financial reporting domain in terms of its role and status within the domain.
7) Ontologies in computing offer the option to develop ontologies containing
different modules in the case of complex conceptual systems. The computability
of the ontologies built on formal languages makes it possible to test the logical
consistency between different modules of a specific ontology. This option makes
it possible to create formal domain ontology modules of the accounting
standards and the CFfFR and test for logical consistency between the different
modules.
The formal domain ontology of the CFfFR does not intend to replace current research
and experience gained from practice, it can just be another research tool in the hands
of researchers. The formal domain ontology of the CFfFR does not intend to replace
the written text, it only serves as a tool to analyse the current text in order to indicate
possible improvements in the text. In the words of Moonitz (1963:43) it has the
potential to “extend our knowledge even to problems beyond anyone’s experience to
date”.
A formal representation of the CFfFR is not a new way of doing science, it is only a
new method. Abstraction of similarities from the mass of evidence has already been
described by Moonitz (1963). A formal representation of the CFfFR is a higher level
of abstraction of the statements, definitions and postulates presented in the CFfFR. It
is a logical process of drawing inferences from the text either confirming previous
knowledge or establishing new knowledge.
The function of the formal domain ontology of the CFfFR is not to prove if a
statement, definition or postulate is either true or false. The ontology tests for logical
consistency within or against the rest of the statements, definitions and postulates.
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The domain experts should decide whether a statement, definition or postulate is
either true or false.
6.5 Idealised Assumptions
The idealised assumptions derived from the previous chapters are summarised and
categorised. The categories are: main assumption, assumptions regarding the
financial reporting domain, assumptions regarding the role and status of the CFfFR,
assumptions on the requirements for a global CFfFR and lastly assumptions on the
influences on setting the ideal CFfFR. In total 13 idealised assumptions provide the
background for the ideal CFfFR to function as a truth-bearing model.
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Main assumption:
1. A globally accepted CFfFR is possible.
Domain assumptions:
2. The semantic domain modelled in this study is the definitions and other
fundamental concepts providing guidance for globally acceptable financial
reporting.
3. The ideal CFfFR provides all the definitions and other fundamental concepts
needed to guide standard setters to set principle-based globally acceptable
4. The definitions and other fundamental concepts are restricted to those definitions
and other fundamental concepts needed to guide the setting of principles to
provide information needed by primary users of general-purpose financial
statements to make decisions.
Role and status assumptions:
5. The ideal CFfFR serves as a meta-metamodel and has a deductive status

towards accounting standards and consequently, has a prescriptive role towards
6. Definitions of the elements of financial statements and other fundamental
concepts can be applied both inductively and deductively on economic
instances. The same results are accomplished regardless of the direction of
application of the definitions and fundamental concepts.
7. Given the deductive status of the ideal CFfFR, accounting standards are logically
and internally consistent with the ideal conceptual framework.
8. The ideal CFfFR satisfies the needs of practitioners, requirements of legislators,
and theories of academics.
Requirements assumptions:
9. The ideal CFfFR is internally and logically consistent.

10. The ideal CFfFR is clear and free of unintended meanings.
Influences on setting the idealised conceptual framework:
11. The ideal CFfFR is not the result of responses to economic, technological,
political or legislative stimuli.
12. Existing accounting standards do not influence the formulation of definitions and
other fundamental concepts in the conceptual framework.
13. There are no political influences and regulatory restrictions on creating the ideal
conceptual framework.
The formal domain ontology of the CFfFR developed in this study contributes towards
addressing to the following idealised assumptions: domain assumptions 2 and 4,
requirement assumptions 9, 10 and 11.
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By addressing the idealised assumptions above the formal ontology of the CFfFR
may at least partially contribute towards reaching the following idealised
assumptions: Main assumption; domain assumption 3; role and status assumptions
5, 6, 7 and 8.
The following idealised assumptions are not addressed by building the formal domain
ontology of the CFfFR developed in this study: Influence assumptions 11, 12 and 13.
The influence assumptions fall outside the scope of influence of this study.
The motivation and benefit of building a formal domain ontology of the CFfFR were
discussed in Chapter 6. In Chapter 7, it is reported how the formal domain ontology
of the CFfFR was built. The results of the ontology are reported in section D.
6.6 Knowledge Contribution
The knowledge contribution towards building the formal domain ontology of the
CFfFR as the main artefact in DSR Cycle 4 was advanced during DSR Cycle 3 with
the addition of two more artefacts. The two artefacts, the role of the ideal CFfFR as a
formal domain ontology according to the OMG four level hierarchy (Figure 6.6) and
the construct artefact the conceptualisation on how a CFfFR ontology could
contribute towards answering the research questions, contribute to the knowledge on
how to build a CFfFR that could be globally acceptable. These artefacts represent
evaluation markers on the FEDS Human Risk & Effectiveness evaluation strategy.
The progress on the FEDS Human Risk & Effectiveness evaluation strategy is
schematically illustrated in Figure 6.7.
With the development of the model artefact and construct artefact during DSR Cycle
3, the FEDS Human Risk & Effectiveness strategy is completed. The theoretical
background and assumptions to build the formal domain ontology of the CFfFR was
established.
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6.7 Conclusion
During DSR Cycle 3, as reported in Chapter 6, the relevance of ontology from a

philosophical perspective and ontology technologies from a computing perspective
was explored to motivate the building of a formal domain ontology of the CFfFR. The
third sub-research question was answered in Chapter 6, indicating how the
formalisation of the CFfFR using ontologies could assist in constructing a CFfFR that
would be closer to the ideal CFfFR and would adhere to more of the requirements
and ideal assumptions of a globally acceptable CFfFR.
The use of a formal language and the necessity of logical consistency to obtain
cross-cultural acknowledgement of a theory was argued from a philosophical
perspective in section 6.2. From a computing perspective, the role of the CFfFR as a
conceptual model where it functions as a formal upper domain ontology was
indicated in section 6.3.
In section 6.5, the idealised assumptions for the ideal CFfFR was presented. It was
indicated in section 6.5.1 which idealised assumptions will be addressed by building
a formal upper domain ontology of the CFfFR. In section 6.5.2, the idealised
assumptions not addressed by the formal upper domain ontology of the CFfFR were
listed.
Based on the knowledge that a formal upper domain ontology of the CFfFR would
contribute towards the construction of a CFfFR that would adhere to more of the
requirements of a global CFfFR, the study proceeded towards the next DSR Cycle,
the actual building of a formal domain ontology of the CFfFR in Chapter 7.
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CHAPTER 7
TABLE OF CONTENT
7 A FORMAL DOMAIN ONTOLOGY OF THE CFfFR ................................................ 231
7.1 Introduction .............................................................................................................232

7.2 Guidelines to Build an Ontology .............................................................................. 234
7.2.1 OLC Phase 1: Requirements of the CFfFR Ontology .............................................. 235
7.2.2 Ontological Analysis, Design and Development and Basic Assumptions to Build a
Formal Ontology of the CFfFR ................................................................................ 236
a) OLC Phase 2: Ontological analysis ................................................................... 236
b) OLC Phase 3: Ontology design......................................................................... 239
c) OLC Phase 5: Ontology development and reuse .............................................. 239
d) Basic assumptions adopted .............................................................................. 241
7.2.3 Knowledge Contribution: Basic Assumptions and Ontology Life Cycle Model ......... 241
7.3 Building the CFfFR Ontology: Version 1 - Iteration 1 ............................................... 242

7.3.1 Modeling of Time: Past, Present and Future ........................................................... 242
7.3.2 Modeling the Definition for Asset ............................................................................. 244
7.3.3 Modeling the Definition for Liability .......................................................................... 246
7.3.4 Modeling the Definition for Equity ............................................................................ 248
7.4.1 Identification of Basic Classes and Relationships.................................................... 251
7.4.2 Modeling the Definition for Asset ............................................................................. 253
a) DP/2013/1 asset definition ................................................................................ 253
b) Proposed asset definition.................................................................................. 254
7.4.3 Modeling the Definition for Liability .......................................................................... 255
a) DP/2013/1 liability definition .............................................................................. 255
b) Proposed liability definition ............................................................................... 255
7.4.4 Modeling the Definition for Equity ............................................................................ 256
a) DP/2013/1 equity definition ............................................................................... 256
b) Proposed equity definition................................................................................. 256
7.5.1 Identifying Key Classes and Relationships for the CFfFR Ontology ........................ 258
7.5.2 Process to Determine Decision-useful Financial Information ................................... 263
7.6.1 Reconsidering Previously Identified Classes and Relationships .............................. 266
7.6.2 Considering the Competency Questions ................................................................. 268
a) Purpose and status of the CFfFR...................................................................... 268
b) Objective: decision-useful information............................................................... 269
c) Users ................................................................................................................269
d) Uses .................................................................................................................269
e) Financial position .............................................................................................. 269
f) Financial performance ...................................................................................... 269
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g) Accrual accounting ........................................................................................... 269
h) Going concern .................................................................................................. 270
i) Qualitative characteristics ................................................................................. 270
j) Disclosure requirements ................................................................................... 270
k) Incomplete aspects in the CFfFR ...................................................................... 270
7.6.3 Building CFfFR Ontology Version 2......................................................................... 271
a) Analysis of the CFfFR to distinguish between competency questions and
classes .............................................................................................................271
b) Economic Measurement Class ......................................................................... 271
c) Reality Class ..................................................................................................... 274
d) Reporting Class ................................................................................................ 277
e) Temporal Class ................................................................................................ 279
f) Object Properties .............................................................................................. 282
7.7 Verification ..............................................................................................................284
7.8 Conclusion ..............................................................................................................284
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7 A FORMAL DOMAIN ONTOLOGY OF THE CFfFR
231
7.1 Introduction
In DSR Cycle 3 (Chapter 6) it was established that a formal domain ontology of the
CFfFR would contribute towards the construction of a CFfFR that could adhere to the
requirements of a global CFfFR. An overview of the structure of Chapter 7 is provided
in Figure 7.3.
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DSR Cycle 4 is the last cycle of the DSR strategy (Figure 3.3 and Figure 7.2) and is
reported on in Chapter 7. In DSR Cycle 4 the awareness (section 3.6.5) of the
applicability of ontology from a philosophical perspective and ontology technologies
as used in computing 105 on the CFfFR resulted in the suggestion to build a formal
domain ontology of the CFfFR (R) (Guarino, 1998; Mäki, 2011). During the
Development Step, the ontology of the CFfFR was built according to the requirements
of the Ontology Life Cycle (OLC) Model (section 7.2.1) as proposed by Neuhaus et al.
(2013). The CFfFR ontology is the artefact output of the Development Step (Figure
7.2) of DSR Cycle 4.The artefact is evaluated against the requirements of a global
CFfFR (DSR Cycle 1, reported in Chapter 4) to determine if the CFfFR ontology
adheres to more of the requirements of a global CFfFR determined during DSR Cycle
1 (Chapter 4). The role of the formal ontology of the CFfFR is also evaluated against
the idealised assumptions (section 6.5) to determine if the ontology of the CFfFR
contributes towards the ideal CFfFR and can serve as a truth-bearing model for the
The CFfFR ontology consists of two versions. The two versions were built by going
through four Iterations and were partially reported on in publications (Gerber et al.,
2014; Gerber, Gerber, Van der Merwe, & Stegmann, 2015; Gerber, Gerber, & Van
der Merwe, 2015). During Iteration 1 the formalisation of the statement of financial
position elements were explored and reported on in Gerber et al. (2014).
During Iteration 2, the work done in Iteration 1 was expanded to include suggestions
from the Discussion Paper issued by the IASB on the CFfFR (IASB, 2013a). The
basic classes and relationships present in the financial position elements were
identified and used to formalise the respective definitions. In Iteration 2, definitions for
asset, liability and equity that are logically consistent and that address some of the
problems identified during the first Iteration, were suggested. This work was published
in the conference proceedings of the SAAA conference for 2015.
During Iteration 3, the CFfFR as a whole was considered for formalisation, at which
point it was noted that a lot of domain knowledge is implied in the CFfFR regarding
the fundamental concepts involved and the decision process to be able to publish
financial reports. A decision filtering process was developed (Figure 7.19) during
Iteration 3 and was reported on and presented at the AMCIS 2015 conference in
Puerto Rico.
During Iteration 4, the knowledge obtained from the previous three Iterations was
used to develop the CFfFR ontology as presented in this study. During Iteration 4, the
competency questions to be answered by the CFfFR ontology was refined and the
CFfFR was analysed to determine which classes of the financial reporting domain
should be included in the CFfFR ontology and which information contributes towards
the competency questions. The main purpose of the CFfFR is to provide decision-
useful information to the users of financial reports. After the analyses of the CFfFR,
105
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as summarised in Figure 7.21, the competency questions were aligned to serve the
main purpose.
Chapter 7 consists of the following:

• internationally suggested guidelines to build an ontology (section 7.2),
• modeling of time for the purpose of financial reporting (section 7.3),
• a first attempt to formalise the definitions of the elements of financial reporting
(section 7.3),
• identification of basic classes and relationships in the financial position elements
and propose internally coherent, logically consistent and unambiguous SFP
definitions (section 7.4),
• identification of key classes and relationships and developing a decision filter for
financial reporting ontology (section 7.5), and
• refining the competency questions and building a CFfFR ontology to support
decision-useful information for financial reporting (section 7.6).
7.2 Guidelines to Build an Ontology
The OLC Model used in computing technologies to build an ontology (section 3.8.3,
Figure 3.8) was adopted and adapted to develop a rigorous modeling technique to
build a formal ontology of the Target R domain (the CFfFR, Figure 5.6). The modeling
technique is used to test the CFfFR against the idealised assumptions, requirements
and role a global CFfFR.
The development of an ontology-based formal language for a domain commences

with the construction of an ontology formally capturing the basic classes 106 and
relationships of the domain. In order to formally model or capture the knowledge of
the specified domain (R) (the CFfFR) as well as the relevant classes and
relationships in the domain, the different entities of a system were organised into its
key classes and relationships between those classes (Guarino et al., 2009). A
taxonomy of the classes of a system or domain forms the backbone of an ontology
(Guarino et al., 2009). The natural text in the CFfFR documentation served as the
main source of knowledge for the CFfFR ontology development. During Iteration 3 of
Version 1, it became evident that a specimen financial report should also be included
as a source document to help identify and formalise key classes and concepts
supporting decision-useful information in the CFfFR ontology.
As a development approach during the DSR Development Step, an ontology

engineering approach, described by Horridge (2009) and Noy and McGuinness
(2000) was incorporated that consists of the following steps:
• Identification of the classes and class hierarchy, including disjointedness;
• Addition of all the relationships (object properties) between classes;
• Refinement of classes based on the relationships that they participate in;
• Identification of definitions;
106
See section 7.2.1 for a discussion on the use of classes and concepts in ontologies.
234
• Addition of annotations, which are used for meta-data or descriptions of
anything that is modelled;
• Refinement of the ontology through various Iterations of the above steps.
The four Iterations of the CFfFR ontology went through the steps as indicated by
Horridge (2009) and Noy and McGuinness (2000). The ontology engineering
approach by Horridge (2009) and Noy and McGuinness (2000) were incorporated in
the OLC Model and used during the various phases of the OLC Model. As the OLC
Model was discussed in detail in section 3.8.3, only the phases utilised in this study
are indicated below.
7.2.1 OLC Phase 1: Requirements of the CFfFR Ontology
Phase 1 of the OLC Model started during DSR Cycle 1 with the determination of the
content requirements of a global CFfFR. The first requirement is that the CFfFR
ontology should comply with the main objective of the CFfFR identified as decision-
usefulness (section 4.6.1d)). Decision-usefulness was identified as the main
competency question to be answered by the CFfFR ontology. The key classes and
relationships should contribute towards providing decision-useful information to the
users of financial reports to comply with the objective of the CFfFR.
The ontology must contain the most fundamental classes and relationships of
principles providing decision-useful financial information to the primary users of
financial reports. The following are the competency questions answered by the
CFfFR ontology:
(1) What are the fundamental classes and relationships of principles providing
decision-useful information to the primary users of financial reports? The
different classes and relationships were identified and refined through all four
Iterations. The final version is schematically illustrated in Figure 7.28, Figure
7.29 and Figure 7.30.
(2) What are the formal definitions of the fundamental classes to provide decision-
useful information to the primary users of financial reports? The definitions of
the fundamental classes were mainly adopted from the CFfFR as it represents
the shared domain knowledge. In cases where modeling decisions were made,
annotations were added to the Protégé file to explain the use of terminology.
(3) What is the class hierarchy of the fundament classes to provide decision-useful
information to the primary users of financial reports? The class hierarchy were
refined throughout the formalising process and is presented in Version 2,
Iteration 4 (section 7.6).
The competency questions above were formalised to adhere to the idealised

assumptions (section 6.5) in order for the CFfFR ontology to function as a truth-
bearing model.
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The content requirements (section 4.6.2) were identified as the fundamental
requirements the CFfFR ontology should adhere to in order to contribute towards the
CFfFR ontology being a truth-bearing model (section 5.2.4).
• The CFfFR ontology should be complete and comprehensive (section 4.6.2).

The CFfFR ontology should formalise all the fundamental key classes and
relationships of the financial reporting domain to adhere to the conform_to
relationship in the CFfFR ontology hierarchy (Figure 6.6).
• The CFfFR ontology should be internally coherent (section 4.6.2). The

relationships between the classes should be well defined to form a coherent
system supporting the main competency question.
• The CFfFR ontology should be clearly and unambiguously formulated (section

4.6.2). The classes and relationships of the definitions and fundamental
concepts should be so precisely defined that it can be interpreted in only one
way and without unintended meanings.
• The CFfFR ontology should be logically consistent (section 4.6.2). The

relationships between classes should pass the test of logical consistency when
tested with the reasoner.
• The CFfFR ontology should be able to indicate inconsistencies and unintended

meanings of the natural text of the CFfFR to the target audience of the CFfFR
ontology.
The scope of the CFfFR ontology is the financial reporting domain as portrayed in the
natural text of the CFfFR and a specimen financial report. As there are no existing
ontologies of the CFfFR or the financial reporting domain (section 6.4), this study is a
first attempt to formulate a CFfFR ontology.
7.2.2 Ontological Analysis, Design and Development and Basic Assumptions to Build
a Formal Ontology of the CFfFR
a) OLC Phase 2: Ontological analysis
During the Ontological Analysis Phase 2 of the OLC (Figure 3.8), the key entities
(individuals, classes and the relationships between them) were identified. The key
entities were linked to the domain terminology. Unintended meanings, inconsistencies
and implied domain knowledge were identified during this Phase. Phase 2 of the OLC
is reported on in sections 7.3, 7.4 and 7.5.
A formal ontology / formal language consist of assertions about classes and the
relationships 107 between the classes within a specified semantic domain
107
According to Corazzon (2013:Theory and History of Ontology) “in doing ontology one always selects the most
important and most general laws among all the laws which the various disciplines have to offer at any given time.
Further, the ontologist interprets and generalizes those laws and must endeavour to establish the most fundamental
and general structures of our world”. Knowledge objects in an ontology “are described in terms of concepts (generic or
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(accounting). The reasoner, based on DL, infers logical consequences of the
assertions made about the domain and checks, for instance, if these assertions are
consistent. In order to build a logically consistent ontology the exact meaning of the
classes and relationships needs to be asserted formally and without any doubt.
Should the modeller doubt the meaning of a specific class or relationship during the
ontology construction process, it is usually an indication of an ambiguity. This forces
the modeller to make some assumptions about the meaning in order to state the
assertion formally.
Therefore, in order to build the formal ontology based on a formal language, the
semantic domain has to be analysed to identify the most basic classes and
relationships and most general laws within the specified (accounting) domain
(Corazzon, 2013). Knowledge objects in an ontology “are described in terms of
classes (generic or instantiated) which are connected through semantical
relationships” (Mineau, 1993:94). This should be the classes and relationships of the
most basic postulates of accounting.
When these principles are applied to the financial reporting domain, the CFfFR
already provides an interpretation and generalisation of the most fundamental
structures of financial reporting. The ontologist should then interpret and generalise
those classes and relationships in order to formalise it (Corazzon, 2013).
Concepts or classes in ontologies
The basis of the ontology is to analyse the financial reporting domain (as portrayed in
the CFfFR) into concepts / classes and the relationships between those concepts /
classes. The word concept is used 21 times in the CFfFR, excluding when it is used
as part of the title Conceptual Framework, indicating the importance of the notion
“concept”. As the use of the word concept is essential in the CFfFR it is important that
the use of “concept” in this study is clearly stated.
The following meanings are provided in dictionaries for the notion “concept”.
According to Collins English Dictionary (2015):
As a noun
1. an idea, especially an abstract idea ⇒ the concepts of biology
2. (philosophy) a general idea or notion that corresponds to some class of entities
and that consists of the characteristic or essential features of the class
3. (philosophy)
a. the conjunction of all the characteristic features of something
b. a theoretical construct within some theory
c. a directly intuited object of thought
d. the meaning of a predicate
instantiated) which are connected through semantical relations” (Mineau, 1993:94). According to Basili and Pazienza
(Basili & Pazienza, 1993:162) “much of the lexical information on verb semantics is entrusted to conceptual relations”.
When these principles are applied to the financial reporting domain, the CFfFR already provides an interpretation and
generalisation of the most fundamental structures of accounting.
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4. (modifier) (of a product, a car) created as an exercise to demonstrate the
technical skills and imagination of the designers, and not intended for mass
production or sale.
According to the Cambridge Dictionaries Online (2015) concept is a “principle or idea”

and the Oxford Dictionaries (2015) provide the following meanings of concept:
1. “An abstract idea: structuralism is a difficult concept, the concept of justice
2. Philosophy: An idea or mental image which corresponds to some distinct entity
or class of entities, or to its essential features, or determines the application of a
term (especially a predicate), and thus plays a part in the use of reason or
language.”
The Mirriam-Webster Dictionary (2015) defines concept as :

1. “: something conceived in the mind : thought, notion
2. : an abstract or generic idea generalized from particular instances.”
When these definitions are analysed the following are repeated when “concept” is
used as a noun: idea, abstract idea and general idea. When the word concept is used
with a philosophical connection, characteristic feature, essential feature or particular
instances are repeated in the definitions. It seems like a concept can be described as
a general or abstract idea (mental image) consisting of characteristic or essential
features. This definition, although it corresponds with the dictionaries consulted, is still
not exact enough when used in a process where terminology is standardised in the
CFfFR ontology.
Klein and Smith (2010), involved in terminology standardisation for ontologies, stated
that the term “concept” is one of the most misused terms used in technical standards.
The use of the term by realists, conceptualists and nominalists are indicated to
support their argument. The problem is that readers import their own expectations of
what the term means even when the term “concept” is used for one specialist
community, thus creating confusion within that community. After a discussion
regarding the use of the term “concept” and related terms such as “concept
definition”, “concept system”, and “concept system node” Klein and Smith (2010)
recommended that in ontologies “instances” and “types” as two kinds of reality entities
provide better alternative terms.
An “instance” in ontology language refers to an “individual” or a “particular”, but it is

preferred to refer to the term “instance”. “Instances draws attention to the fact that
entities in question are instances of corresponding types” (Klein & Smith, 2010:8).
Alternatives for “type” are “universal” and in realist philosophy and ontology also
called: “class”, “kind”, “category”, “genus”, “species” and “taxon”. Klein and Smith
(2010) propose that the term “class” is used to refer to collections of instances. In this
study, the term “class” is used to describe a collection of instances. A further reason
for using the term “class” is that class is used in Protégé thus avoiding confusion
between the terms concept and class.
“Type” in relationship to “class” indicates a certain type of class. For example,

mammal is a class and dog is a type of mammal. If we relate it to accounting, it can
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be explained as follows: asset is a class and fixed asset is a type of asset. Classes
are categorised based on the characteristics of the instances. Distinctive
characteristics of instances will differentiate between different types represented by a
class with corresponding characteristics of instances grouping types under a single
class. Once the classes and relationships were identified, these classes and
relationships were formalised during Phase 3 of the OLC model.
b) OLC Phase 3: Ontology design
The ontology design was based on the classes and relationships identified during
Phase 2. Description Logics (DL’s) and OWL 2 were used to formalise the classes
and relationships of the CFfFR. The current ontology is not separated into modules.
The ontology of the CFfFR may serve as a basic module should accounting
standards be formalised at a later stage. After Phase 3 the ontology were developed
according to Phase 5 of the OLC Model. 108
c) OLC Phase 5: Ontology development and reuse
The ontology Development Phase 5 consisted of four activities: (1) informal modeling,
(2) formalisation of competency questions, (3) formal modeling and (4) operational
adaptation.
Activity 1: Informal modeling:
During informal modeling the individuals, classes and their relationships were
identified and terminology of the domain were mapped to them (Neuhaus et al.,
2013). The results of the informal modeling were used to formalise the
scenarios and competency questions. The idealised assumptions (section 6.5)
were also used to test the informal and formal modeling processes to evaluate if
the ontology contributes towards the ideal CFfFR. The results of the
formalisation of the competency questions are presented in section 7.6.2.
Activity 3: Formal modeling:
During the formal modeling of the ontology, the classes and their relationships
were captured in the ontology language OWL and D.L. The results of the formal
model were evaluated by determining if the “ontology represents the domain
appropriately (fidelity), adheres to the design decisions made in the Ontology
Design Phase (craftsmanship), and is supposed to meet the requirements for
domain representation (fitness)” (Neuhaus et al., 2013:10).
Evaluating fidelity
One of the basic assumptions adopted in this study is that the CFfFR
represents the most basic classes and relationships regarding the financial
reporting domain (section 7.2.2). As the CFfFR forms the basis document to
108
A reminder that the ontology did not form a system therefore Phase 4 was not part of the cycle.
239
guide the ontology of the CFfFR, the assumption is that the ontology elements
are correct according to the accepted document (CFfFR) within the accounting
community. The domain is viewed at a very high level from a document
prepared by some of the most experienced and well-recognised domain experts
– the IASB. This study focused mainly on the evaluation of the logical
consistency and clarity of the natural text by formalising the classes and
relationships of the financial reporting domain as formulated in the CFfFR.
Because of the evaluation process, some remarks were also made on the
completeness of the CFfFR.
Evaluating craftsmanship
Craftsmanship is evaluated by looking at two aspects, established best

practices and if design decisions were followed in the development process
(Neuhaus et al., 2013). Iteration 4 does not include the use of an upper ontology
such as DOLCE, but is based on a process of naming conventions explained in
the OWL-DL pizza ontology (Rector, Drummond, Horridge, Rogers, Knublauch,
et al., 2004).
The ontology is evaluated based on “mathematical and logical properties such

as logical consistency, graph-theoretic connectivity, model-theoretic
interpretation issues, inter-modularity mappings and preservations” (Neuhaus et
al., 2013:10). As this study does not include modules, the model-theoretic
interpretation issues and inter-modularity mappings criteria are not applicable.
The results of the Formal Modeling Phase are reported on in Chapters 7, 8 and
9.
Evaluating fitness
The competency questions (section 7.2.1, a), vii), idealised assumptions

(section 6.5) and research questions (section 3.2) form the basis to evaluate if
the ontology meets the model requirements and ultimately answer the research
questions. The results and findings of the ontology are presented in Chapters 8
and 9.
Activity 4: Operational adaptation
In order to have an operational ontology, the ontology is adapted to the

operational requirements during the operational adaptation activity. The concern
is whether the ontology will respond within a time-frame that meets its
performance requirements (Neuhaus et al., 2013). The operation adaptation
activity is not important during this study as it is not part of the study to deploy
the ontology.
Is the chosen ontology language expressive enough to meet the ontology

requirements?
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During the Development Step cycles of the DSR project, Protégé 4.3 with
bundled reasoners (e.g. FACT++ and Pellet) were used as tools to develop an
OWL 2 ontology (W3C, 2012). OWL 2 functions as a formal language for the
selected basic definitions of the core elements necessary in the CFfFR.
Currently OWL 2 as based on DL’s are deemed expressive enough to meet the
ontology requirements.
d) Basic assumptions adopted
For this research study the following assumptions were accepted:

• Assume that the CFfFR should encapsulate the most basic definitions and
principles (postulates) necessary for the development of financial accounting
standards;
• Assume the position that the textual representation of the CFfFR, given its
supposed role, is sufficient without any further explanations. It should not be
necessary to explain concepts or statements from third party sources. If an
explanation is needed it is an indication of an unintended meaning or implicit
domain knowledge imbedded in the natural text and it was reported as such;
• Use only the current textual representation of the CFfFR to develop the formal
language and ontology. Should the textual representation be insufficient it is an
indication of an incomplete representation of the financial reporting domain and
an incompleteness were reported.
• Regard situations where the published text is unclear, ambiguous or inconsistent
as omissions and propose that this should be amended;
• Accept the textual description as presented in the CFfFR, but suggest that this
could be augmented with an ontology-based formal language where the
semantics are captured unambiguously;
• Suggest that, if inconsistencies, ambiguities, implicit domain knowledge and
incompleteness exist, they do not necessarily have to be solved as the solution
may be complex, but they should at least be known.
7.2.3 Knowledge Contribution: Basic Assumptions and Ontology Life Cycle Model
In section 7.2 it was indicated how the OLC Model was used to build the CFfFR
ontology. The basic assumptions were documented in section 7.2.2. The guidelines to
build the ontology CFfFR serves as the construct output in the Development Step of
DSR Cycle 4 and is the first point of contribution in the FEDS Technical Risk &
Efficacy evaluation strategy. The knowledge contribution is that the requirements,
according to the OLC Model and basic assumptions, provide the technical platform to
successfully build the CFfFR ontology. Figure 7.4 provides an overview of the role of
the first artefact during the building process in the FEDS Technical Risk & Efficacy
evaluation strategy.
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Figure 7.4: FEDS Strategy - DSR Cycle 4, Construct artefact.
7.3 Building the CFfFR Ontology: Version 1 - Iteration 1
The purpose of Iteration 1 was to determine if it is possible to formalise the definitions

of the elements portrayed on the statement of financial position. This iteration
provided valuable information regarding the problems to be encountered when a
definition written in natural text is used as source to formalise the basic classes and
relationships communicated in the natural text. The definitions for asset, liability and
equity are the foundation of a financial report as is evident from Chapter 2 where it
was indicated how the SFP dominated financial reporting through history. The notion
of time plays key role in accounting. In building an ontology of the CFfFR the
modeling of time plays an important role as time serves as decision point in
accounting.
7.3.1 Modeling of Time: Past, Present and Future
Adding temporal dimensions to OWL is not straightforward as OWL’s specific logic-

based formalism does not support the modeling of dynamically changing information
(Krieger, 2008). OWL supports only unary and binary predicates and relationships
cannot directly be equipped with temporal arguments (O’Connor & Das, 2011).
Several solutions to the modeling of time in OWL have been proposed in literature,
either by equipping the formal semantics (Artale, Guarino, & Keet, 2008; Lutz, Wolter,
& Zakharyaschev, 2008; Krieger, 2008), or through modeling constructs (Hobbs &
Pan, 2004; Ma, 2007; O’Connor & Das, 2011). An ontologist would choose a solution
based on the requirements that the ontology should fulfil.
In the basic definitions of the CFfFR, the classes Past, Present and Future are
pertinent. For the first version of the ontology artefact, a modeling solution was
adapted, namely the basic temporal constructs of Hobs and Pan (2004) that defines
(only) two classes of TemporalEntity namely Instant and Interval. The
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predicates begins and ends are the relationships between Instants and temporal
entities, which are called temporalBegins and temporalEnds in this ontology.
The granularity of Instant is not specified, and can, for argument sake, be a date
e.g. the reporting date. The work of Hobs and Pan (2004) allows for several
formalisms regarding time and at this stage seems to be appropriate for the modeling
that is required for the ontology artefact.
The CFfFR definitions do not clearly state what is meant with Past, Present
and Future. It would be straightforward to assume that Past and Future
are Intervals. Part of the ontology is to clearly state the meaning of terms.
Terminology related to time is inherently problematic as indicated by Russell (1970).
Present is an indication of the present moment, but it is an ambiguous particular
because the present is always changing (Russell, 1970). Present as used in the
definitions is problematic. Does present in the definitions refer to the current present
moment, the present moment when the financial report was drafted, the present
moment as the date indicated on the financial report, or the present moment when the
transaction was conducted? The definitions should be able to provide guidance at any
stage during the financial reporting process.
For the first version of the ontology, the ontological choice was made to
model Present as an Instant, with a member
(individual) TimeOfConsideration. Past then has a temporalEnd, which is
the TimeOfConsideration, and Future temporalBegins at
the TimeOfConsideration.
In the second Iteration TimeOfConsideration served as Instant and was

replaced by DateOfReporting instead of Present as preferred. In discussions
with accounting professionals, the use of DateOfReporting for Present was
criticized. The professionals correctly indicated that the decision to include an
economic activity (transaction) could not be limited to the reporting date, as it should
be included in the accounting records from the moment it complies with the specific
definition and recognition criteria. During Iteration 3 and 4 (sections 7.6 and 7.7) the
class name was changed to ConsiderationDate in the ontology. Therefore, in this
study ConsiderationDate refers to the instant whenever the inclusion or exclusion
of an element is considered. This implies that it may, for example, be the time when a
contract is concluded, the reporting date, when an obligation is settled or an asset
derecognized.
This solution introduced nominals into the ontology, which could influence reasoning
performance, but the reasoning was still deemed sufficient for the purposes of the
ontology. See a schematic presentation of the notion of time in Figure 7.5.
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ConsiderationDate
Present
Past Future
Figure 7.5: Presentation as an Instant (ConsiderationDate), with Past and Future

as related Intervals.
The temporal class was expanded during Iteration 4 (section 7.7) to

include ReportingDate in the ontology when it is specifically referred to as the
date of a financial report. The
classes PresentReportingDate, PastReportingDate
and FutureReportingDate were created to differentiate between different reports
and to be able to formalise for example when a previous reporting period started and
when a current reporting period ends. The classes FutureTemporalInterval
and PastTemporalInterval were introduced to indicate future and past reporting
periods. These classes were deemed necessary in order to be able to distinguish
between
• LongtermFutureReportingPeriod,
• CurrentFutureReportingPeriod, and
• PastReportingPeriod.
A TemporalClass was created in Protégé to formalise the notion of time. Figure 7.6
is an illustration of how time was formalised as TemporalClass.
Figure 7.6: TemporalClass is_a relationships
The temporal class assertion as indicated in Figure 7.6 seems to be sufficient to

capture the use of time periods and time instances as portrayed on a financial report.
7.3.2 Modeling the Definition for Asset
The definition for asset according to the CFfFR (IASB, 2010a:4.4 (a)) is formulated
as:
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“An asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the
entity.”
When the definition for asset was analysed, the following basic classes were
identified: Resource, Entity, Event and Benefit. These classes are marked
as disjoint from each other. Disjointedness means that classes labelled as “disjoint”
are separate and cannot form part of another disjoint class. A Resource cannot be a
part of, or be a sub-class of an Entity or an Event or a Benefit. A Resource can
be in a relation 109 to an Entity and all other disjoint classes.
The meaning of Resource is not explained in the CFfFR leaving it open for
interpretation to the reader. A decision was made to use the class Resource without
trying to explain the meaning as it could have different meanings to different readers.
The lack of an exact meaning for Resource indicates that the interpretation
of Resource can lead to some unintended interpretations.
Resource is accepted to be the most basic and broadest class for “something” that
can be used by a reporting entity to advance its business objectives. In philosophical
terms, it can be called a “universal” in the financial reporting domain. From the
ontologist’s perspective, there are numerous resources in the world but only a few,
adhering to certain criteria, can be used by a reporting entity to advance that specific
reporting entity’s business objectives.
When considering the meaning of entity it is assumed that the class Entity refers to
the Reporting Entity.
The class Control is implied because control over a resource is implied as the result
of a past event. Modeling control as a class implies that Control should relate
to Entity by introduction of an object property (relation). Entity relates
to Control via hasTypeOfControl. Resource relates to Control
via isControlledBy. This means that a ControlledResource is a Resource
that isControlledBy a Control.
In the definition of an asset the class Benefit, a sub-class economic benefit was
identified. There can be many benefits in the world, but in the definition of an asset,
the class Benefit is specified as an EconomicBenefit. The exact meaning of an
economic benefit is not clear from the text. Domain knowledge is assumed regarding
the meaning of what an economic benefit is. The question that needs an agreed upon
answer provided by domain experts is: “What is an economic benefit?”
The use of the term “expected” is not clear. It could refine

FutureEconomicBenefit or flow (which is a relation). In other words, does the
definition expect flow of benefit, or does it expect future economic benefit? The
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Called an “ObjectProperty” in Protégé.
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modeling decision was made to associate it with economic benefit and thus an
ExpectedFutureEconomicBenefit or the EFEB class was created as a sub-
class of FutureEconomicBenefit that is also expected by an entity.
The object properties (relationships) used in the formalisation of the asset definition
are: happenIn, isResultOf, hasTypeOfControl, isControlledBy,
expectedBy, fromWhichInflow.
Finally, the representation definition of an Asset is a ControlledResource and

fromWhichInflow.EFEB
The following Description Logic symbols, as listed in Table 7.1, were used in the
formal representation of the definitions:
Table 7.1: Description Logic symbols

Symbol Meaning
Intersection or disjunction, the overlap between sets. If S and T are sets of formula,
⊓ S⊓T is a set containing those elements that are members of both.
Union or conjunction used to join sets. If S and T are sets of formula, S⊔T is a set
⊔ containing all members of both S and T.
A subset containing some or all elements of another set. A ⊑ B means A is_a B or A
⊑ is_a type of B.
¬ Negation, is not. ¬ A means not A.
≡ If and only if, is defined as.
∀ For all. Universal quantifier. ∀r.E means r for-all E.
∃ Existential quantification, exist some.
A formal representation of the definition for asset is provided in Figure 7.7.
PastEvent ⊑ Event ⊓ ∃ happenIn.Past

Control ⊑ ∃ isResultOf.PastEvent
Entity ⊑ ∃ hasTypeOfControl.Control
ControlledResource ⊑ Resource ⊓ ∃ isControlledBy.Control
EconomicBenefit ⊑ Benefit
FutureEconomicBenefit ⊑ EconomicBenefit ⊓ ∃ happenIn.Future
EFEB ⊑ FutureEconomicBenefit ⊓ ∃ expectedBy.Entity
Asset ≡ ControlledResource ⊓ ∃ fromWhichInflow.EFEB

Figure 7.7: Formal representation of Asset
7.3.3 Modeling the Definition for Liability
The definition for liability according to the CFfFR (IASB, 2010a:4.4 (b)) is formulated
as:
246
“A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.”
Obligation and Settlement were identified as two additional disjoint classes

added to the classes identified in the definition for Asset, to formalise the definition of
Liability. According to the definition, a present obligation is settled by the outflow of
resources embodying economic benefits. The description “resources embodying
economic benefits” implies an additional class, thus the
class ResourcesEmbodyingEconomicBenefits were created to be able to stick
to the wording of the official definition of Liability.
The class ResourcesEmbodyingEconomicBenefits caused a modeling problem

in Protégé as the class Resource embodies all the resources available in reality.
During the modeling of the definition of Asset, the class Resource was refined within
the financial reporting domain so that only those resources that are under the control
of a reporting entity can be classified as an Asset. The implication is that only the
class Asset can embody an outflow of economic benefit from a reporting entity to
settle a present obligation. A Resource that does not comply with the definition of an
asset cannot be used to settle a liability of a reporting entity. This is an example of
domain knowledge implied in one of the most basic definitions used in financial
reporting. The definition of liability should be integrated with the definition of asset.
See
Figure 7.8 for a schematic presentation of the relationship between Resource

and Asset.
Figure 7.8: Relationship between Resource and Asset
The use and meaning of expected is problematic as it is not clear

whether expected refines Settlement or flow (which is a relation). Does the
247
definition expect the flow or expect the resulted settlement? A modeling decision was
made to create an ExpectedSettlement class as a Settlement
that isExpectedBy some Entity.
The object properties (relationships) used in the formalisation of the liability definition
are: hasSettlement, isResultOf, happenIn, hasObligation,
embodies, fromWhichOutflow.
A formal representation of the definition for liability is provided in Figure 7.9.
Obligation ⊑ ∃ hasSettlement.Settlement ⊓ ∃ isResultOf.PastEvent

PresentObligation ⊑ Obligation ⊑ ∃ happenIn.Present
Entity ⊑ ∃ hasObligation.Obligation
ControlledResource ⊑ Resource ⊓ ∃ isControlledBy.Control
ResourceEmbodyingEconomicBenefit ⊑ Resource ⊓ ∃
embodies.EconomicBenefit
Settlement ⊑ ∃ fromWhichOutflow.ResourceEmbodyingEcnomicBenefit
ExpectedSettlement ⊑ Settlement ⊓ ∃ expectedBy.Entity
Liability ≡ PresentObligation ⊓ ∃hasSettlement.ExpectedSettlement

Figure 7.9: Formal representation of liability
7.3.4 Modeling the Definition for Equity
The definition for equity according to the CFfFR (IASB, 2010a:4.4 (c)) is formulated
as:
“Equity is the residual interest in the assets of the entity after deducting all
its liabilities.”
In analysing this definition, Interest was identified as an additional and disjoint

class to be used for equity. ResidualInterest is a type of Interest that has to
be refined further as it is interest in assets after deducting liabilities. One way to
formalise the notion of deduction in a DL ontology is through set difference or
formally: B\A={x ∈ B | x ∉ A}3. For the equity definition, it is viable to use set
difference and therefore Equity was initially modelled as Asset and not
Liability.
However, this definition of Equity resulted in an inconsistency in Protégé. The

reasoner inferred that the Equity and therefore Asset classes are inconsistent (or
sub-classes of Nothing) as indicated in Figure 7.10.
248
Figure 7.10: Inconsistency in equity definition
The definition of equity is inconsistent because, from the previous definitions, an

Asset is a refined Resource and a Liability is a refined Obligation. An
Asset and an Obligation are derived from different and disjoint classes and
therefore no class can be created that is a combination of them, in this case
deducting Liability from Asset.
A semantic analysis using implicit domain knowledge was performed on the definition
of equity in order to try to remove the inconsistency. The origin of the current
definition of equity can be traced back to the formulation of the accounting equation
by Hugh Oldcastel in 1543 (see section 2.3.2a) (Edwards, 1960; Fogo, 1905)
resembling more of a calculation than a definition. Based on the accounting equation
by Hugh Oldcastle, the definition of equity implies a value, or in the terminology of the
definition, an interest to be associated with both assets and liabilities because
residual interest is the result.
The inconsistency in the text is caused by the implicit assumption that asset and
liability have associated values, which also implies that equity must have a value,
even though this implied value is never stated in the text. The definitions do not
provide any guidance on how the values should be determined. Using domain
knowledge of accounting and financial reports, the assumption is made that the total
value of assets less the total value of liabilities results in the total value of equity.
A modeling decision was made to

add AssetInterest and LiabilityInterest as types
of Interest specifically to be able to indicate that Asset and Liability
hasInterest some AssetInterest and LiabilityInterest respectively as
indicated in Figure 7.11.
Furthermore, using set difference for deduction in this ontology:

• ResidualInterest is the set difference between
Interest and LiabilityInterest.
249
• Another decision necessary here in order to model the set difference properly is
that all Interest is either AssetInterest or LiabilityInterest.
• The object property used in the formalisation of the equity definition
is hasInterest.
• During the first Iteration of the ontology, the formal definition of equity was
formalised as: Equity is Interest and not LiabilityInterest.
A formal representation of the definition for equity is provided in Figure 7.11.
ResidualInterst ⊑ Interest
AssetInterest ⊑ Interest
LiabilityInterest ⊑ Interest
Interest ⊑ AssetInterest ⊔ LiabiliyInterest
Asset ⊑ ∃ hasInterest AssetInterest
Liability ⊑ ∃ hasInterest LiabilityInterest
ResidualInterest ⊑ Interest ⊓ ¬ LiabilityInterest

Entity ≡ ResidualInterest
Figure 7.11: Formal representation of equity
7.3.5 Knowledge Contribution: Iteration 1
During Iteration 1, the notion of time and the definitions for asset, liability and equity
were analysed. During the modeling process, unintended meanings and logical
inconsistencies were indicated. It was determined that it is possible to formalise the
definitions after some modeling decisions were made. Iteration 1 is the first model
output of DSR Cycle 4 and the second knowledge contribution point in the FEDS
Technical Risk & Efficacy evaluation strategy towards building the CFfFR ontology.
Iteration 1 moved towards the naturalistic and summative axis on the FEDS
evaluation strategy with the formalisation of time and proposal of the definitions for
the SFP elements as illustrated in Figure 7.12.
Figure 7.12: FEDS Strategy - DSR Cycle 4, Iteration 1
250
7.4 Building the Ontology: Version 1 - Iteration 2
The formal representations developed during Iteration 1 were used as basis to refine
the formalisations during Iteration 2. During Iteration 1, the definitions were formalised
using only the written text of the actual definitions. During Iteration 2, the wider
context of the CFfFR was considered to determine if there is additional information
provided in the CFfFR to clarify some of the problems experienced during Iteration 1.
During the time when the work was done on the second Iteration, a review of the
CFfFR was published by the IASB as DP/2013/1 (IASB, 2013a). As the IASB made
some suggestions regarding the formulation of the definitions for asset, liability and
equity in DP/2013/1 those suggestions were taken into consideration when the
formalisations were refined. In order to test if it is possible to formulate logically
consistent and clear definitions for asset, liability and equity definitions for these,
elements were modelled taking into account information provided in DP/2013/1 and
using Protégé.
The first step was to identify the most basic classes and relationships related to the
elements of the SFP. 110
7.4.1 Identification of Basic Classes and Relationships
For the purpose of the second Iteration of the ontology, the most basic classes
represented in the elements of the SFP were identified. According to the analysis of
the CFfFR and the current definitions of the elements of the SFP, the most basic
classes contained in them are resources, claims (against those resources) and
entity (the owner of the resources and claims) (IASB, 2010a:OB12). In the CFfFR of
the IASB (2010a:OB12) it is stated that a financial report contains information about
claims and economic resources. Equity and other obligations are therefore claims
against the reporting entity, and resources under its control constitute the assets.
These classes must be disjointed from each other as specified during Iteration 1.
Within ontology engineering, the identification of the class hierarchy is a departure
point. The class hierarchy (or taxonomy) is the logical relationship between sub-
classes (lower on the hierarchy of concepts) to the most basic classes or top-level
classes.
No sub-classes were identified under the class Resource, whilst two sub-classes
were identified under Claims, i.e. Equity and Liability. The next decision was
to determine the most basic distinguishing aspect between Equity and Liability.
According to a reading of the comments in DP/2013/1, the most distinguishing aspect
is the class Obligation as defined and explained in the DP/2013/1 on the reporting
date / ConsiderationDate (section 7.2.3). The time notion present
(ConsiderationDate) functions as a deciding factor to determine an obligation on
the reporting date. Equity is linked to Entity with the object property isOwedBy,
110
The work done in Iteration 2 was partially reported on in (Gerber, Gerber, Van der Merwe, et al., 2015).
251
but it is not an Obligation on the ConsiderationDate (distinguished from
liability by the temporal class TemporalInstant sub-class
ConsiderationDate).
Another distinguishing aspect is that Equity is always linked to at least

one Shareholder (or owner). Equity is always owed to a shareholder and it cannot
be owed to a class other than a shareholder. Shareholder serves as a second
class to distinguish Equity from Liability. Both conditions (no-obligation
and Shareholder) must be valid in order for something to be classified as
equity. Equity is a Claim with no Obligation owed to a Shareholder
on ConsiderationDate.
Once Equity was distinguished from Liability by the classes Obligation,

and Shareholder two sub-classes of liability were identified. A distinguishing aspect
of an obligation according to the discussion in DP/2013/1 is: How will the obligation
be settled? The two most basic ways in which an obligation may be settled is either
by providing equity or by parting control of a resource (asset or by delivering a
service). If equity becomes an obligation, it changes to be a liability although it is still
owed to a shareholder as one of the classes, no-obligation, is not valid any more. For
practical purposes of this study, it is then called an “equity” liability. Even when an
obligation is partially settled by equity and partially by an asset (hybrid instrument), it
only represents a combination of the two most basic settlement methods.
The basic classes and relationships are schematically presented in Figure 7.13.
Figure 7.13: Basic classes and relationships of the SFP elements
252
With the most basic classes and relationships of the elements representing financial
position identified, it was attempted to formalise the definitions of these elements
using the additional information obtained from DP/2013/1 (IASB, 2013a).
7.4.2 Modeling the Definition for Asset
a) DP/2013/1 asset definition
In DP/2013/1 (IASB, 2013b) an asset of a reporting entity is defined as: “a present

economic resource controlled by the entity as a result of past events”. In addition to
the asset definition an economic resource is defined as: “a right, or other source of
value, that is capable of producing economic benefits” (IASB, 2013b).
The asset definition as stated in DP/2013/1 addresses the following questions raised
on the definition in the CFfFR (section 7.3.1):
1. A “resource” is defined as “a right, or other source of value”. This provides some
clarity, but from a logical modeling perspective, the definition “resource” is in the
first instance “a source of value” of which a “right” 111 is one type of source of
value. The implication is that there are also “sources of value” other than rights
that are resources. It is open for interpretation to determine what the “other
sources of value” may be.
2. The sub-class EconomicBenefit is still used in the definition of economic
resource.
3. As the words “controlled by”, is still used in the same manner in the definition in
DP/2013/1 as in the CFfFR (section 7.3.1) the same ambiguity exists in
SP/2013/1.
4. DP/2013/1 excludes the term “expected”, which solves the problems experienced
with the representation of the CFfFR definition. There is however still some
uncertainty built into the term “capable” as it is used in the definition, which
should provide for some uncertainty.
5. Regarding the use of time “present”: As acknowledged by the IASB (IASB,
2013b) par. 2.16 (b) “this notion is already implicit in the existing definition” and
by making it explicit does not contribute to make the definition more clear, in fact
it created some problems. To include “present” in the definition on the basis of
“emphasising the parallel with the definition of a liability” (IASB, 2013b:para. 2.16
(b)) is not enough motivation to include it in the definition of an asset. When
attempting to represent “present economic resource” it was unclear what
“present” means? Is it the resource that has economic value at “present”, or is it a
“present” resource? What does the time notion “present” refer to, is it for example
the reporting date or the time of consideration? If “present” refers to the reporting
date, it is assumed and not clear from the text.
111
See the DP/2013/1 (IASB, 2013b) par 2.14 (a) for an example of a “right”.
253
b) Proposed asset definition
Part of the study was to determine if it is possible to formally represent the definitions
of the elements providing the financial position of a reporting entity in a logically
consistent and clear manner.
The following serves as motivation for the proposed asset definition:

1. The proposed definition includes the additional definition provided in the
DP/2013/1 for economic resource. The combination of the two definitions helps to
eliminate possible ambiguities and vagueness.
2. The sub-class EconomicBenefit was kept, as it is a deciding class in the
process to determine an asset. The remarks regarding the clarity of the meaning
of “economic” are maintained.
3. Based on the discussion above the notion of time “present” was omitted in the
proposed definition.
4. It was decided not to dissect the proposed definition of control as provided in
DP/2013/1 (IASB, 2013b:para. 3.23), however some possible issues in the
proposed definition were identified namely:
a) The intended meaning of “presentability”;
b) The intended meaning of “that flow from it”; and
c) The previous comments on “economic”, “present” and “benefit” that are also
applicable to the proposed definition of control.
Based on the problems identified in section 7.3.1 and the definition provided in
DP/2013/1, the following definition for asset is proposed and then formalised:
An asset of a reporting entity is: a resource (right or other source of value), which is
under the control of an entity as a result of past events and which is capable of
producing economic benefits.
In order to formally represent the proposed asset definition the following additional
classes were created: SourceOfValue, OtherSourceOfValue, Right.
are: isCapableToProduce, isUnderControlOf, isControlOf, isResultOf.
The following is a formal representation of the proposed asset definition:
Asset ≡ Resource ⊓ ∃ isCapableToProduce.EconomicBenefit ⊓ ∃

isUnderControlOf.Control
Control ⊑ ∃isControOf.Entity ⊓ ∃ isResultOf.PastEvent
Resource ≡ SourceOfValue ≡ OtherSourceOfValue ⊔ Right
OtherSourceOfValue ⊑ ¬ Right
EconomicBenefit ⊑ Benefit
PastEvent ⊑ Event ⊓ ∃ happenIn.Past
Past ⊑ Interval ⊓ ∃ temporalEnds.{ConsiderationDate}
Figure 7.14: Proposed asset definition
The proposed definition is logically consistent according to the DL used in Protégé.
254
7.4.3 Modeling the Definition for Liability
a) DP/2013/1 liability definition
In DP/2013/1 (IASB, 2013b) a liability of a reporting entity is defined as: “a present

obligation of the entity to transfer an economic resource as a result of past events”
(IASB, 2013b).
When attempting to model liability as proposed in the DP/2013/1, the following was
found:
1. A reporting entity can only transfer economic resources under control of that
specific reporting entity and not any economic resource. See the comments
made under the discussion of the CFfFR liability definition (section 7.3.3).
2. The problem regarding “expected” identified in CFfFR definition is solved with the
exclusion of “expected” from the DP/2013/1 liability definition.
3. The discussion on the use of the time notion “present” in the definition of an asset
is also valid in the use of the time notion “present” in the liability definition.
4. In the DP/2013/1 (IASB 2013, par. 2.16 (a)) it is emphasised that “present” /
(ConsiderationDate) contributes to decide whether a liability exists at the
reporting date. This corresponds with the discussion on the identification of the
basic classes and relationships in section 7.4.1.
b) Proposed liability definition
The following is suggested to be able to formally represent the definition of liability in

an unambiguous way:
1. The words “of the entity” in the definition in the DP/2013/1 be replaced with “owed
by the entity”. The purpose of the change is to emphasise and clearly formulate
the relationship between the classes Obligation and Entity.
2. Replace “present” with “time of consideration” (ConsiderationDate) as it will
clearly indicate the intended meaning of present.
3. The phrase “transfer an economic resource” is not included in the proposed
definition because of the problem discussed above. The reason is not to have an
inconsistency with the proposed definition of equity.
4. In order to reflect the basic classes and relationships identified and reported on in
section 7.4.1 (Figure 7.13) it is suggested that obligations should differentiate
between “obligations to transfer an asset” and “obligations to transfer equity”.
5. From the perspective of a liability, the only distinguishing factor between a liability
and equity will be if a claim is an obligation at the date of consideration or not.
Based on the problems identified in section 7.3.3 and the definition provided in
DP/2013/1, the following definition for liability is proposed and then formalised:
A liability is: “An obligation, owed on the time of consideration by the reporting entity
as a result of past events”.
are: isOwedBy, isResultOf, isControlOf, isValidInTime.
255
Figure 7.15 is a formal representation of the proposed liability definition.
Liability ≡ Obligation ⊓ ∃ isOwedBy.Entity

⊓ ∃ isresultOf.PastEvent ⊓ ∃ isValidInTime.TimeOfConsideration
Obligation ≡ PresentObligation ≡ ⊑ ∃
isValidInTime.TimeOfConsideration
Obligation ⊑ Claim ⊓ ∃ isresultOf.PastEvent
Liability ⊑ ¬ Equity
Figure 7.15: Proposed liability definition
The proposed asset and liability definitions are logically consistent and internally
coherent.
7.4.4 Modeling the Definition for Equity
a) DP/2013/1 equity definition
No changes to the equity definition is proposed in DP/2013/1. The inconsistency in

the current definition for equity detected in Iteration 1 and reported on in section 7.3.4
(Figure 7.10) is still valid.
b) Proposed equity definition
The analysis of the basic classes and relationships (section 7.4.1) serves as basis for
the proposed equity definition. The two deciding factors that must both be valid to
distinguish equity and liability were identified as No-Obligation and Shareholder
(section 7.3.4).
The following definition for equity is proposed: “Equity is a shareholder claim against
a reporting entity that is the result of a past event and which is not an obligation on
the consideration date”.
In order to formally represent the proposed equity definition, the following additional
class was created: Shareholder.
The object properties (relationships) used in the formalisation of the equity definition
are: isOwedBy, isResultOf, isClaimOf.
A formal representation of the proposed definition for equity is provided in Figure

7.16.
Equity ≡ Claim ⊓ ¬ PresentObligation ⊓ ∃ isClaimOfShareholder

⊓ ∃ isOwedBy.Entity ⊓ ∃ isResultOf.pastEvent
Equity ⊑ ¬ Obligation
Figure 7.16: Proposed equity definition
256
The proposed equity definition can be formally represented and is not inconsistent
with the liability definition. The definition corresponds with the most basic classes and
relationships identified in section 7.4.1.
The following table summarises the three definitions of asset, liability, equity and
economic resource from the different sources in this study. 112
Table 7.2: Summary of SFP definitions

Discussion Paper
Definition CFfFR Proposed
DP/2013/1
A resource (right or other
A resource controlled by
source of value) which is
the entity as a result of A present economic
under the control of an
past events and from resource controlled by the
Asset: which future economic entity as a result of past
entity as a result of past
events and that is capable
benefits are expected to events.
of producing economic
flow to the entity
benefits.
A present obligation of
the entity arising from
past events, the A present obligation of the An obligation, owed on
settlement of which is entity to transfer an the time of consideration
Liability: expected to result in an economic resource as a by the entity as a result of
outflow from the entity of result of past events. past events.
resources embodying
economic benefits.
A shareholder claim
Equity is the residual Equity is the residual against the entity, that is
interest in the assets of interest in the assets of the result of past events
Equity: the entity after deducting the entity after deducting and which is not an
all its liabilities. all its liabilities. obligation on the time of
consideration.
A right or other source of
Economic value, that is capable of Incorporated into the
No existing definition
resource producing economic definitions.
benefits.
During the second Iteration of the ontology building process it was determined that by
making certain modeling decisions it is possible to build an ontology of the definitions
of the elements for financial position that is logically consistent and internally
coherent. With this knowledge, it was attempted in Iteration 3 to build an ontology of
the CFfFR.
During Iteration 2, the knowledge obtained in Iteration 1 was used to formulate and
model the definitions of the elements of the SFP. Additional information was obtained
from DP/2013/1 113 to assist with the modeling process, as DP/2013/1 addressed
some of the unintended meanings identified during Iteration 1. Iteration 2 is the
second model output of DSR Cycle 4 and the third verification point in the FEDS
112
Also reported in (Gerber, Gerber, Van der Merwe, et al., 2015).
113
At the time Iteration 2 was modeled, the ED on the CFfFR (IASB, 2015d) was not available. For the purpose of the
study, this use of DP/2013/1 is sufficient to indicate how to build a CFfFR ontology in order to answer the main
research question.
257
Iteration 2 moved further towards the naturalistic and summative axis on the FEDS
evaluation strategy, as the Iteration is more technical and building on previous
knowledge.
Figure 7.17: FEDS Strategy - DSR Cycle 4, Iteration 2.
Based on the analysis of the basic classes and relationships and the formal
representation of the definitions of the elements for the financial position (section
7.3.5) of a reporting entity, the first attempt was made to build an ontology of the
complete CFfFR in Iteration 3.
During Iteration 3, the goal was to understand the role, position, content and usage of
the CFfFR and how an ontology could fulfil the intended purpose and objective of the
CFfFR. The theoretical background that serves as basis for Iteration 3 is the result of
Chapters 5 and 6. In Chapter 5, it was determined that the CFfFR can be viewed as a
meta-metamodel serving as a truth container for the financial reporting domain
(section 5.2.3). In Chapter 6, it was established that the CFfFR ontology could serve
as a formal domain ontology for financial reporting (section 6.4). If the CFfFR is
viewed as a truth container and if the CFfFR ontology serves as a formal domain
ontology for financial reporting, then the CFfFR ontology should contribute towards
the intended purpose and objective of the CFfFR.
The intended purpose of the CFfFR is to provide accounting standard setters with a
coherent framework for setting standards and to help preparers and users of financial
reports to understand the postulates and principles behind accounting standards
(section 4.4.2). The objective of the CFfFR follows a decision-useful approach
providing the criteria to be used when deciding when information is useful for users
and should be included in a financial report (section 4.5.1c).
7.5.1 Identifying Key Classes and Relationships for the CFfFR Ontology
Following the OLC Model Phase 2 (section 7.2.2a) of Neuhaus et al. (2013) the
natural text of the CFfFR (IASB, 2010a) was analysed with the purpose to determine
258
key classes and relationships for the CFfFR ontology. The analysis (refined and
completed during Iteration 4) is provided in Appendix D – CFfFR working document)
and Appendix E – Ontology engineering decisions).
The key classes and relationships were formalised in a first version of a CFfFR
ontology. During the first version ontology of the CFfFR, DOLCE was selected
(Guarino, 2015; Gangemi, Guarino, Masolo, Oltramari, & Schneider, 2002; Borgo &
Masolo, 2009) as an upper ontology to provide structure to the ontology (Figure 6.6).
Within the DOLCE upper ontology the following classes (together with their respective
sub-classes) were identified as non-physical-endurant under the sub-
class non-physical-object category. 114
Table 7.3: Non-physical endurant classes

Class Annotation
The class Action refers to the decisions of users who should take action
Action based on information provided in a financial report. The actions can be
buying, selling, holding or lending (IASB, 2010a:OB3).
Three types (sub-classes) of benefits are mentioned in the CFfFR.
Benefit Benefit is related to (1) users that should benefit from information, (2)
benefit in relationship to cost of information and (3) an economic benefit
for a reporting entity.
In the CFfFR, the capital concept is prominent and represents invested
Capital money and is used as synonymous with net assets or equity (IASB,
2010a:4.57).
Claim was identified in section 7.4.1 as one of the two most basic
Claim
classes providing the financial position of a reporting entity.
Control Control results in ownership over a resource.
Decision Decision is a type of action.
Element is a part of a statement. Element is not defined in the CFfFR.
Element Asset, liability, and equity are referred to as elements providing the
financial position of a reporting entity. Income and expense are referred
to as elements portraying the performance of a reporting entity.
A modeling decision was made to assume that Entity refers to the Entity
Entity that is reporting on relevant economic activities i.e. the reporting
entity. Entity is not defined in the CFfFR.
The provision of information to users of financial reports is the aim of
Information financial reporting. This is a very vague concept at present but it is
mentioned prominently within the CFfFR.
In the financial reporting domain, Instrument is linked to economic
Instrument
ideas for example debt and equity.
According to footnote 2 on paragraph OB2 of the CFfFR, Management
Management refers to management and the governing board of an entity. No further
distinction is made in the CFfFR regarding management.
Responsibility Responsibility is linked to management.
Settlement Settlement is the terminology used to describe the repayment of a debt.
The class Statement is reserved in the ontology to refer to a financial
statement. Four types of financial statements are mentioned in the
CFfFR, Statement of Financial Position, Statement of Profit or Loss and
Statement Other Comprehensive Income, Statement of Changes in Equity and
Statement of Cash Flows. A financial statement is defined as forming part
of a Financial Report, with Financial Report representing the bigger
collection.
Value To be reported in a financial report and more specifically in a financial
statement, an economic activity should pass through the decision filter
114
For an explanation on the meaning and use of endurants and perdurants see (Borgo & Masolo, 2009; Schneider,
2010; Guizzardi & Halpin, 2008; Guizzardi, 2005).
259
Class Annotation
(Figure 7.19) and during the decision process a monetary value should
be allocated to a specific economic activity before it can be reported. In
essence, it is values of economic activities that are reported and not
elements.
The following classes (together with their respective sub-classes) were classified
under the physical-endurant, physical-object category:
Table 7.4: Physical endurant classes

Class Meaning
Even though the classes “financial statement” and “financial report” are
used as synonyms in the CFfFR, there are distinct differences. Financial
statements can exist separate from a financial report. A financial report
always contains a set of financial statements, so the PartOf relationship
holds.
Report
The FinancialReportDate is the present reporting date, which is the
end date of the past reporting period. This is the date printed on the title of
the financial report. The information regarding
the FinancialReportDate was obtained from an example of a
financial report and does not originate from the CFfFR.
The class Statement is reserved in the ontology to refer to a financial
statement. Four types of financial statements are mentioned in the CFfFR,
Statement Statement of Financial Position, Statement of Profit or Loss and Other
Comprehensive Income, Statement of Changes in Equity and Statement
of Cash Flows. A financial statement is defined as forming part of a
Financial Report, with Financial Report representing the bigger collection.
The meaning of the class Resource was discussed in detail in section
Resource
7.4.1.
The class User is refined with some sub-classes such as external users
User of financial reports such as investors, shareholder and lenders. There are
also users of the CFfFR such as standard setters, preparers of financial
reports, auditors and academics.
The first version of the CFfFR ontology was an attempt to formally represent all the
classes included in the decision process model.
The following class (together with their respective sub-classes) in Table 7.5 was
classified under the perdurant / event / accomplishment category:
Table 7.5: Perdurant, event, accomplishment

Class Meaning
Event is classified as a perdurant accomplishment and then further refined
Event as a FinancialActivityEvent. A PastEvent was identified as one
type of FinancialActivityEvent.
The TemporalClass class was formalised and discussed during Iteration 1 and 2
when the definitions of the elements providing the financial position were formalised
(section 7.2.3).
The first version indicating the is_a relationships of the CFfFR ontology is provided
in Figure 7.18. 115
115
The first version of the CFfFR ontology was published in (Gerber, Gerber, & Van der Merwe, 2015).
260
Figure 7.18: CFfFR ontology first version: is_a relationships
During the Analysis Phase it was determined that some information guiding the
decision process to determine and report decision-useful information in financial
reports is lacking. Significant challenges were experienced to identify the key classes
and relationships and construct precise ontological assertions. It was determined that
261
significant, implicit and common domain knowledge is required to understand and
interpret the CFfFR, IFRS’s and financial reports. Although, within the financial
reporting domain, the decision process is regarded as implicit knowledge (common
knowledge), it is critical to make this knowledge explicit for the CFfFR ontology
construction.
In order to comply with the most basic objective of the CFfFR, to provide the
postulates and principles that would provide decision-useful information to users of
financial reports, it was determined that the CFfFR on its own does not contain
enough detail to construct precise ontology assertions. Since the scope of the CFfFR
is financial reporting, example financial reports were included in the process (using a
bottom-up approach) to assist with identifying key classes to be formalised. The
ontology was changed to include the classes
AnnualFinancialReport, StatementOfCashFlows,
StatementOfChangesInEquity, StatementOfFinancialposition,
StatementOfProfitOrLossAndOtherComprehensiveIncome,
FinancialStatementInformation, NotesToFinancialStatements.
These classes are the physical objects on which the decision-useful information are
published and should be part of the CFfFR ontology if the CFfFR ontology must
contain the basic classes related to the provision of decision-useful financial
information. Although the use of these classes is implied domain knowledge, it is
essential that it is included in the CFfFR ontology.
Another class identified in the CFfFR that created a challenge is the class Element.
The CFfFR mentions the elements of the statement of financial position when it refers
to the classes Asset, Liability and Equity and the elements of financial
performance when it refers to the classes Income and Expense. The use of the word
element in connection to financial statements implies implicit domain knowledge.
When the class Element was analysed it was unclear what Element refers too.
From an ontological perspective, the problem was defining what exactly an “element”
is when looking at a financial statement and how it should be formalised? What is
reported on a financial statement is not the physical asset or liability or equity or
income or expense. It is a value attached to a certain economic activity that can be
classified under a class called Asset or Liability or Equity or Income
or Expense. Once again, this is an example of implied domain knowledge required in
the formalisation process. After consulting some dictionaries it was determined that
an element is an essential or characteristic part of something. Applied to financial
statements, an element refers to a specific part of a financial statement for example
the section of the statement of financial position dealing with reporting of the value of
assets. For the purpose of building the CFfFR ontology, the modeling decision was
made that Element does not refer to the physical asset (the instant) or even the
value of a specific asset, but to the part of the statement reporting the value allocated
to the class that can be defined as Asset. This interpretation of the use of the
class Element is equal to referring to a paragraph or chapter in a book dealing with a
certain topic.
262
What is reported is a summation (Σ) of the measurement (in some cases after a
complex valuation process) of all the economic activities, categorized according to
element characteristics and definitions. A statement of financial position does not
present the assets (the actual instances) of a reporting entity, but a sum (Σ) of the
value of the assets. The challenge for this study is to formally represent the key
classes and relationships supporting the publication of the values allocated to
economic activities that is useful for decision-making.
7.5.2 Process to Determine Decision-useful Financial Information
Another example of implicit domain knowledge not explicitly described in the CFfFR
or IFRS documents is the process that is followed to allocate values to economic
activities. The decision process starts when an economic activity takes place and
continues until the information related to that economic activity is classified as useful
for decision-making and then reported in a financial report. The information to be
reported can either include a monetary value, or not.
The CFfFR was analysed to determine how this decision process takes place and to
determine the most basic classes describing the decision process. The minimum key
classes (classes in Protégé) identified to support the selection of economic activities
that provide decision-useful information for the users are: 116
• Objective of financial reports (serves as competency question) (IASB, 2010d:1);
• Purpose of the CFfFR (serve as competency question) (IASB,
2010d:Introduction)
• Financial Report (used ambiguous with financial statements in the CFfFR);
• Financial Statements (specific financial statements not included in the CFfFR,
included in IAS1);
• Other information and reports (not included in the CFfFR);
• Reporting date and reporting period (not included in the CFfFR);
• Notions of time period and time instance (linked to accrual accounting and
reporting date, not included in the CFfFR);
• Users of financial reports and the CFfFR (IASB, 2010d:1 and Introduction);
• Reporting entity (RE) (in process of development);
• Economic activity (EA) (not explicitly defined in the CFfFR);
• Going concern (IASB, 2010d:4.1);
• Accrual accounting (IASB, 2010d:OB17);
• Definitions of the elements (under revision) (IASB, 2010d:4.1–4.33);
• Recognition criteria (IASB, 2010d:4.37–4.49);
• Measurement criteria (under revision) (IASB, 2010d:4.54–4.56);
• Qualitative characteristics of decision-useful information (IASB, 2010d:QC);
• Disclosure requirements (in process of development);
• Economic activities reported in the financial report, but not included in the
financial statements (not included in the CFfFR).
116
These key concepts are also reported in (Gerber, Gerber, & Van der Merwe, 2015).
263
During the decision process some of the key concepts (ideas) in the CFfFR function
as decision filters in order to determine what, when and how (section 4.6.2a)
(Deegan, 2014)) an economic activity should be reported in a financial report. These
decision filters are organised according to a certain order, thus the numbering in the
illustration (Figure 7.19).
The decision process determined by key concepts in the CFfFR functions as follows:
The economic activities of a reporting entity are screened through the decision filters
starting with firstly determining if the reporting entity is a going concern (filter 1). If the
entity is not a going concern the criteria regarding valuation and measurement would
change. As a basis for accounting the accrual principle (accrual accounting) is
adopted (Filter 1). All economic activities must pass through decision Filter 1 to be
included in a financial report. Certain economic activities are reported on in the notes
and other information form part of the financial report without passing through Filters
2, 3 and 4. The information regarding this information must be relevant and faithfully
represented (Filter 5) to be useful for decision-making and must comply with
disclosure requirements (Filter 6). Filter 5 is placed after Filter 4, as the value of an
economic activity needs to be known before a decision regarding the relevance can
be taken.
In order to reflect and make explicit the above mentioned assumed domain
knowledge, a model for the decision process through six filters in sequential order
was developed (Figure 7.19).
Figure 7.19: Decision process to report decision-useful information
264
The model was informally validated and refined using feedback from accounting
domain experts. The decision filter model depicts the implicit domain knowledge
regarding the transformation from economic activities of a reporting entity to the
reporting of decision-useful information in a financial report. The model assisted in the
identification of key classes and relationships in the first version of the CFfFR
ontology.
During the process of building the first version ontology of the CFfFR it was not clear
from the CFfFR what information presented in the CFfFR should be included in the
ontology and what information should serve as competency questions. It was
considered if the following classes, although they are present in the CFfFR, would
rather contribute to the competency questions of the ontology than to the ontology
itself: Action, Decision, Information, Instrument, Management,
Responsibility and User. These classes were reconsidered during the fourth
Iteration taking the main objective of the CFfFR ontology into account. The main
objective of the CFfFR ontology was identified as to formally represent the classes
and relationships in the financial reporting domain that would provide decision-useful
information.
During Iteration 3, the knowledge obtained in Iterations 1 and 2 was used to identify
the key classes and relationships of the CFfFR ontology. The second artefact
developed during Iteration 3 is the decision process model. Iteration 3 is the third
model output of DSR Cycle 4 and the fourth knowledge contribution point in the FEDS
Iteration 3 is more summative and more naturalistic than the previous Iterations and is
the last Iteration before the CFfFR ontology was built.
Figure 7.20: FEDS Strategy - DSR Cycle 4, Iteration 3.
265
7.6.1 Reconsidering Previously Identified Classes and Relationships
The problems encountered while building the ontology of the CFfFR during Iteration 3
(section 7.5.1) and the development of the decision process (Figure 7.19) to
understand how decision-useful information is selected resulted in a revision of the
basic classes and relationships included in the formal representation of the CFfFR.
The CFfFR was analysed to determine what information should be included in the
CFfFR ontology in order to formalise the basic classes required to provide decision-
useful information. The procedure to classify and distinguish between information in
the CFfFR that should form part of the CFfFR ontology and information that should
form part of the competency questions informing the ontology was to read the CFfFR
document paragraph by paragraph and determine where in the decision process
(Figure 7.19) the information fits.
Keeping the end product, namely decision-useful information in a financial report, in

mind, it was assessed if information dealt with in a paragraph would be included in a
financial report or not. Information that is to be included in the financial report should
be formally represented in the ontology. Information not included in a financial report
either informs the ontology, thus forming part of the competency questions, or is just
explanatory in nature. This classification was done to identify the classes and
relationships that should be included in the CFfFR ontology in order to answer the
main competency question: “Does the CFfFR ontology formally represent the classes
and relationships that would provide decision-useful information in a financial report?”
This does not imply that the other information, classified as competency questions
and informative information, should be excluded from the CFfFR document as it still
contains basic postulates and principles related to the financial reporting domain.
See Figure 7.21 for a schematic illustration of how the information in the CFfFR
document contributes towards the CFfFR ontology.
266
Figure 7.21: CFfFR ontology
The following classes with their respective sub-classes included in CFfFR ontology
version one were reconsidered and excluded from CFfFR ontology version
two: Action, Decision, Information, Instrument, Management,
Responsibility and User.
Table 7.6: Classes excluded from CFfFR ontology version two

Annotation in Reason for exclusion from
Class
version one version two
The class Action refers to the Although users make decisions based
decisions of users who should take on information included in a financial
action based on information provided report, these decisions do not form
Action
in a financial report. The actions can part of the information in a financial
be buying, selling, holding or lending report. The class Action was
(IASB, 2010a:OB3). therefore excluded.
The class Decision as a type of
action is not reported in a financial
Decision Decision is a type of action. report. Decisions are made by people
based on and outside a financial
report.
When included in version one, it was
noted that the class is very vague.
The provision of information to users Although the idea (concept) of
Information of financial reports is the aim of information is very prominent in the
financial reporting. CFfFR, everything in a financial report
is information. It is not possible to
formally represent “everything”.
“Instrument” is a collective name
In the financial reporting given to certain types of financial
Instrument domain, Instrument is linked to mechanisms used by users of
economic ideas like debt and equity. financial reports. The term is not used
in a financial report.
According to footnote 2 on paragraph Management prepares financial
Management OB2 of the CFfFR, Management reports based on the decision
refers to management and the process indicated in Figure 7.19. The
267
Annotation in Reason for exclusion from
Class
version one version two
governing board of an entity. No class Management falls outside the
further distinction is made in the financial report.
CFfFR regarding management.
As Responsibility is linked
Responsibility Responsibility is linked to
to Management, it should also be
management.
excluded.
The class User is refined with some
sub-classes such as external users of The users of financial reports function
financial reports for example outside financial reports. The needs
User investors, shareholder and lenders. of users inform what should be
There are also users of the CFfFR included in a financial report and can
such as standard setters, preparers of therefore not form part of the
financial reports, auditors and ontology.
academics.
7.6.2 Considering the Competency Questions
The CFfFR was analysed 117 while considering the decision process (Figure 7.19) for
guidance on how and what to formally represent as the classes and relationships that
would answer the CFfFR ontology competency questions.
The following competency questions were formulated in section 7.2:

(1) What are the fundamental classes and relationships of principles providing
decision-useful information to the primary users of financial reports?
(2) What are the formal definitions of the fundament classes to provide decision-
useful information to the primary users of financial reports?
(3) What is the class hierarchy of the fundament classes to provide decision-useful
information to the primary users of financial reports?
The following information provides guidance to formally represent the classes and
relationships:
a) Purpose and status of the CFfFR
In the purpose and status section, the scope of the CFfFR is defined. The CFfFR
ontology should be designed so that it could assist the board, national standard-
setting bodies, preparers of financial reports, auditors and other users of the CFfFR to
understand the basic classes and relationships involved in providing decision-useful
financial information.
117
The analysis is recorded and reported in:
Appendix A – Some major world crises in the twentieth and twenty-first centuries
A discussion of some of the major world crises in the twentieth and twenty-first centuries is included in a separate
document in the CD accompanying this document.
Appendix B – Major corporate collapses
A discussion on the major corporate collapses is included in a separate document in the CD accompanying this
document.
Appendix C – List of stock market crashes and bear markets
The List of stock market crashes and bear markets is included in a separate document in the CD accompanying this
document.
Appendix D – CFfFR working document.
268
The ideal status of the CFfFR as meta-metamodel in the financial reporting hierarchy
was argued in Chapter 5. The ideal role of the CFfFR ontology as a metamodel in the
financial reporting ontology hierarchy was argued in Chapter 6.
b) Objective: decision-useful information
The objective of the CFfFR ontology is to formally represent the most basic classes
and relationships providing decision-useful information in financial reports. This is the
most basic competency question to be answered by the CFfFR ontology.
The purpose, status and objective of the CFfFR determines the broad scope of the
CFfFR thus defining the broad scope of the CFfFR ontology.
Other concepts defining and informing the CFfFR ontology are:
c) Users
The users are the recipients of the financial information and the agents prescribing
the information they want to be disclosed. The users cannot form part of the CFfFR
ontology, they inform the CFfFR ontology.
d) Uses
There are two use categories to be considered. The first category is concerned with
the discussion on the purpose of the CFfFR. These uses inform what the CFfFR
should be used for and cannot be modelled. The second category of uses is
concerned with the use of financial information by the users of financial reports. The
second category also informs what should be included in a financial report and cannot
be modelled.
e) Financial position
A financial report should provide information regarding the financial position of a

reporting entity. It is a requirement that should be complied with by the CFfFR. It is
complied with by modeling the definitions for and classes Asset, Liability
and Equity.
f) Financial performance
A financial report should provide information regarding the financial performance of a

reporting entity. It is a requirement that should be complied with by the CFfFR. It is
complied with by modeling the definitions for and classes Income and Expense.
g) Accrual accounting
The concept accrual accounting is an underlying assumption adopted in accounting,

thus forming part of decision Filter 1 (Figure 7.19). The concept of accrual accounting
is adhered to by modeling the class TemporalClass. By
formalising TemporalInstant and TemporalInterval, the principles of accrual
accounting are included in the CFfFR ontology.
269
h) Going concern
The concept going concern is an underlying assumption informing the measurement

strategy to be followed during the decision process and for that reason also forms
part of decision filter one (Figure 7.19). The going concern requirement is met in the
CFfFR ontology by including the class EconomicMeasurementClass.
i) Qualitative characteristics
The qualitative characteristics (CFfFR Chapter 3) are explicit guidelines informing

when financial information should be included in a financial report. The qualitative
characteristics are inherently competency questions that should be adhered to. By
following the decision process (Figure 7.19), Filter 5 is the last filter in the process to
decide if information is useful for decision-making and if it should be included in a
financial report. A competency question of an ontology informs the ontology and is not
included in the formalisation process.
j) Disclosure requirements
The last filter (Filter 6) in the decision process (Figure 7.19) determines how the
decision-useful information should be disclosed in a financial report. The disclosure
requirements also inform the ontology how information should be disclosed and
cannot be formalised. The basic concepts for disclosure requirements have not been
finalised. The IASB is working on a project to formulate the disclosure requirement
concepts.
k) Incomplete aspects in the CFfFR
When the decision process (Figure 7.19) was developed and during the analysis of
the CFfFR, revising version one of the CFfFR ontology, some incomplete aspects
were identified in the CFfFR.
A. Reporting Entity
The starting point, or basis, of the decision process (Figure 7.19) is the reporting
entity. The reporting entity as semantic domain contains everything that should be
included in a financial report as the report is regarding the economic activities of
the reporting entity. All the economic activities to be reported fall under
the ReportingEntity class. The key role of the ReportingEntity class in the
decision process stresses the importance that the concept of a Reporting Entity
should be clearly described and defined.
B. Valuation / Measurement criteria
The chapter in the CFfFR dealing with measurement is out-dated and is in the
process of being updated. During the revision of CFfFR ontology version one it
was determined that measurement is a key concept in the translation process to
attach values to economic activities. Once an economic activity has been identified
to be of importance for decision-making and inclusion in a financial report, it must
270
be measured reliably. Based on the measurement principles, a value must be
attached to the economic activity (see Filters 3 and 4 Figure 7.19). The determined
value is of crucial importance for decision making by external users of financial
reports. Clear and relevant measurement principles are lacking from the CFfFR.
One of the biggest challenges during the development of the ontology was the
measurement and translation of an economic activity in order to attach a value to
the economic activity that would be useful for decision-making. The useful value
should be reported in a financial report.
C. Disclosure Requirements
The last filter (Filter 6, Figure 7.19) in the decision process determines how the
decision-useful information must be presented to the users of financial reports. The
disclosure requirement section is still absent from the CFfFR. The IASB is in the
process of developing disclosure requirement principles, but it has not been
finalised and can therefore not be included in this study.
7.6.3 Building CFfFR Ontology Version 2
It was decided not to use DOLCE as upper ontology for the CFfFR ontology version
two. The purpose of version two is to clearly portray four basic classes identified
during the analyses of the CFfFR document to be formalised in the CFfFR ontology
information. At a later stage DOLCE can be imported again.
a) Analysis of the CFfFR to distinguish between competency questions and

classes
Figure 7.21 illustrates the composition of the concepts in the CFfFR document
informing the CFfFR ontology as well as the classes to be included in the CFfFR
ontology. The two outer circles inform the CFfFR ontology and the inner circle
contains the four main classes identified to be formalised.
The concepts in the outer circles were discussed in section 7.6.2.
The four most basic classes identified that must be modelled to provide decision-
useful information are: EconomicMeasurementClass, RealityClass,
ReportingClass and TemporalClass.
b) Economic Measurement Class
The importance of the EconomicMeasurementClass was explained during the

discussion of the incomplete aspects of the CFfFR (section 7.6.2k)). In the CFfFR,
measurement and value are concepts identified as two of the most import implied
domain knowledge aspects omitted during discussions of the basic postulates and
principles of financial reporting. In the discussion of CFfFR ontology version one it
was mentioned that what is reported in a financial report is mostly monetary values.
For the purpose of the CFfFR ontology, it is essential that the implied domain
knowledge is identified and made explicit. The class is called
271
the EconomicMeasurementClass to emphasise that it is economic values
(monetary values) that are reported in financial reports. Economic values are the
result of a (often-complex) measurement process, thus the use of the word
measurement. The CFfFR only talks of the reporting of assets, liabilities, equity,
income and expenses without any reference to the values (economic measurement of
the economic activities) attached to these classes.
In order to make this implied domain knowledge explicit, a modeling decision was
made to create the following classes: AssetEconomicMeasurement,
EquityEconomicMeasurement, LiabilityEconomicMeasurement,
IncomeEconomicMeasurement and ExpenseEconomicMeasurement.
The class Value with sub-classes EquityValue, ResidualValue,

TotalAssetValue and TotalLiabilityValue were created to enable the
formalisation of the CFfFR definition for equity. The problems experienced when
modeling the CFfFR equity definition was reported during the discussion of Iteration 1
(section 7.3.4).
The is_a relationships between the EconomicMeasurementClass and its sub-

classes as formalised in Protégé is schematically illustrated below in Figure 7.22.
Figure 7.22: Economic Measurement Class: is_a relationships
The complex usage of the EconomicMeasurementClass is indicated in Figure 7.18

to illustrate the importance of the EconomicMeasurementClass. A detailed
description of the usage of the classes is included in Appendix E – Ontology
engineering decisions.
272
Figure 7.23: Economic Measurement Class – Usage
273
Figure 7.24 illustrates the complexity of relationships
the EconomicMeasurementClass and its sub-classes are involved in. The
relationships are called and modelled as ObjectProperties in Protégé. A detailed
description of the usage of the ObjectProperties is included in Appendix E –
Ontology engineering decisions.
Figure 7.24: Economic Measurement Class: Object Property relationships
c) Reality Class
When analysing the classes identified during CFfFR ontology Version 1, the basic
characteristics of these classes were considered. It was realised that some classes
relate to the reality of economic activities. These classes were grouped and classified
as sub-classes under a class called the RealityClass. The values of
the RealityClass and its sub-classes are the most basic classes providing
decision-useful information to users of financial reports. The sub-classes contained in
the definitions of the classes Asset, Liability, Equity, Income
and Expense are included under the super class RealityClass. It is assumed that
all the classes reported on in financial reports can be sub-classified under one of the
classes currently modelled under the RealityClass.
274
The modeling of the definitions for Asset, Liability and Equity was discussed
and reported on during the modeling attempts of Iterations 1 and 2.
The definition provided in the CFfFR for Income is (IASB, 2010a:A43):

“Income is increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of liabilities
that result in increases in equity, other than those relating to contributions
from equity participants.”
The following classes were identified in the definition of Income:
• RealityClass with sub-classes, EconomicBenefit, Asset, Liability,

Equity, Income and Shareholder.
The identification of the class Shareholder is a modeling decision based on the use
of “equity participants” in the definition.
• TemporalClass with sub-classes, TemporalPeriod,

PastReportingPeriod, with TemporalInstant, ConsiderationDate
and PresentReportingDate also included being able to model the accounting
period referred to in the definition.
The classes mentioned under the class TemporalClass are all the result of implied
domain knowledge and is not explicitly mentioned in the definition. The domain
knowledge is implicitly contained in the term “accounting period”.
• ReportingClass with sub-classes FinancialStatement,

FinancialPerformanceFinancialStatementElement,
IncomeFinancialStatementElement.
All the classes identified under the class ReportingClass are based on implicit
domain knowledge and it is not explicitly stated in the definition of income.
• EconomicMeasurementClass:
The definition does not mention anything related to value or economic measurement.
It is assumed that “enhancements of asset” means the increase in the value of
assets. This is ambiguous as it is not clear “what” of an asset will be enhanced. Will
there be more assets in the number of assets? Alternatively, will the economic
measurement of a single asset or a group of assets increase? Does asset refers to
the element asset or a specific asset (an instance) or a sub-category of the
class Asset? In order to formally model a definition, that specific definition must be
explicitly clear and without any unintended meanings.
The following Object Properties were identified in the definition of Income:
275
• fromWhichInflow, (based on “increases, inflows or enhancements, and
contributions”), fromWhichOutflow (based on “decreases”).
With the information provided in the CFfFR it is not possible to formally represent a
definition for the class Income at this stage.
The definition provided in the CFfFR for Expense is (IASB, 2010a:A43):

“Expenses are decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity, other than those relating to
distributions to equity participants.”
The following classes were identified in the definition of Expense:
• RealityClass with sub-classes, EconomicBenefit, Asset, Liability,

Equity, Income and Shareholder.
The identification of the class Shareholder is a modeling decision based on the use
of “equity participants” in the definition.
• TemporalClass with sub-classes, TemporalPeriod,

PastReportingPeriod, with TemporalInstant, ConsiderationDate
and PresentReportingDate also included being able to model the accounting
period referred to in the definition.
The classes mentioned under the class TemporalClass are all the result of implied
domain knowledge and is not explicitly mentioned in the definition. The domain
knowledge is implicitly contained in the term “accounting period”.
• ReportingClass with sub-classes FinancialStatement,

FinancialPerformanceFinancialStatementElement,
IncomeFinancialStatementElement.
All the classes identified under the class ReportingClass are based on implicit
domain knowledge and it not explicitly stated in the definition of income.
• EconomicMeasurementClass:
The definition does not mention anything related to value or economic measurement.
It is assumed that “outflow or depletion of asset” means the decrease in the value of
assets. This is ambiguous as it is not clear “what” of an asset will be decreased. The
same unintended meaning present in the definition of income is also present in the
definition of expense.
The following Object Properties were identified in the definition of Expense:
276
• fromWhichInflow, (based on “incurrence”), fromWhichOutflow (based on
“outflows or decreases”).
Due to the circular nature of the definitions for Income and Expense, the references
to Asset, Liability and Equity and the implied knowledge, it was not possible
to formally represent the definitions for Income and Expense.
The following is a graphical presentation of the is_a relationships of the

class RealityClass and its sub-classes:
Figure 7.25: Reality Class: is_a relationships
d) Reporting Class
The information included in the class ReportingClass was obtained from a

specimen financial report. As a financial report is the target in which information
useful for decision-making is published, it was deemed necessary to formally
represent a financial report.
The direct siblings of ReportingClass

are Report, Statement, FinancialStatementElement
and FinancialReportInformation. The distinction between a financial report
and a statement is modelled by classifying Statement separate
277
from FinancialReport. A statement is not a financial report and a financial report
is not a statement. Statement has a sub-class FinancialStatement that is
further subdivided into different types of financial
statements, StatementofFinancialPosition, StatementOfProfitOrLossAn
dOtherComprehensiveIncome,
StatementofChangesInEquity and StatementOfCashFlows.
A FinancialStatement can be included in a FinancialReport, but it is a
separate class from the class FinancialReport.
The use of the class Element was discussed in section 7.5.1. It was concluded that,
according to dictionaries consulted, the word element could refer to an essential or
characteristic part of something. Financial statements can be divided into sections
containing information specific to certain classes known in the financial reporting
domain as financial performance and financial position.
A part of a financial statement reporting on the financial position of a reporting entity

is categorised as a sub-
class FinancialPositionFinancialStatementElement of
the FinancialStatementElement. In
the FinancialPerformanceFinancialStatementElement sub-class of the
class FinancialStatementElement information regarding the financial
performance of reporting entity is reported.
The FinancialPositionFinancialStatementElement is refined by the sub-

classes AssetFinancialSttementElement, EquityFinancialStatementEle
ment and LiabilityFinancialStatementElement.
The FinancialPerformanceFinancialStatementElement is refined by the

sub-classes ExpenseFiancialStatementElement
and IncomeFinancialStatementElement.
For the purpose of financial reporting the class Report is further refined by the sub-
classes FinancialReport and AnnualFinancialReport. FinancalReport is
a report containing financial information of a reporting entity.
An AnnualFinancialReport is a type of FinancialReport produced annually
reporting on the economic activities of a reporting entity for the previous financial
period, usually a 12-month period. Another class identified is financial information
contained on a financial report classified
as FinancialReportInformation. FinancialReportInformation is refined
by the sub-classes EntityInformation and NotesToFinancialStatements. It
is not claimed that the sub-classes are a complete collection of all the information that
are provided on a financial report, but it illustrates how the different types of
information can be classified.
The illustration below (Figure 7.26) portrays the is_a relationships of the
class ReportingClass.
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Figure 7.26: Reporting Class: is_a relationships
e) Temporal Class
The class TemporalClass was discussed in detail in section 7.2.3. The distinction
made between the sub-classes TemporalInstant and TemporalInterval
enables the CFfFR ontology to formally represent the notion time as perceived in the
Figure 7. is a graphical illustration of the is_a relationships of the

class TemporalClass.
279
Figure 7.27: Temporal Class: is_a relationships
280
The following illustration (Figure 7.28) is schematic presentation from Protégé
portraying the is_a relationships of the CFfFR ontology’s four main classes and their
respective sub-classes:
Figure 7.28: CFfFR ontology – Version 2 is_a relationships
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f) Object Properties
Object Properties indicates the relationships between classes in Protégé. As the

financial reporting domain has not yet been formalised, standard Object Properties
have not been created for the domain. Part of the analysis of the classes in the
CFfFR was to determine the relationships between these classes and then to
formalise these relationships using the OWL language embedded in Protégé.
The ObjectProperties presented below (Figure 7.29) were created during the
formalisation process of the identified classes.
Figure 7.29: CFfFR Version 2 - Object Properties
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Figure 7.30 is a schematic presentation of all the classes and relationships of the second version of the CFfFR ontology.
Figure 7.30: CFfFR Version 2 – all relationships
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7.7 Verification
In building the CFfFR ontology, the FEDS Human Risk & Effectiveness evaluation
strategy and the Technical Risk & Efficacy strategies culminated into the final artefact
during Iteration 4. By building the CFfFR ontology, the main research question and
the three sub-research questions were answered and the FEDS evaluation strategy
completed.
Figure 7.31: FEDS Evaluation Strategy
The formal domain ontology of the CFfFR complies with more of the requirements
and definition of a global CFfFR than the natural text CFfFR. The findings made
through building the CFfFR ontology in two versions and four Iterations indicate how
the CFfFR can be improved towards a global CFfFR.
7.8 Conclusion
During DSR Cycle 4 (Chapter 7) a domain ontology of the basic classes and
relationships of the CFfFR providing decision-useful information was formalised. The
guidelines as provided in the OLC (Neuhaus et al., 2013) were followed in the
building process. The CFfFR ontology went through four refining Iterations.
The first challenge solved was to formalise the notion of time and the manner in
which it functions in the financial reporting domain (section 7.2.3). The
classes TemporalClass, TemporalInstant and TemporalInterval, with
their respective sub-classes, are sufficient to model how time functions in the financial
reporting domain.
During Iteration 1 of building the CFfFR ontology, how to formally represent the basic
classes and their relationships as contained in the definitions provided in the CFfFR
for the classes Asset, Equity and Liability (section 7.3) were experimented
with. Some inconsistencies, unintended meanings (ambiguities) and implicit domain
knowledge assumed in the CFfFR were detected and reported. It was not possible to
formalise the equity definition provided in the CFfFR without making modeling
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decisions and assuming the meaning and impact of implicit knowledge not explicitly
mentioned.
The definitions for assets, equity and liabilities were refined in Iteration 2 using
additional information provided by the IASB in DP/2013/1 (IASB, 2013a) (section
7.3.5). In order to model the definitions in a logically consistent manner the definitions
were analysed with reference to the rest of the CFfFR in order to identify the most
basic classes in a statement of financial position (section 7.4.1). Based on the formal
representation of the classes Asset, Equity and Liability definitions written in
natural text were proposed that are internally coherent and logically consistent. A
comparison of the different definitions is provided in Table 7.2.
In Iterations 3 and 4 the CFfFR ontology was developed. During the initial planning to
build the CFfFR ontology it was assumed that the natural text of the CFfFR document
would provide enough information to complete the CFfFR ontology. The assumption
was based on the claim of the CFfFR that it contains the basic postulates and
principles needed to give guidance in order to set accounting standards that would
result in decision-useful information for the users of financial reports. During the
attempt to develop the CFfFR ontology in Iteration 3, it was realised that it was not
possible to develop the CFfFR ontology because of too much assumed domain
knowledge in the CFfFR as well as the absence of too much basic information
essential to build the CFfFR ontology.
The problems encountered in Iteration 3 were addressed by developing a decision

filter process (Figure 7.19). The decision process explicitly illustrates the decision
process unknowingly followed by preparers of financial statements to report decision-
useful information. The process starts with the initiation of an economic activity
(instance) of a reporting entity and ends when it is published in a financial report.
Although most of the information is provided in the CFfFR, some critical concepts
(classes) are not included in the CFfFR. Some of the lacking information is available
in accounting standards such as IAS1 and some was obtained by analysing a
specimen financial report.
The information lacking from the CFfFR is of critical importance to the CFfFR
ontology in order to answer the competency questions set during Phase 1 (section
7.2.1) of the OLC.
The CFfFR document was analysed and the information in the CFfFR was classified
according to the basic classes and the information informing these classes. The
analysis is schematically presented in Figure 7.21. With the additional information
and the explicit knowledge of the decision process, it was possible to identify four
basic classes of the CFfFR ontology. In this study, these classes are called
the EconomciMeasurementClass, the RealityClass, the ReportingClass
and the TemporalClass. In Iteration 4, the CFfFR ontology was developed using
the decision process model and the ontology analysis around the four basic classes.
The ObjectProperties (relationships) were developed and tested for
inconsistencies using the reasoner FaCT++. The result is an inherently coherent and
logically consistent CFfFR ontology built around the four basic classes and their
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relationships. A schematic presentation of the identified classes connected with the
relationships is provided using the Onto Graf function of Protégé in Figure 7.30. The
result is a formal representation of the basic classes and their relationships (a CFfFR
ontology) needed to provide decision-useful information to the users of financial
reports.
In Section D, the findings made during the execution of the research plan is
evaluated in Chapter 8 and the contributions of the research project are reported in
Chapter 9.
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SECTION D – EVALUATION, FINDINGS AND CONTRIBUTION
Figure 7.32: Chapter map: Section D
287
INTRODUCTION
In Section D of the study, the research conducted in this study is evaluated to

indicate if the research problem was solved by answering the research questions.
Section D contains two chapters. In Chapter 8, the findings for the DSR approach
using various research techniques are presented. The findings are presented
according to the structure of the DSR strategy cycles. The new knowledge obtained
during a DSR Cycle contributed towards the next cycle and culminated into
answering the main research question in DSR Cycle 4. As the DSR Cycles mainly
coincide with the different sub-research questions, Chapter 8 is structured to discuss
the findings as they relate to the sub-research questions. The findings are evaluated
to determine if it answer a related sub-research question.
In Chapter 9, the research contributions towards the body of knowledge made by the
study are highlighted. The contributions towards the body of knowledge are
structured according to the discipline from which a specific contribution originates.
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CHAPTER 8
TABLE OF CONTENT
8 FINDINGS AND EVALUATION ................................................................................... 290

8.1 The Research Problem and Research Questions Answered ....................................... 291
8.2 Sub-Research Question 1 (SRQ 1) ............................................................................. 295
8.2.1 SRQ 1: Findings.......................................................................................................... 295
8.2.2 SRQ 1: Evaluation ...................................................................................................... 297
8.3 Sub-Research Question 2 (SRQ 2) ............................................................................. 298
8.3.1 SRQ 2: Findings.......................................................................................................... 298
8.3.2 SRQ 2: Evaluation ...................................................................................................... 299
8.4 Sub-Research Question 3 (SRQ 3) and the Main RQ ................................................. 300
8.4.1 SRQ 3 and Main RQ: Findings .................................................................................... 300
8.4.2 SRQ 3: Evaluation ...................................................................................................... 303
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8 FINDINGS AND EVALUATION
Figure 8.1: Chapter map: Chapter 8
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8.1 The Research Problem and Research Questions Answered
In the literature review (Chapter 2) the evolutionary development of the CFfFR was
described using a system of stimulus/response (Salvary, 1979). In this system, the
response often became a stimulus for prompting another response. In Table 2.3, a
summary is provided on how the political, legislative, scientific, economic and
business societies responded to the different stimuli and development by these
different societies. The reaction of the accounting profession to these demands and
other developments contributed towards the development of accounting practices
and theories to respond to the demands of parties interested in financial information.
In Table 2.3, the discussion on the reaction of the accounting profession to the
demands of users of financial information concluded with the publication of “The
Conceptual Framework for Financial Reporting” by the IASB (2010a) on September
28, 2010. After World War II, a demand developed for one set of high standard
internationally converged. The research problem identified is that there is a need for a
global CFfFR that provides definitions and other fundamental concepts that are a
sound foundation for the development of accounting standards that are principally
based, internally consistent and internationally converged, but such a global CFfFR
does not exist.
Adopting the stimulus/response system, discussed during the literature review

(Chapter 2), the research problem was approached by considering current
technological developments in the field of computing, which could assist with a
response to the challenges posed to the accounting profession to develop a globally
acceptable CFfFR.
Based on the research problem, the main research question answered in this study
is:
By answering the following sub-research questions, it was possible to answer the

main research question:
Sub-research Question 1 (SRQ 1):

• What are the role, definition and requirements of a global CFfFR consisting of

• How can model building assist to construct a global CFfFR consisting of
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• How can the formalisation of the CFfFR using ontologies assist to construct a
CFfFR consisting of logically formalised fundamental concepts, which could
In order to answer the research questions and solve the research problem a DSR
strategy was followed by completing four DSR Cycles. During the Development Steps
of the DSR Cycles, various artefacts were developed which served as evaluation
markers according to the FEDS evaluation strategy.
In order to determine if the main and sub-research questions were answered,

artefacts aimed at answering the respective questions were constructed and
evaluated during the DSR Cycles of the design process 118 and can be viewed as
“micro-evaluations” (Vaishnavi & Kuechler, 2013). The knowledge contributions from
DSR Cycles 2 and 3 spinning from the Development Steps were evaluated “by a
‘thought experiment’ in which those parts of the design were mentally exercised” by
the researcher (designer) (Vaishnavi & Kuechler, 2013:22). The various artefacts
were evaluated to be successful if they contributed towards building the CFfFR
ontology and ultimately answering the main research question. A formal evaluation of
the final artefact, the formal domain ontology of the CFfFR, were performed by
determining if the final artefact contributes knowledge towards the construction of a
CFfFR that could be globally accepted in section 7.7
Figure 8.2 is a schematic representation of how the research questions were

answered:
118
This is in accordance with the evaluation practice described by Vaishnavi and Kuechler (2013).
292
In sections 3.6.1 to 3.6.5, the DSR strategy to answer the research questions was
discussed. The following matrix indicates how the DSR strategy answered the
research questions. The matrix is explained in section 3.9.

MAIN RQ √ √
SRQ 1 √ √
SRQ 2 √
SRQ 3 √ √
Table 8.2 illustrates how the artefacts developed during the DSR Cycles contributed
towards answering the research questions.
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Construct: Model: Construct:
Development Step moves to DSR Construct: Idea of an ideal CFfFR as truth The role of the ideal CFfFR as a • Basic assumptions to build a
Cycle 1. Requirements & Definition of a bearing model (section 5.2.4). formal domain ontology according formal domain ontology of the
global CFfFR. to OMG four level hierarchy CFfFR (section 7.2.2).
Construct:
(Sections 4.6 and 4.7)
(section 6.4.). • Use of OLC in financial
bearing model (section 5.2.4). reporting domain (section 7.2)

domain) (section 5.3.5). (section 6.4.3.). liability and equity.
Model:
ARTEFACT

Construct: Model:
Model:
definitions, which are logically
consistent.
Model:
ontology.
Model:
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8.2 Sub-Research Question 1 (SRQ 1)
What are the role, definition and requirements of a global CFfFR consisting of
standards that are principle-based, internally consistent and internationally
converged?
The first sub-research question was answered during DSR Cycle 1 (Chapter 4) and
DSR Cycle 2 (Chapter 5) (Table 8.2).
8.2.1 SRQ 1: Findings
In Chapter 4, a systematic review was conducted to determine the requirements for

and definition of a global CFfFR. As the requirements and definition are not officially
published by the standard setting bodies (the IASB and FASB), 119 literature dealing
with the requirements of a global CFfFR was identified and analysed. The
requirements of a global CFfFR are provided in section 4.6.
The data collected to determine the requirements was documented in Part A of

Chapter 4. In Part B, the requirements were classified in two categories. Under
Category 1 (section 4.6.1), the characteristics and perceptions surrounding a global
CFfFR are summarised. In Category 2 (section 4.6.2), the content requirements for a
global CFfFR are listed.
The first characteristic in Category 1 is that a standard setting body should have
credibility and legitimacy (section 4.6.1a)) in order for the accounting standards
published by such a standard setting body to be accepted in the accounting
community. It was determined that the IASB is recognised as a credible organisation
due to its rigorous process to set accounting standards and the wide acceptance of
the IFRS standards. The existence of the CFfFR contributes to the credibility of the
IASB.
Derived from the functional and technical needs of a global CFfFR, the necessity for a
body of shared domain knowledge with the objective to improve financial reporting
through fundamental concepts (section 4.6.1b)) was established. The objective of the
CFfFR is to improve financial reporting by identifying and formulating fundamental
concepts of financial reporting (section 4.6.1c)). Another finding was that for a theory
to be globally acceptable, it should be based on an agreed paradigm within a specific
knowledge community (section 4.6.1d)). It was found that the CFfFR is based on
such an agreed paradigm known as decision-usefulness of financial information for
the users of financial reports.
The content requirements of a global CFfFR listed below were identified in section
4.6.2.
119
The FASB literature up to and until the CFfFR was published in 2010 is included in the study as the CFfFR is
based on the FASB conceptual framework.
295
• A global CFfFR should be complete and comprehensive. The postulates and
principles in a global CFfFR should cover all possible transactions and other
events and conditions deemed useful for decision-making. The level of
abstraction should be sufficient to provide a comprehensive summary of the
fundamental concepts from which other concepts can be derived.
• A global CFfFR should be internally coherent to provide consistent guidance to
standard setters.
• The fundamental concepts of a global CFfFR should be formulated clearly and
unambiguously with no unintended meanings
• A global CFfFR should be logically consistent to achieve scientific credibility in
an accounting community consisting of different cultures.
A schematic summary of the requirements summarised under Category 1 and

Category 2 are presented in Figure 4.6. A definition of a global CFfFR was derived
from the identified requirements. The proposed definition of a global CFfFR was
formulated as:
A conceptual framework for financial reporting is an internally coherent and

logically consistent representation of fundamental concepts that unambiguously
prescribes the nature, function and limits of financial reporting.
The requirements and definition of a global CFfFR are the first artefact and point of
knowledge contribution on the Human Risk & Effectiveness verification strategy
(Figure 4.4).
With the knowledge contribution obtained from DSR Cycle 1 as basis, a new
Awareness Step regarding the ideal role of a global CFfFR within financial reporting
was entered into in DSR Cycle 2 (Figure 3.3).
In order to determine the ideal role of a global CFfFR, an interdisciplinary

investigation was performed. In Chapter 5, it was investigated if a global CFfFR can
function as a model within the financial reporting domain. The role of a global CFfFR
was investigated from philosophy of science and computing perspectives.
From a philosophy of science perspective, it was founded that a global CFfFR could
serve as a model of isolation by idealisation (section 5.2.1). A global CFfFR can be
viewed as a representation by surrogate systems (section 5.2.2) and the CFfFR
ontology can function as a truth container or a truth-bearing model (section 5.2.3).
The model formula as discussed by Mäki (2008; 2009; 2011) and Grüne-Yanoff and
Mäki (2014) was applied to determine the role of the CFfFR in the financial reporting
domain. The applicability of the model system to the CFfFR was indicated. Using the
adopted model theory of an idealised model as a truth-bearing model, idealised
assumptions for an ideal CFfFR were formulated (section 5.4) based on the literature
review (Chapter 2) and the requirements and definition proposed in Chapter 4. The
idea of an ideal CFfFR is the first artefact of DSR Cycle 2 and the second point of
knowledge contribution on the Human Risk & Effectiveness verification strategy.
296
Once it was determined that the role of the CFfFR in the financial reporting domain
can be seen as an ideal truth-bearing model, the use of models in computing was
examined. The value of models and their use in computing was applied to the
financial reporting domain and it was determined that if the CFfFR is viewed as a
model it contributes towards the understanding of the role of the CFfFR within the
financial reporting domain (section 5.3.3). According to a view of models in
computing, the CFfFR can be viewed as a token model in relationship to accounting
standards and a financial report (section 5.3.4). It was found that within the financial
reporting domain the CFfFR has the role and function of a meta-metamodel (section
5.3.5).
Once the role of the CFfFR as a meta-metamodel in the financial reporting domain
was established, the idealised assumptions identified during the investigation in
section 5.2 were expanded to accommodate the role of the CFfFR as a meta-
metamodel. The role of the CFfFR as a meta-metamodel was illustrated in Figure
5.12. Accordingly, the OMG four level hierarchy of models, metamodels and models
must adhere to classes and relationships described in models of a higher hierarchy
for the model system to be inherently coherent and logically consistent.
The role of a global CFfFR as an idealised meta-metamodel differs from the status of
the CFfFR. The status of the CFfFR is stated as follows:
“This Conceptual Framework is not an IFRS and hence does not define
standards for any particular measurement or disclosure issue. Nothing in
this Conceptual Framework overrides any specific IFRS” (IASB,
2010a:A19).
If the role of a global CFfFR is determined to be an idealised meta-metamodel, then

the global CFfFR should adhere to the requirements and characteristics of a meta-
metamodel. The status of the CFfFR according to the IASB does not comply with the
requirements of completeness and comprehensiveness, inherent coherency or logical
consistency as required by the OMG four level hierarchy. The idea of the ideal CFfFR
and the role of the CFfFR as a meta-metamodel answer SRQ 1 and contribute
towards answering SRQ 2 (Table 8.2).
8.2.2 SRQ 1: Evaluation
According to the FEDS evaluation strategy the artefact developed during DSR Cycle
1 and the first two artefacts developed during DSR Cycle 2 served as the first three
evaluation episodes on the Human Risk & Effectiveness strategy path as indicated in
Figure 8.3.
297
Figure 8.3: CFfFR ontology artefacts 1-3
As it was possible to determine the characteristics and perceptions as well as the

content requirements for a global CFfFR (section 4.6) and formulate a definition for a
global CFfFR (section 4.7) based on these requirements, it can be concluded that
SRQ 1 was partially answered in Chapter 4 with the development of the artefact in
DSR Cycle 1. During DSR Cycle 2, the ideal role of the CFfFR was determined to be
that of a meta-metamodel within the financial reporting domain (Figure 8.3).
SRQ 1 was answered in Chapter 5 during DSR Cycle 2 when the role of global
CFfFR was determined to be a meta-metamodel according to the OMG four level
hierarchy.
8.3 Sub-Research Question 2 (SRQ 2)
How can model building assist to construct a global CFfFR consisting of fundamental
concepts, which could function as a sound foundation for accounting standards that
are principle-based, internally consistent and internationally converged?
The second sub-research question was answered during DSR Cycle 2 and reported
on in Chapter 5 (Table 8.2). The first two artefacts developed during DSR Cycle 2,
the idea of an ideal CFfFR and the role of the ideal CFfFR as a meta-metamodel, had
a double function and contributed towards answering SRQ 1 (section 8.2 and Table
8.2).
8.3.1 SRQ 2: Findings
During DSR Cycle 2, it was established that the ideal CFfFR has the role of a meta-
metamodel within the financial reporting domain. A global CFfFR should comply with
the role of an ideal CFfFR in order to adhere to the characteristics of a meta-
metamodel within the OMG four level hierarchy. Applicable characteristics of the
OMG four level hierarchy are that a model on a lower level in the hierarchy
should conform_to the concepts and relationships defined in a higher-level model.
Although a higher level model functions on a higher level of abstraction, all the
298
concepts and relationships of the lower level model should be present in a higher-
level model to ensure that it complies with the comprehensive requirement. If the
model hierarchy adheres to the comprehensive requirement, the model structure
should also be complete, as all the instances in the domain should be represented in
the highest model in the hierarchy. If a global CFfFR functions as meta-metamodel
according to the OMG model hierarchy it should comply with the complete and
comprehensive content requirements as determined in section 4.6.2.
The idea of an ideal CFfFR truth-bearing model contributes towards the goal of the
CFfFR to be globally acceptable as an ideal CFfFR, and serves as a benchmark
against which the CFfFR can be measured. In order for the ideal CFfFR to assume
the role of a truth-bearing model, the notion of intentionally false but ideal
assumptions provides the vocabulary and conceptualisation to communicate
regarding the end goal of the CFfFR. With the end goal in mind, it is possible to
evaluate if the development of the CFfFR is progressing toward a global CFfFR. The
ideal assumptions of the ideal CFfFR functions as a construct artefact and the fourth
knowledge contribution on the Human Risk & Effectiveness evaluation strategy
(Figure 8.4).
SRQ 2 was answered by indicating how model building and the positioning of the
ideal CFfFR within the role of a meta-metamodel, according to the OMG four level
hierarchy (Figure 5.11 and Figure 5.12), could function as a sound foundation for
accounting standards. Firstly, within the OMG four level hierarchy, the models on the
different levels of the hierarchy must conform_to the other models for the complete
system to be internally coherent and logically consistent. Secondly, in order for the
model system to be sound, the model on the highest level of abstraction, the meta-
metamodel, should be complete and comprehensively inclusive of the models on the
lower levels and ultimately the instances in the SUS. By formulating the idealised
assumptions, the ideal CFfFR serves as a truth-bearing model as it indicates how the
ideal CFfFR should look like and provide an indication of where the CFfFR does not
adhere to the ideal CFfFR to be globally acceptable.
The artefacts produced during DSR Cycle 2 established the knowledge that model
building could assist in constructing a global CFfFR. Figure 8.4 illustrates the role of
the artefacts in the Human Risk & Effectiveness FEDS framework evaluation strategy
to build towards the CFfFR ontology.
299
Figure 8.4: CFfFR ontology artefacts 1-4
8.4 Sub-Research Question 3 (SRQ 3) and the Main RQ
How can the formalisation of the CFfFR using ontologies assist to construct a CFfFR
consisting of logically formalised fundamental concepts, which could function as a
8.4.1 SRQ 3 and Main RQ: Findings
With the knowledge obtained during DSR Cycles 1 and 2, the possibilities of
conceptual modeling and ontologies in computing were explored. During DSR Cycle
3, ontology in philosophy (section 6.2) was investigated to serve as background for
the use of ontologies in computing (section 6.3) and the application of ontologies in
the financial reporting domain (section 6.4). From the discussion on ontology in
philosophy, the importance of logic and logical consistency in ontologies was
determined. A finding of this study is that logical consistency is a pre-requisite for
cross-cultural acceptance of theories (section 6.2.3). This finding supports and
emphasises the content requirement for a global CFfFR determined during DSR
Cycle 1, that a global CFfFR should be logically consistent (section 4.6.2e)) to
achieve scientific credibility in an accounting community.
The use of formal languages (Figure 6.5) based on formal logic was adopted by
computing in order to build logically consistent models (section 6.2.2). This provided
the opportunity to explore the possibility that, if it is possible to build a formal ontology
of the CFfFR, it would assist in building a CFfFR ontology that is logically consistent
which would contribute towards answering SRQ 3.
The applicability of conceptual modeling, as used in computing, on the financial

reporting domain was argued in section 6.3.2a). Once the applicability of conceptual
modeling was established, the possible benefits of the CFfFR as digital domain was
determined (section 6.3.2b)). An investigation into the relationship between
300
ontologies, models and metamodels (section 6.3.2c)) resulted in the finding that the
CFfFR functions in the financial reporting domain with the purpose of providing
guidelines for the development of accounting standards that are principally based,
internally consistent and internationally converged.
DSR Cycles 1, 2 and 3 provided the theoretical foundation and motivation to use
ontology technologies to answer SRQ 3 and together with that the main research
question.
In DSR Cycle 4, the development of the formal domain ontology of the CFfFR was
done in two versions, through four Iterations. The CFfFR ontology was developed
according to the guidelines of the OLC Model (section 7.2). At the start of Iteration 1,
certain assumptions were adopted to build a formal domain ontology of the CFfFR
(section 7.2). One of the assumptions was that the CFfFR would be the main source
of information and that if the meaning of something is not clear from the natural text
of the CFfFR, it is an indication of an ambiguity or an unintended meaning. Based on
this assumption, some unintended meanings were indicated during the formalisation
process.
Another assumption was that the CFfFR should encapsulate all of the most basic
definitions and principles (postulates) to be included in the CFfFR ontology in order to
comply with the competency question: to formalise the classes and relationships that
could provide decision-useful information to the users of financial reports. This
assumption could not be maintained and additional information not included in the
CFfFR (i.e. financial reports and DP/2013/1) was required to build a CFfFR ontology.
This is an indication that the CFfFR does not encapsulate all of the most basic
definitions and principles (postulates) necessary to provide decision-useful
information to the users of financial reports. Some of the additional information
required was identified as implied domain knowledge not communicated explicitly in
the CFfFR.
Implied domain knowledge was experienced to be a major problem in building the

CFfFR ontology. The following were identified as some of the most important implied
domain knowledge not provided, but crucial to building the CFfFR ontology:
• An important concept not addressed in the CFfFR is the functioning of the notion
of time in financial reporting. The value and function of the notion of time are
assumed as domain knowledge and not discussed explicitly. An explicit
explanation of the use of the notion of time is provided in section 7.2.3. This
problem was solved by creating the classes TemporalInstance
and TemporalInterval with its related sub-classes.
• Another basic class assumed as domain knowledge is the reporting class. The
reporting class is dealt with in detail in IAS 1, but the basic principles of the
reporting class should be included in the CFfFR to comply with the
completeness and comprehensive content requirement of a global CFfFR.
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• It is never explicitly stated in the definitions of the elements of financial
statements that it is monetary values that are reported on in financial
statements. The modeling decision was made to create the class Value to be
able to model this implied domain knowledge.
• Related to the implied domain knowledge of the class Value is the lack of
clarity on how a value is attached to an economic activity or instance. The
implied domain knowledge on how and when economic activities are measured
was made explicit by developing a decision filter process. The decision filter
process is schematically presented in Figure 7.19. Based on the decision filter
process and a detailed analysis of the CFfFR in Iteration 4, a main class
called EconomicMeasurementClass was created to formalise the notion of
measurement in the financial reporting domain (section 7.6.3b)).
• Another basic concept essential to formally represent the CFfFR but not
explicitly explained in the CFfFR is that decision-useful information is reported in
a financial report consisting of financial statements, notes to these financial
statements and other information. In order to formalise this implied knowledge, a
class called ReportingClass was created (section 7.6.3d)). The terms
financial reports and financial statements are used in the CFfFR without
distinguishing between the two terms.
• More implied domain knowledge was identified when the definitions of the
elements of financial reports were formalised and is reported during the four
Iterations.
Some inconsistencies in the CFfFR were identified. The most important

inconsistencies were found in the definitions of liability (sections 7.3.3 and 7.4.3),
equity (section 7.3.4) and income an expense. The inconsistencies detected in the
definitions of income and expense was of such a nature that these definitions could
not be modelled without inconsistencies (section 7.6.3c)).
Numerous unintended meanings in the natural text were detected and modeling
decisions were made to enable a formalisation of these classes and relationships.
Although it was not the intention at the beginning of the study to indicate
incompleteness in the CFfFR some incomplete concepts were detected. Some of
these incomplete aspects are acknowledged by the IASB and are in the process of
being developed. The known incomplete concepts were identified as reporting entity,
valuation and measurement criteria and disclosure requirements. These concepts are
currently being developed by the IASB.
One of the biggest challenges experienced in the attempt to formally represent the
most basic classes and relationships that would provide decision-useful information to
the intended users of financial reports, was to decide what information provided in the
CFfFR must be formalised as classes and relationships in the ontology and what
information informs the ontology by way of competency questions. After an
unsuccessful attempt to formally represent the CFfFR document in Iteration 3, a new
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strategy was adopted in Iteration 4. In Iteration 4, the CFfFR was analysed (Appendix
D – CFfFR working document and Appendix E – Ontology engineering decisions)
using the decision process filter (section 7.5.2, Figure 7.19) to determine what
information should be included in the formal domain ontology of the CFfFR and what
information forms part of the competency questions (sections 7.6.1, 7.6.2 and
7.6.3a)). The results of the analysis are schematically illustrated in Figure 7.21.
Based on the analysis and information obtained during Iterations 1, 2 and 3 a formal
representation of the most basic classes and relationships that would provide
decision-useful information was done in Protégé using OWL and is presented as a
second version of a CFfFR ontology (Figure 7.30). The CFfFR ontology was tested
for logical consistency using the reasoner FaCT++. According to the reasoner, the
CFfFR ontology is internally coherent and logically consistent.
By adopting the ideal assumptions of the ideal CFfFR and building a CFfFR ontology
it was indicated how the use of ontology technologies could assist in constructing a
globally acceptable CFfFR as the CFfFR ontology complies with more requirements
of a global CFfFR than the CFfFR. During the building process, deficiencies in the
CFfFR related to the ideal CFfFR were indicated. The CFfFR ontology can therefore
be viewed as a truth-bearing model. The CFfFR ontology indicates that it is possible
to construct a global CFfFR by identifying inconsistencies and unintended meanings
in the CFfFR. Figure 8.5 illustrates the Technical Risk & Efficacy evaluation strategy
followed in building the CFfFR ontology.
Figure 8.5: CFfFR ontology Technical Risk & Efficacy artefacts
The artefacts developed during DSR Cycle 4 were developed to substantiate the
decisions made while building the CFfFR ontology. The following artefacts were
published via peer reviewed processes, providing an indication of the acceptability of
these artefacts:
• DSR Cycle 4: The basic assumptions and OLC (Gerber et al., 2014);
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• DSR Cycle 4: Iteration 1, modeling time and modeling the definitions of asset,
liability and equity (Gerber, Gerber, Van der Merwe, et al., 2015);
• DSR Cycle 4: Iteration 2, Identification of basic classes and relationship in SFP
element definitions (Gerber, Gerber, Van der Merwe, et al., 2015);
• DSR Cycle 4: Iteration 3, Decision process model (Gerber, Gerber, & Van der
Merwe, 2015).
The final evaluation episode was when the CFfFR ontology was built during Iteration
4. The CFfFR ontology, by being internally coherent, logically consistent and more
complete, complies with more requirements of an ideal CFfFR than the CFfFR. It can
be concluded that the main research question was answered by demonstrating how a
CFfFR consisting of logically formalised fundamental concepts can be developed.
This CFfFR ontology can serve as a meta-metamodel within the ontology hierarchy of
financial reporting (Figure 6.6). In its role as metamodel, the CFfFR ontology can
internally consistent and internationally converged. By building the CFfFR in two
versions through four Iterations, it was indicated where the natural texts of the CFfFR
does not comply with the content requirements of a global CFfFR thus making the
CFfFR ontology a truth-bearing model. By building the second version of a CFfFR
ontology, SRQ 3 and the main research questions were answered as the formal
domain ontology of the CFfFR is principle-based, the classes and relationships are
the principles, and it is internally consistent as it was tested for internal and logically
consistency with the reasoner. The CFfFR ontology provides a method and
information towards a global CFfFR that can be internationally converged.
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CHAPTER 9
TABLE OF CONTENT
9 CONTRIBUTION......................................................................................................... 306
9.1 Introduction ................................................................................................................. 307
9.2 Methodological Perspective ........................................................................................ 312
9.2.1 Design Science Research ........................................................................................... 312
9.2.2 Ontology Life Cycle Model Applied to Accounting ....................................................... 312
9.2.3 Method to Test Concepts / (Classes) and Relationships in a Natural Text .................. 313
9.3 Technological Perspective .......................................................................................... 313
9.4 Interdisciplinary Perspective........................................................................................ 313
9.4.1 Models as Isolation by Idealisation and Truth Containers............................................ 314
9.4.2 Models in Computing .................................................................................................. 314
9.4.3 Ontology in Philosophy: Formal Language and Logical Consistency........................... 315
9.4.4 Ontologies in Computing ............................................................................................. 316
9.5 Accounting Perspective............................................................................................... 316
9.5.1 Requirements and Definition for a Global CFfFR ........................................................ 316
9.5.2 The Ideal Meta-metamodel Role of a Global CFfFR .................................................... 317
9.5.3 The CFfFR Ontology ................................................................................................... 317
9.5.4 Identification of Logical Inconsistencies, Unintended Meanings, Implied Domain
Knowledge and Incompleteness of the CFfFR ............................................................ 317
9.6 Conclusion .................................................................................................................. 318
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9 CONTRIBUTION
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9.1 Introduction
The research problem identified during the literature review is that since the first
academic publication on accounting by Luca Pacioli entitled Summa de Arithmetica,
Geometrica, Proportioni et Proportinalita in 1494, the accounting community have
been searching for a conceptual framework for financial reporting that is globally
accepted. In this study, some suggestions are made on how a global CFfFR can be
created. In Chapter 9, the research contributions made during the execution of the
DSR strategy are discussed. The aim of the study is to communicate the usefulness
of the newly generated knowledge regarding the drafting of a global CFfFR.
One of the guidelines for studies using the DSR approach is that such a study should
produce clear and verifiable contributions in the areas of the designed artefact
(Hevner et al., 2004).
In this study, the contributions towards solving the research problem are embedded
in the multi-disciplinary DSR approach. The study takes advantage of theories in
philosophy (ontology), philosophy of science (idealised models) and computing
(conceptual modeling, OMG model hierarchy and ontologies) to generate new
knowledge related to the CFfFR ontology artefact. Recent advances in ontology
technologies utilised in the computing discipline served as a stimulus to embark on
the research project in search of a possible solution for the research problem.
During the DSR strategy, twelve artefacts were developed and were presented as
knowledge contributions during the four DSR Cycles. The role of these artefacts in
answering the research questions were discussed in Chapter 8 and is illustrated in
Table 9.1.
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Construct:
Idea of an ideal CFfFR as truth-
(section 6.4. • Use of OLC in financial reporting
bearing model (section 5.2.4). domain (section 7.2).

Role of the ideal CFfFR as a Conceptualisation on how CFfFR Iteration 1 (section 7.3):
meta-metamodel (type and token ontology could contribute towards • Modeling of time.
models of financial reporting the research questions (section • Modeling definitions of asset,
domain) (section 5.3.5). 6.4.3. liability and equity.
Model:
Construct: Model:
vocabulary and conceptualisation • Identification of basic classes and
to communicate regarding ideal relationships in SFP element
and possible global CFfFR definitions.
Model:
consistent.
Model:
ARTEFACT

ontology.
Model:
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Although the contributions of the study are linked to the artefacts as discussed in
Chapter 8, the contributions are not only contained to the artefacts. The contributions
of the study are also linked to the findings made during the building process of the
CFfFR ontology. In Chapter 9, the contributions of the study towards addressing the
research problem are described from the following perspectives:
• a methodological perspective;
• a technological perspective,
• an interdisciplinary perspective and,
• an accounting perspective.
Although the last artefact produced, the CFfFR ontology was also noted under the
findings perspective the value of the contribution justifies that it is discussed
separately. Table 9.2 summarises the contributions under the different perspectives.
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Table 9.2: Summary of contributions
Perspectives
Methodological Technological Interdisciplinary Accounting
DSR as research method: Ontology technologies: Models as isolations by idealisation Requirements and definition for a
• The successful use of the DSR • The use and application of Protégé, and truth containers: global CFfFR.
approach in financial accounting. OWL and FACT++ as ontology • The formulation of untrue idealised Content Requirements:
The use of DSR broadens the technologies on the CFfFR creating assumptions contributes towards • Complete and Comprehensive;
research possibilities in financial the possibility of digital and determining how a global CFfFR • Internally Coherent;
accounting. computer readable accounting can be constructed. • Clear and Unambiguous;
• Using DSR in financial reporting in a standards. • The notion of an ideal CFfFR as • Logically Consistent.
study where the outcome of the truth container regarding the reality Definition of a global CFfFR:
study is not clear at the outset. of financial reporting contributes • A conceptual framework for
• Using DSR in financial reporting on towards the method how it is financial reporting is an internally
the CFfFR producing 11 knowledge possible to gain knowledge of reality coherent and logically consistent
contribution artefacts (Table 9.1). by isolating a research object in representation of fundamental
financial reporting. concepts that unambiguously
prescribes the nature, function
and limits of financial reporting.
Ontology Life Cycle Model: Models in computing: The ideal meta-metamodel role of
• The application of the OLC Model Viewing the financial reporting domain the global CFfFR.
as research technique in financial from a model perspective contributes • The ideal meta-metamodel role
accounting combined with ontology towards: contributes towards understanding
technologies to add rigour to the • communication between developers the role of a global CFfFR within
research process. The use of the and users; the financial reporting hierarchy.
OLC Model broadens the research • analysing and understanding the • The importance of coherence
possibilities in financial accounting. financial reporting domain; between the CFfFR and
• provide input in the design process; accounting standards within the
• document requirements for future financial reporting hierarchy was
use. illustrated.
• Contribution of type and token
models and the characteristics
requirements of conceptual models
in computing to determine the role
of a global CFfFR as a meta-
Contributions
metamodel.
Testing concepts / (classes) and their From ontology in philosophy: The formal domain CFfFR ontology.
relationships in a natural text: • Value of the use of a formal • The CFfFR ontology can fulfil the
• The combined use of DSR and the language to represent the CFfFR; role of a meta-metamodel in the
OLC Model provide a theoretical • The importance of logical financial reporting ontology
substantiation and rigorous method consistency as requirement for a hierarchy.
to test and formalise classes and global CFfFR. • The CFfFR ontology is closer to
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Perspectives
Methodological Technological Interdisciplinary Accounting
their relationships communicated in an ideal CFfFR than the CFfFR as
a natural text. it complies to more of the
Ontologies in computing: The results from building the CFfFR
• Use of the OMG model hierarchy to ontology for the CFfFR identifying:
illustrate the relationships in the • logical inconsistencies;
financial reporting domain. • unintended meanings;
• The creation of the decision process • implied domain knowledge and;
filter to illustrate how accountants • incompleteness of the CFfFR.
determine what, when and how
economic activities are reported.
• Analysis of the CFfFR to distinguish
between competency questions and
classes and relationships included
in the CFfFR ontology.
The formal domain CFfFR ontology
artefact and the findings related to
building the artefact. The artefact was
constructed by analysing a natural text
representing accepted domain
knowledge.
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9.2 Methodological Perspective
The nature of the research project being an interdisciplinary project combining

accounting, computing and philosophy resulted in different methods being used to
answer the research questions. The challenge was to combine the methods under
one research strategy. From a methodological perspective, the use of DSR and the
OLC Model are novelties in research approach and research techniques utilised in
financial accounting. The use of ontology technologies to analyse and test concepts
(classes) and their relationships as it is communicated in a natural text from financial
reporting provide rigour to the analysis process not previously used in financial
reporting.
9.2.1 Design Science Research
In computing and engineering, a Design Science Research (DSR) approach is used

when the purpose of the study is to build an artefact, but the process and exact
outcome of the artefact is not clear at the outset of the study. A DSR approach allows
the researcher to use various research methods and accumulate knowledge during
the different cycles of the research project. Every research cycle builds on the
knowledge gained during a previous DSR Cycle (Figure 3.2).
The purpose of this study was to build an artefact, an ontology of the CFfFR to
determine how and if it is possible to progress towards a global CFfFR. At the outset
of the study, the process and exact structure or outcome of the artefact was vague.
As the process and the outcome of the research project was unknown, a research
approach was necessary to accommodate the stated uncertainties. With the study
being an interdisciplinary study it was determined that, in circumstances similar to this
study, a DSR approach is used in computing. By adopting a DSR approach, it was
possible to accumulate knowledge using different research techniques in a structured
manner applied to different disciplines in order to reach the result - a CFfFR ontology
artefact.
At the time of this study no evidence of the use of a DSR approach in financial
accounting could be found. The contribution from a methodological perspective is that
in this study it was demonstrated that a DSR approach could be used in financial
accounting projects where the research process and research outcome is uncertain
at the start of the research project. The goal was to develop an artefact for a wicked
problem, in this case an investigation on how ontologies can contribute to solve the
wicked problem on how to construct a global CFfFR was conducted.
9.2.2 Ontology Life Cycle Model Applied to Accounting
The research technique used in DSR Cycle 4 to build the CFfFR ontology was
adopted and adapted from the OLC Model developed by Neuhaus et al. (2013)
during the 2013 Ontology Summit to develop and evaluate ontologies. The OLC
Model was chosen (section 3.8.3) to ensure that the CFfFR ontology would conform
to international requirements of an ontology.
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Although not all the cycles in the OLC Model were completed, the guidelines provided
ensured that the building process was rigorously performed. As was the case with the
adoption of the DSR approach, the adoption of the OLC Model from computing in an
accounting study proved to broaden the research possibilities in accounting. Apart
from using the OLC Model in a financial accounting study, it is also not common to
build an ontology in computing using a natural written text as a domain reality. The
contribution from a methodological perspective is that the method has not previously
been applied in the accounting discipline to build a model of an accounting concept.
The successful use of the OLC Model to build a CFfFR ontology suggest the
possibility to use the model to build ontologies of accounting standards.
9.2.3 Method to Test Concepts / (Classes) and Relationships in a Natural Text
The main research question was defined as: “How can a CFfFR consisting of logically
formalised fundamental concepts be developed? The method used in this study was
initially motivated from a theoretical perspective before it was applied on the CFfFR.
The building of the CFfFR ontology was theoretically substantiated by referencing the
use of model theories in philosophy of science and computing. The theoretical
substantiation to use ontology technologies was motivated by indicting the
applicability of model and ontology theories on the financial reporting domain.
The contribution made by this study is that the DSR research approach and OLC
Model used in this study both provide a theoretical substantiation and a rigorous
method to build an artefact from a natural text that logically formalise the fundamental
classes and relationships of a specific domain. Based on this contribution, it should
be possible to use this method to analyse financial accounting standards.
9.3 Technological Perspective
From a technological perspective, the contribution is related to the use of ontology

technologies. The technology used in this dissertation is a recent development and
used to formally represent specified domains. Ontology technologies are used in
artificial intelligence, enabling computers a certain level of intelligent reasoning
(section 3.8.3). Following the stimulus/response system used to describe the
historical development of the CFfFR in Chapter 2, the use of ontology technologies
such as Protégé could become a technological stimulus towards computer readable
financial accounting standards.
The contribution from this study is that the use of ontology technologies to build the
CFfFR ontology artefact indicated that it might be possible to digitise financial
accounting standards into a computer readable format.
9.4 Interdisciplinary Perspective
The interdisciplinary approach followed to utilise established knowledge from other

disciplines provided the possibility to endeavour on a research path not possible if the
research approaches and methods were limited to a traditional accounting research
paradigm. In sections 9.4.1, 9.4.2, 9.4.3 and 9.4.4 the knowledge contributions from
the different disciplines are discussed.
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9.4.1 Models as Isolation by Idealisation and Truth Containers
From philosophy of science the knowledge was adopted that an idealised model
based on untrue idealised assumptions (a model isolated by idealisation, section
5.2.1) can be a truth container (section 5.2.3) regarding reality. This knowledge
contributed towards the theoretical motivation that a CFfFR ontology based on
idealised assumptions (sections 5.4 and 6.5) could bear some truth regarding the
method and possibility to create a global CFfFR (section 5.2.4, Figure 5.5 and Figure
5.6).
The contribution by this study is that it is possible to gain knowledge of reality (the
financial reporting domain) by isolating a research object (the CFfFR) by adopting
untrue and idealised assumptions regarding the phenomenon under investigation.
9.4.2 Models in Computing
The knowledge contributions obtained from the use of models in computing for this
study consist in that it allows the researcher to investigate the financial reporting
reality (a SUS) on an abstract level (section 5.3.2). The usage of conceptual models
in computing to represent static phenomena (classes and their relationships) and
dynamic phenomena (events and processes) were adopted when building the CFfFR
ontology. In computing, models are also used as graphical representations to simplify
and standardise complex realities (SUSs). The following four purposes of conceptual
models in computing (Wand & Weber, 2002) was adopted and applied in this study:
(1) Communication between developers and users. The CFfFR ontology model and
other models developed in this study can be used for communication between
standard setters, users of financial reports and other interested parties.
(2) Assist analysts to understand the domain. The following conceptual models
were developed in this study and contribute towards the understanding and
communication of the financial reporting domain:
• Figure 4.6: Requirements of a conceptual framework
• Figure 5.5: Model formula of the CFfFR
• Figure 5.6: Model formula of the formal domain ontology
• Figure 5.8: Financial reporting token, type model relationship including
financial accounting standards
• Figure 5.10: OMG four level hierarchy combined with financial reporting
token and type model relationships
• Figure 5.11: CFfFR as meta-metamodel in the four level hierarchy
• Figure 5.12: OMG four level hierarchy applied to financial reporting models
• Figure 6.6: Ontology, OMG and model hierarchy of the financial reporting
domain
• Figure 7.6: TemporalClass is_a relationships
• Figure 7.7: Formal representation of Asset
• Figure 7.8: Relationship between Resource and Asset
• Figure 7.9: Formal representation of liability
• Figure 7.10: Inconsistency in equity definition
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• Figure 7.11: Formal representation of equity
• Figure 7.13: Basic classes and relationships of the SFP elements
• Figure 7.14: Proposed asset definition
• Figure 7.15: Proposed liability definition
• Figure 7.16: Proposed equity definition
• Figure 7.19: Decision process to report decision-useful information
• Figure 7.21: CFfFR ontology
• Figure 7.22: Economic Measurement Class: is_a relationships
• Figure 7.26: Reporting Class: is_a relationships
• Figure 7.27: Temporal Class: is_a relationships
• Figure 7.28: CFfFR ontology – Version 2 is_a relationships
• Figure 7.30: CFfFR Version 2 – all relationships
(3) Provide input in the design process. The models developed and indicated above
were all used to provide input in the design process of the CFfFR ontology
(Figure 7.21 and Figure 7.30) thus contributing towards understanding how a
global CFfFR can be constructed.
(4) Document requirements for future reference. The requirements and role for a
CFfFR ontology was documented in Chapters 4, 5, 6 and 7 using graphic
models. The graphic models are listed under number (2) above. The process to
build the ontology is documented in Appendix D – CFfFR working document and
Appendix E – Ontology engineering decisions. The work documented may
contribute towards future discussions regarding the construction of a global
CFfFR ontology.
The theory (type and token models), characteristics (abstraction of a System Under
Study (SUS)) and requirements (complete representation on an abstract level) of
conceptual models in computing contributed towards the understanding of the
requirements (Chapter 4, Figure 4.6) and role of a global CFfFR as a meta-
metamodel in the financial reporting hierarchy (Chapter 5, Figure 5.5 and Figure
5.12).
The contribution from studying the use of models in computing is that the financial
reporting domain can be viewed from a model perspective. From a model
perspective, the requirements and role of the CFfFR within the financial reporting
domain were confirmed and demonstrated. If the role of CFfFR is viewed as a meta-
metamodel, the role of the CFfFR differs from the status assigned to the CFfFR by
the IASB and FASB.
9.4.3 Ontology in Philosophy: Formal Language and Logical Consistency
The contributions to the study obtained from ontology in philosophy are (1) the value
of the use of a formal language to represent the CFfFR and (2) the importance of the
requirement that a global CFfFR should be logically consistent.
Although the discipline related to ontology in philosophy is an ancient discipline

(starting with Aristotle) and well known and applied in accounting research, some
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valuable knowledge was adopted in this study. From ontology, the notion of a formal
language and the advantages of presenting a knowledge domain in a formal
language was adopted via its use in ontology technologies. An essential requirement,
i.e. logical consistency for the acceptance of a global CFfFR, was derived and
confirmed from the use of logic in ontologies. In philosophy, it is argued that logical
consistency of a theory is a pre-requisite for cross-cultural acceptance of that theory
(section 6.2.3). One of the requirements determined for a global CFfFR is that it
should be logically consistent (section 4.8.4).
9.4.4 Ontologies in Computing
The contributions from ontologies in computing can be summarised as follows:

• The use of the OMG model hierarchy to illustrate the relationships of a financial
reporting domain ontology (Figure 6.6). The combination of the ontology
hierarchy of the financial reporting domain, the model hierarchy of the financial
reporting domain and the OMG model hierarchy provides a high-level
conceptual understanding of the use of ontologies and models in the financial
reporting domain.
• The creation of the decision process filter model illustrating how accountants go
about determining what, when and how economic activities of a reporting entity
should be reported in a financial report (Figure 7.19).
• The analysis of the CFfFR to determine what information should be included in
the CFfFR ontology and what information serves an informative purpose
(Figure 7.21).
The main contributions of the study are the formal domain CFfFR ontology artefact
(Figure 7.21 and Figure 7.30) and the findings (Chapter 8) related to building the
formal domain CFfFR ontology. In Chapter 8, the findings are presented. The
discussion findings indicate how the research problem and research questions were
addressed.
9.5 Accounting Perspective
From an accounting perspective the following contributions indicated in sections

9.5.1, 9.5.2, 9.5.3 and 9.5.4 can be viewed as contributions towards financial
accounting and more specifically the financial reporting domain in accounting.
9.5.1 Requirements and Definition for a Global CFfFR
During DSR Cycle 1 (Chapter 4), the requirements and a definition for a global CFfFR
were identified. The requirements contribute towards the body of knowledge by
combining the requirements known in the field into one conceptual model. These
requirements were used in the study to test the global acceptability of the CFfFR and
should, if the CFfFR complies with these requirements, contribute towards building a
CFfFR that is more acceptable in the international community.
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9.5.2 The Ideal Meta-metamodel Role of a Global CFfFR
The role of the ideal CFfFR as a meta-metamodel determined during DSR Cycle 2
(Chapter 5) contributes towards the understanding of what the role of a global CFfFR
should be. The model hierarchy stressed the importance of coherence between the
CFfFR and accounting standards as model in order for the CFfFR to be globally
acceptable. The implication is that the current status of the CFfFR should be
reconsidered to be closer to the ideal role of global CFfFR for the CFfFR to be more
acceptable in the international community.
9.5.3 The CFfFR Ontology
The role of the CFfFR ontology was determined to be that of a metamodel during
DSR Cycle 3 (Chapter 6) according to the OMG four level hierarchy. The contribution
is that it is clear that a CFfFR ontology, by having the role of a metamodel, is closer to
the ideal CFfFR than the CFfFR itself. By building a logically consistent CFfFR
ontology during DSR Cycle 4 (Chapter 7) it was indicated how it is possible to get
closer to the ideal CFfFR that would be globally acceptable.
9.5.4 Identification of Logical Inconsistencies, Unintended Meanings, Implied

Domain Knowledge and Incompleteness of the CFfFR
Some logical inconsistences, unintended meanings, implied domain knowledge and

incomplete concepts were identified during the building process of the CFfFR in DSR
Cycle 4 (Chapter 7). These findings were reported in Chapter 8 and can now be
considered by the accounting community to improve the CFfFR. Although the
accounting community already knew some of the findings reported before they were
highlighted in this study, these findings are now the result of a structured and well-
motivated process supported by technologies developed to detect logical
technologies, unintended meanings, implied domain knowledge and incompleteness
in a specified domain.
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9.6 Conclusion
In Chapter 9, an overview of the knowledge generated through using the DSR

approach was presented. It was argued that the newly generated knowledge
contributes towards solving the research problem and related research questions.
These contributions extend the knowledge on the requirements, role and problems
with providing a global CFfFR.
The main contribution of the study is the creation of a CFfFR artefact. The artefact
demonstrates that it is possible to get closer to the ideal CFfFR that could be globally
acceptable. The findings reported on the problems experienced during the process of
building the CFfFR ontology contributes towards adjustments that could be
considered when revising the CFfFR.
The contributions of knowledge obtained from the different disciplines consulted in

this study were also discussed. These contributions include the use of a model theory
from philosophy of science, the use of a formal language and confirmation of
importance of the logical consistency requirement from philosophy and the
conceptual demonstration of the hierarchy and role of accounting models and the
hierarchy of accounting ontologies.
Chapter 10 concludes the report on this research project by providing an overview of

this study.
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CHAPTER 10
TABLE OF CONTENT
10 CONCLUSION ........................................................................................................ 320

10.1 Introduction .............................................................................................................321
10.2 Problem Identification, Motivation and Scope .......................................................... 321
10.3 Summary of Findings .............................................................................................. 324
10.3.1 Research Design .................................................................................................... 324
10.3.2 The Requirements and Definition of a Global CFfFR .............................................. 324
10.3.3 The CFfFR Viewed from a Model Perspective ........................................................ 325
10.3.4 Applicability of Ontologies ....................................................................................... 325
10.3.5 Evaluating the CFfFR by Building a CFfFR Ontology .............................................. 327
10.3.6 Answering the Main Research Question ................................................................. 330
10.4 Reflection ................................................................................................................330
10.4.1 Methodological Reflection ....................................................................................... 330
10.4.2 Substantive Reflection ............................................................................................ 331
10.4.3 Scientific Reflection ................................................................................................. 332
10.5 Limitations of the Research ..................................................................................... 333
10.6 Areas for Further Research ..................................................................................... 334
10.7 Conclusion ..............................................................................................................334
319
10 CONCLUSION
320
10.1 Introduction
The purpose of Chapter 10 is to provide a conclusion to the study. Section 10.2

summarises the problem, motivation and scope of the study. Section 10.3 presents a
summary of the findings of the study, structured according to the research design
answering the research questions. Section 10.4 presents a reflection on the research
project followed with a discussion on the limitations of the study in section 10.5.
Areas for further research are suggested in section 10.6.
10.2 Problem Identification, Motivation and Scope
The CFfFR developed during the ages through an evolutionary process of stimulus
and response (Salvary, 1979). Investors in an intertwined global economy require
one set of clear, high-quality, principles-based accounting standards that is used
globally (Zeff et al., 2013; Zeff, 2012). The SEC confirms this need for a single set of
globally-recognised accounting standards (Stein, 2015). Although this need was
already formally voiced in 1957 (Kraayenhof, 1960), the accounting community is still
in need of a single set of globally-recognised accounting standards (Bullen & Crook,
2005; Barth, 2006; Barth, 2013b).
In order to meet the need for a single set of globally-recognised accounting standards
a common frame of reference guiding the setting of accounting standards is required
(Barth, 2008; Barth, 2013a; IASB, 2010a; Whittington, 2008b). The search for a
globally-recognised CFfFR became an official project between the IASB and the
FASB with the signing of the Norwalk Agreement (FASB and IASB, 2002). The ideal
of a global CFfFR had not been achieved at the time this study was conducted. The
CFfFR is currently under revision by both the FASB and IASB (Bullen & Crook, 2005;
IASB, 2012a). The purpose of this study was to investigate how a formal
representation of the classes and relationships of the financial reporting domain as
documented in the CFfFR can assist in developing a CFfFR that is globally
recognised.
The research problem was solved by answering the main and three sub-research
questions formulated in section 3.2 around the research problem.
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The main research question answered in this study is formulated as follows:

The main research question is answered by posing three sub-research questions.

The three sub-research questions are:
• Sub-research question 1 (SRQ1): What are the role, definition and

requirements of a global CFfFR consisting of fundamental concepts, which could
• Sub-research question 2 (SRQ 2): How can model building assist to construct a
global CFfFR consisting of fundamental concepts, which could function as a
• Sub-research question 3 (SRQ 3): How can the formalisation of the CFfFR
Table 8.2 provides a summary of how the artefacts developed during the four DSR
Cycles contributed towards answering these research questions:
322
Table 10.1 Summary of artefacts contributing towards answering the research questions in the DSR Cycles
Construct:
(section 6.4.). • Use of OLC in financial
bearing model (section 5.2.4). reporting domain (section 7.2)

domain) (section 5.3.5). (section 6.4.3.). liability and equity.
Model:
ARTEFACT

Construct: Model:
Model:
consistent.
Model:
ontology.
Model:
323
10.3 Summary of Findings
10.3.1 Research Design
The research project was designed to determine if the development of a formal

domain ontology of the CFfFR could assist in developing a global CFfFR. As the
process to develop a formal domain ontology from a natural text or outcome of the
project were not certain, the DSR research strategy was adopted because a DSR
strategy provides for adjustments to the research process based on knowledge
acquired during the execution of a research cycle. The use of a DSR strategy in an
accounting research project was an experiment in its own right. No evidence could be
found that a DSR strategy had been used in accounting before and it was uncertain
at the outset of the project if the DSR strategy would provide the desired results.
Figure 3.3 presents a schematic illustration of the four DSR Cycles performed.
This research strategy proved to fit the research process because the knowledge
gained in one cycle informed the following cycle, all contributing to the ability to
answer the main research question with the completion of the last research cycle.
The results and contributions of this study indicate that a DSR strategy can be
applied successfully in an accounting study.
10.3.2 The Requirements and Definition of a Global CFfFR
The first step in the design was to determine the requirements for the CFfFR to be
globally acceptable. The requirements were determined by performing a systematic
review (Table 3.3) during DSR Cycle 1.The results of the systematic review are
reported in Chapter 4. A schematic summary of the requirements and the relationship
of the requirements with the rest of the financial reporting domain are provided in
Figure 4.6.
Based on the requirements for a global CFfFR, a definition that includes the needs,
purpose and requirements of a global CFfFR is proposed. The proposed definition is:
A conceptual framework for financial reporting is an internally coherent and

logically consistent representation of fundamental concepts that unambiguously
prescribes the nature, function and limits of financial reporting.
When the CFfFR ontology was compared to these requirements, the conclusion was
made that the research questions were answered (section 8.4.2). It was concluded
that the CFfFR ontology serves as a truth-bearing model regarding the formation of a
global CFfFR.
The CFfFR ontology as truth container as well as the procedure to build the CFfFR
demonstrated how and where the CFfFR could be improved to comply with more
requirements and be closer to a global CFfFR. The requirements and proposed
definition can serve as a benchmark against which future CFfFRs can be measured
to determine their possible global acceptability.
324
10.3.3 The CFfFR Viewed from a Model Perspective
Once the requirements and definition serving as benchmark against which the CFfFR
and CFfFR ontology are tested were determined, the role of a global CFfFR was
determined in DSR Cycle 2 and reported in Chapter 5. The status of the CFfFR and
role of the CFfFR ontology were tested against the ideal role. The ideal role was
determined using the OMG model hierarchy (OMG, 2014; OMG, 2008; Gonzalez-
Perez & Henderson-Sellers, 2007). According to the OMG model hierarchy the ideal
CFfFR serves as a meta-metamodel in the financial reporting model hierarchy (Figure
5.11 and Figure 5.12). One of the requirements of a meta-metamodel is that a model
on a higher hierarchy should be an abstraction of models in a lower hierarchy
containing all the concepts of the lower model, but on a more abstract level. Another
characteristic of a model hierarchy is that the concepts (classes) and relationships of
the models in the hierarchy should be coherent with the concepts (classes) and
relationships of other models in the same hierarchy in order for the hierarchy system
to be internally coherent.
Based on the characteristics of the OMC hierarchy system it was found that the ideal
CFfFR, in order to function as a sound foundation for accounting standards that are
internally consistent, should have a meta-metamodel role within a financial reporting
model hierarchy (Figure 5.12). Based on the role of the ideal CFfFR it was
determined that a global CFfFR should function as a meta-metamodel within the
The implication of an ideal and global CFfFR’s role as a meta-metamodel is that all
the models in the financial reporting hierarchy should be coherent for the hierarchy
system to be sound. This means that once a global CFfFR has been developed, it
can have a prescriptive role towards the other models in the hierarchy. The role of the
ideal and global CFfFR as a meta-metamodel emphasised the importance of the
completeness requirement determined during the previous cycle. The ideal CFfFR
should contain all the concepts (classes) and relationships of the financial reporting
domain, but on a high level of abstraction.
When the current status assigned to the CFfFR was compared to the ideal role of a
global CFfFR it was determined that it does not comply with the characteristics of a
meta-metamodel. The CFfFR was tested during DSR Cycle 4 and it was found that it
does not comply with the completeness requirement, is not internally coherent,
logically consistent or completely coherent with the other models (accounting
standards) in the financial reporting domain.
The implication of stating the role of a global CFfFR as a meta-metamodel is that the
status of the CFfFR should be revised to adopt the role of a meta-metamodel in the
financial reporting model hierarchy in order to get closer to the ideal CFfFR to
become globally accepted.
10.3.4 Applicability of Ontologies
With the role of an ideal and global CFfFR established as a meta-metamodel in

Chapter 5, the applicability of ontologies on the financial reporting domain was
325
established in Chapter 6 during the execution of DSR Cycle 3.The purpose of DSR
Cycle 3 was to explore the possibilities offered by the development and successful
use of ontology technologies in other disciplines. The applicability of ontologies on
the financial reporting domain was determined from the philosophical and computing
disciplines.
The importance of logical consistency as requirement for a global CFfFR was

highlighted from a philosophical perspective. It was found that logical consistency is a
pre-requisite for the cross-cultural acceptance of theories (section 6.2.3). The
implication is that the CFfFR should be logically consistent to be globally accepted
across different cultures.
The historical development of ontology as a discipline within philosophy was

described to indicate the links between ontology in philosophy, ontologies in
computing and the link to the financial reporting domain. The link between ontology in
philosophy and the financial reporting domain was established by applying the
definition of ontology in philosophy to the financial reporting domain (6.2.1a) and
6.2.1b)). The similarities and differences between ontology in philosophy and
ontologies in computing was used to indicate the influence of philosophy on
computing and how these two disciplines could benefit the financial reporting domain.
The use of logic and more specifically formal logic in philosophy and the application
of logic in computing by means of formal languages or artificial languages such as
Description Logics (DL) (Figure 6.5) were found to be beneficial for the purpose of
this study.
During DSR Cycle 3, the suggestion was made to develop a formal representation of
the classes and relationships of CFfFR into a CFfFR ontology using the Web
Ontology Language also known as (OWL). OWL is a formal language based on DL.
Using OWL made it possible to formalise the classes and relationships of the financial
reporting domain as documented in the CFfFR, ensuring that they are logically
consistent (Chapter 7).
For the purpose of this study, two important characteristics of ontologies in computing
were established during the background study of ontologies in computing. The first
characteristic is that ontologies in computing provide a logically consistent and
unambiguous presentation of primitive classes of a specified domain
(section 6.3.1a)). This characteristic agrees with two requirements of an ideal and
global CFfFR, logical consistency and clear formulation. The second characteristic,
computational formal logic, takes advantage of the benefit of formal logic by making it
computer readable (section 6.3.1b)). The implication of this knowledge for this study
was that it made it possible to digitise the classes and relationships of the financial
reporting domain in a logically consistent manner.
The applicability of ontology technologies on the financial reporting domain was

established by indicating the similarities between conceptual modeling in computing
with the CFfFR (section 6.3.2a)). Based on conceptual modeling it was determined
that the CFfFR can serve as a digital domain for financial reporting. By combining the
knowledge of the power of computational logic (section 6.3.1b)) with the knowledge
326
of the ideal CFfFR having the role of a meta-metamodel (section 5.3.5), with
conceptual modeling and ontologies in the computing discipline (6.3.2c)) a CFfFR
ontology hierarchy for the financial reporting domain was developed (Figure 6.6). The
CFfFR ontology hierarchy is also based on the OMG model hierarchy.
In section 6.4 it was stated how the use of ontologies in computing assist with
answering the research questions. This knowledge was used to suggest the building
of a CFfFR ontology that was executed in DSR Cycle 4.
10.3.5 Evaluating the CFfFR by Building a CFfFR Ontology
The OLC Model was used to plan and structure the building of the CFfFR ontology
(section 3.8.3). The basic assumptions adopted to build the CFfFR ontology are
documented in section 7.2.2. The building of the CFfFR ontology passed through four
Iterations (sections 7.3, 7.3.5, 7.4.5 and 7.5.3). Sub-research question 3 (SRQ 3) and
the main research question were answered during DSR Cycle 4.
By building the CFfFR ontology of the financial reporting domain during DSR Cycle 4,
two objectives of the research project were achieved. Firstly, as the natural text of the
CFfFR was used as the basis to build the CFfFR ontology, the CFfFR was tested
against the requirements of an ideal CFfFR for logical consistency, unintended
meanings (ambiguity) and completeness. It was found that the CFfFR is not logically
consistent (sections 7.3, 7.3.5) and contains many unintended meanings (sections
7.3, 7.3.5. 7.4.5. 7.5.3). Some ambiguities can be attributed to implied domain
knowledge. Although it was not the intention at the start of Iteration 1 to evaluate the
CFfFR for completeness, incomplete or missing classes and relationships regarding
financial reports were identified during Iterations 3 and 4 (Figure 7.19, Figure 7.21).
In order to formalise the CFfFR, two conceptual understandings of the modeling

decisions taken and information to be reported were developed. The first conceptual
understanding was the conceptual modeling of the implicit and assumed domain
knowledge involved when deciding what, when and how economic activities should
be disclosed in a financial report. A decision process filter was developed and
informally tested by domain experts for accuracy (Figure 7.19).
The second conceptual understanding is an analysis to distinguish between

information that should be formalised (included as of classes and relationships in the
CFfFR ontology), and information, although included in the CFfFR, that informs the
CFfFR ontology and is not formalised. The detailed analysis to distinguish between
formalised information and informative information in the CFfFR is provided in
Appendix D – CFfFR working document and decisions. The informative information
was labelled as and translated into competency questions in this study. The
informative information included in the CFfFR is reported in section 7.6.2 and
graphically displayed in Figure 7.21.
By making modeling decisions due to unintended meanings and implicit domain

knowledge as well as including information from DP/2013/1 (IASB, 2013a) and a
specimen financial report it was possible to formalise most of the classes and
327
relationships identified in the CFfFR. It was for example not possible to formalise the
definitions for income and expense as currently formulated in the CFfFR.
It was found that the use of an ideal model isolated by idealisation and based on false
but idealised assumptions could be used to gain knowledge of a social reality such as
the CFfFR.
The creation of a CFfFR ontology artefact (although not perfect) implies that it should
be possible to adjust the CFfFR to be closer to the ideal CFfFR. By eliminating logical
inconsistencies, incompleteness, unintended meanings and implied domain
information the CFfFR could be closer to the ideal CFfFR and be more inclined to
become globally accepted.
Figure 10.2 is a graphical portrayal of the CFfFR ontology.
328
Figure 10.2: CFfFR ontology
329
10.3.6 Answering the Main Research Question
The main research question: How can a CFfFR consisting of logically formalised
fundamental concepts can be developed, which could function as a sound foundation for
accounting standards that are principle-based, internally consistent and internationally
converged? In order for the CFfFR to function as a sound foundation for accounting
standards that are principle-based, internally consistent and internationally converged,
the CFfFR itself should be principle-based, internally consistent and internationally
converged.
By building the CFfFR in two versions through four Iterations it was indicated where the
natural texts of the CFfFR does not comply with the content requirements of a global
CFfFR, thus making the CFfFR ontology a truth-bearing model.
The main research question was answered as the formal domain ontology of the CFfFR
is principle-based, internally consistent and indicates a method towards a global CFfFR.
The CFfFR ontology is principle-based as the classes and relationships and
accompanying competency questions represent the most basic principles needed to
provide decision-useful information to the users of financial reports. The CFfFR ontology
is internally consistent as it was tested for internal and logically consistency with the
reasoner. Finally, the CFfFR ontology provides a method and information towards a
global CFfFR that can be internationally converged. The contributions of the study to the
body of knowledge are summarised in Table 9.2.
10.4 Reflection
This section is a reflection on the extent the research approach influenced the results
(methodological reflection). It contains a comparison of the results of this particular
research with other research on the same topic (substantive reflection) and the research
contribution to the scientific body of knowledge made by this study (scientific
contribution).
10.4.1 Methodological Reflection
The qualitative study was conducted from an interpretative ontological perspective

(section 3.3.4). The nature of the CFfFR as a social construct constantly changing by
way of human intervention motivated the decision to adopt an interpretivist ontological
perspective. The modeling decisions made by the researcher were based on
interpretations of the information available. The interpretative nature of the modeling
decisions can be viewed as subjective involvement of the researcher in making a
decision based on the information available at the time the decision had to be made. The
interpretative nature of the study also implies that it is possible for another researcher to
make modeling decisions that might differ from this study if those decisions are made at
another time with more or different information available.
330
Another researcher could argue that the study can also be performed from a critical
realism perspective (section 3.3.3). It is debatable if a critical realism perspective would
have resulted in different material findings and contributions. The nature of the CFfFR
cannot be classified other than as a social construct with the characteristic of constant
change. Modeling decisions would, from a critical realism perspective, still be
interpretative in nature. Although this study adopted an interpretative ontological
perspective the model theory from Mäki (2008) and some of the ontological theories in
computing (Smith & Ceusters, 2010) used in this study have their origins in critical
realism. Adopting these theories does not mean that the researcher moved between
different ontological perspectives, as the nature of the reality under study and the
perspective of the researcher on the reality as well as the subjective nature of the
modeling decisions taken did not change. The final motivation to conduct this study from
an interpretative perspective is because an explanation in the social sciences invariably
entails interpretation, implying some degree of subjective involvement in the decision
making process. Ultimately, the researcher formed part of the thought process of other
researchers to formulate and create a new social reality - the CFfFR ontology.
Although the DSR approach followed in this study allowed an exploratory approach in an
uncertain environment, it added rigour to the process by forcing a consciousness of the
reason, purpose, outcome and contribution of every cycle performed. The DSR approach
supported the abductive approach to reasoning followed in this study. With the DSR
approach, it was possible to stay true to alternating between inductive and deductive
reasoning approaches as explained in section 3.4.3. Within the DSR approach, it was
possible to use multiple research techniques as indicated in section 3.8 and link these
techniques with the required reasoning approach for that specific DSR Cycle in order to
obtain the information required.
It can be concluded that the DSR strategy followed in this study added rigour and the
flexibility to explore across disciplines in order to be able to address the research
problem in a manner that can be scientifically motivated.
10.4.2 Substantive Reflection
The results of this study confirm some of the findings in other studies that a global CFfFR
is needed and that the current CFfFR is not internally coherent.
This study differs from the other studies in that it provides a theoretical framework
(requirements, definition and role of the CFfFR) as benchmark according to which the
CFfFR can be tested. The study further provides a method and procedure, based on
ontology technologies accepted in other disciplines that can be used to test a natural text
such as the CFfFR or accounting standards against pre-determined requirements.
331
One of the leading experts on the XBRL-project, Charles Hoffman 120 (regarded by some
as the father of the XBRL-project (Bonsón et al., 2008)), informally confirmed by email
the practical value of the contribution made by this study. The following is an extract from
an email received from Hoffman regarding Gerber et al. (2015):
“This paper is one of the most fantastic things that I have seen in my entire
career in accounting. This is spot on. It really makes no difference if the IASB
and/or FASB actually ever do what you are suggesting in your paper
(however, that is the obvious best-case scenario…but you know how things
go some times). The accounting profession needs an ontology for U.S.
GAAP and an ontology for IFRS regardless of what the IASB/FASB do. That
would allow accounting professionals to not only discuss the accounting
standards more rationally and see that inconsistencies and unintended
meanings stand out; but also to build some incredibly interesting tools which
would be extremely valuable in financial reporting.”
Although the comment above reflects the opinion of one individual, it provides an
indication that the results of this study may have some practical value for the accounting
profession.
10.4.3 Scientific Reflection
Section 10.4.2 compared the results of this study with other studies and concluded with
an indication of the possible practical value of the study for the accounting profession.
This section is a reflection on the contribution to the scientific body of knowledge.
The scientific contribution is provided in Chapter 9. This study contributes towards the
body of knowledge by proving that is possible to create a CFfFR ontology, an artefact,
that is logically consistent and internally coherent (Chapters 6 and 7). The creation of a
CFfFR ontology based on idealised assumptions made it possible to analyse and identify
logical inconsistencies, internal incoherencies, unintended meanings, implied knowledge
and incompleteness in the CFfFR in a manner that can be substantiated by methods
accepted and used in other disciplines. The information obtained by testing the CFfFR
against the requirements and role of an ideal CFfFR makes it possible to adjust the
CFfFR to be closer to a global CFfFR.
The requirements identified in Chapter 4 contribute a summary of information previously

known, but not explicitly formulated as requirements for the CFfFR. The requirements
provide a standard against which the CFfFR can be measured. Based on the identified
requirements it was possible to formulate a definition for a global CFfFR.
In Chapter 5, the role of the ideal CFfFR was determined as that of a meta-metamodel
within the financial reporting domain. Although this role differs from the current status of
120
The work done by Hoffman can be viewed at his website (Hoffman, 2015).
332
the CFfFR, it is an indication of the role that a global CFfFR should have. The knowledge
that it is possible to build a CFfFR ontology with a natural text document as source
makes it possible to consider building ontologies of accounting standards with their
respective natural texts are sources.
In conclusion, it can be said that it is now known how the accounting profession can build
a CFfFR that could function as a sound foundation for accounting standards that are
principle-based, internally consistent and internationally converged.
10.5 Limitations of the Research
The following limitations were identified when conducting the research:
• The study did not adjust or suggest detail adjustments to the CFfFR. This study can
only make some suggestions that could be considered by standard setting bodies.
• The value of the study ultimately depends on the manner in which the contributions
are accepted and implemented in the accounting community. This study does not
have any control or influence over the acceptance and implementation of the
contributions. The value of the study was confirmed in a limited manner by the
publication of some of the results through a peer-reviewed system. These
publications are considered as part of the validation of the value of the results.
• The “consulting process” on implied domain knowledge and unintended meanings

were limited to the natural text of the CFfFR, DP/2013/1 and a specimen of a
financial report. This limitation was decided on to be able to test the clarity with
which the natural text of the CFfFR communicates most concepts of the financial
reporting domain. Ultimately, the accounting community should become more
involved in this study to prove the value of the study.
• DSR strategy is not familiar in the accounting community as a research strategy.

Although it was presented as a contribution, the DSR strategy followed can also be
seen as a threat to the study as it has not been used before in an accounting study.
The unfamiliarity could cause some scepticism in the accounting community with
regards to accepting the results obtained by using this strategy. After considering the
benefits offered by the DSR strategy within this multi-disciplinary study, it was
decided that the benefits offered by a DSR strategy outweighs the possible
scepticism.
• Although the CFfFR ontology is the result of a fourth Iteration it should be refined
more once more accounting domain experts and ontology experts get involved.
• The ontology technologies used are not readily accessible to accounting experts and
the input of an ontology engineer is essential. This limitation is not unique to this
333
study. The building of a domain ontology always involve the input of both ontology
engineers and domain experts.
10.6 Areas for Further Research
Some of the areas for further research relate to the limitations indicated in section 10.5.
• The CFfFR ontology should be refined with inputs from more accounting domain
experts to provide an ontology that represents the agreed upon knowledge of the
accounting discipline.
• Input from domain experts should be obtained to help with the identification of
implicit domain knowledge in the CFfFR and accounting standards and making that
knowledge explicit in an ontology.
• The building of ontologies of accounting standards should be considered. By

integrating the ontologies of the CFfFR and accounting standards into one ontology,
it could be possible to create an ontology of the financial reporting domain as
indicated in the OMG four level ontology hierarchy of the financial reporting domain
(Figure 6.6). The integration of the CFfFR ontology and accounting standard
ontologies could provide valuable information regarding the logical consistency
between accounting standards and the CFfFR. These ontologies could also assist in
identifying incoherence between the different standards as well as between the
standards and the CFfFR. This integration would contribute towards the ideal role of
the CFfFR as a meta-metamodel.
• The integration of a financial reporting domain ontology with the XBRL-project

should be investigated. An integration between these two areas could contribute to
digitalizing the complete financial reporting domain, from the initial economic activity
to the publication of a financial report.
10.7 Conclusion
This study has developed an artefact, a CFfFR ontology, by performing design science
on the financial reporting domain. In order to develop the CFfFR ontology the
requirements and role of a global CFfFR were determined. By developing the CFfFR
ontology, the CFfFR was tested for global acceptability against the requirements and
role. The study indicates some logical inconsistencies, unintended meanings, implicit
domain knowledge and incomplete areas in the CFfFR that need to be addressed in
order for it to be more globally acceptable. By highlighting these problem areas in the
CFfFR it was indicated how the accounting profession could build a CFfFR that could
internally consistent and internationally converged as indicated in section 10.3.6.
334
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Appendices
12 APPENDICES
12.1 Appendix A – Some Major World Crises in the Twentieth and Twenty-first
Centuries
A discussion of some of the major world crises in the twentieth and twenty-first centuries
is included in a separate document in the CD accompanying this document.
12.2 Appendix B – Major Corporate Collapses
A discussion on the major corporate collapses is included in a separate document in the

CD accompanying this document.
12.3 Appendix C – List of Stock Market Crashes and Bear Markets
The List of stock market crashes and bear markets is included in a separate document in
the CD accompanying this document.
12.4 Appendix D – CFfFR Working Document
The CFfFR working document is included in a separate document in the CD

accompanying this document.
Appendices
12.5 Appendix E – Ontology Engineering Decisions
1. Ontology Engineering Decisions

The ontology is constructed with two major inputs from the CFfFR:
a. the elements or entities and the relationships between them that informs the construction of financial reports;
b. the competency questions that informs the design of the ontology and the purpose / objectives of the ontology.
2. Ontology classes, assertions and notes
Class Name Assertion Note / Reference

Benefit • is_a type of Thing
EconomicBenefit • is_a type of Benefit
FutureEconomicBenefit • is_a type of EconomicBenefit 4.10. The future economic benefits
• happenIn some FutureTemporalInterval embodied in an asset may flow to the
entity in a number of ways. For example,
an asset may be:
(a) used singly or in combination with other
assets in the production of goods or
services to be sold by the entity;
(b) exchanged for other assets;
(c) used to settle a liability; or
(d) distributed to the owners of the entity.
4.8. The future economic benefit embodied

in an asset is the potential to contribute,
directly or indirectly, to the flow of cash
and cash equivalents to the entity.
ExpectedFutureEconomicBenefit • is_a type of FutureEconomicBenefit
(EFEB) • is_a type of expectedBy some Entity
• happenIn some FutureTemporalInterval
Claim • is_a type of Thing Claim is not defined in the CFfFR, but
Claim was identified as one of only two
main classes on the Statement of
Financial Position. The other main class is
Asset.
Obligation • is_a type of Claim
• has-Settlement some Settlement
356
Appendices

PresentObligation • is- a type of Obligation
• isValidOnDate some PresentReportingDate
• hasSettlement some Settlement
Liability • is Equivalent to PresentObligation and CFfFR p. A34: A liability is a present
(hasSettlement some ExpectedSettlement) obligation of the entity arising from past
• hasLiabilityValue some decimal events, the settlement of which is
• isValidOnDate some PresentReportingDate expected to result in an outflow from the
entity of resources embodying economic
• hasSettlement some Settlement
benefits.
• is Disjoint With Asset
A liability is a present obligation, owed by
the entity to transfer the control of an
asset, which is a result of past events
Equity • is_a type of Claim CFfFR p.A35: Equity is the residual
• is Equivalent to ResidualValue interest in the assets of the entity after
deducting all its liabilities.
Our developed definition: Equity is a

shareholders’ claim against the entity that
is the result of past events, and which is
not a present obligation
Control • is_a type of Thing
ResourceControl • is_a type of Control 3.23 - The IASB proposes to use the same
• IsControlOf some Entity basic concepts to define control of an
economic resource in the CFfFR. It
proposes the following definition: An entity
controls an economic resource if it has the
present ability to direct the use of the
economic resource so as to obtain the
economic benefits that flow from it.
Element • is_a type of Thing
FinancialStatementElement • is_a type of Element The CFfFR states “Financial statements
• is-Equivalent To portray the financial effects of transactions
MeasurementOfFinancialPositionElement or and other events by grouping them into
MeasurementOfPerformanceElement broad classes according to their economic
characteristics. These broad classes are
termed the elements of financial
statements. The elements directly related
to the measurement of financial position in
the balance sheet are assets, liabilities
357
Appendices

and equity. The elements directly related
to the measurement of performance in the
income statement are income and
expenses. The statement of changes in
financial position usually reflects income
statement elements and changes in
balance sheet elements; accordingly, this
Conceptual Framework identifies no
elements that are unique to this
statement."
MeasurementOfFinancialPositionEle • is_a type of FinancialStatementElement
ment • is-Disjoint With
MeasurementOfPerformanceElement
AssetElement • is_a type of
MeasurementOfFinancialPositionElement
EquityElement • is_a type of
LIabilityElement • is_a type of
MeasurementOfPerformanceElement • is_a type of FinancialStatementElement
• is-Disjoint With
ExpenseElement • is_a type of CFfFR A38: Expenses are decreases in
MeasurementOfPerformanceElement economic benefits during the accounting
period in the form of outflows or depletions
of assets or incurrences of liabilities that
result in decreases in equity, other than
those relating to distributions to equity
participants.
Choose to model according to the
definition of income that is another
mechanism to interpret the “values” of
assets, liabilities.
IncomeElement • is_a type of CFfFR A38: Income is increases in
MeasurementOfPerformanceElement economic benefits during the accounting
period in the form of inflows or
enhancements of assets or decreases of
liabilities that result in increases in equity,
other than those relating to contributions
358
Appendices

from equity participants.
Choose to model according to the

definition of income that is another
mechanism to interpret the “values” of
assets, liabilities.
Entity • is_a type of Thing Entity - most general description of social
• hasFinancialPosition some construct that prepare and present
FinancialPosition financial statements
• hasInformation some EntityInformation
• hasManagement some Management
• hasObligation some Obligation
• hasTypeOfControl some Control
• hasFinancialPerformance some
FinancialPerformance
ReportingEntity • is_a type of Entity Entity - most general description of social
• is_a type of publishFinancialReport some construct that prepare and present
FinancialReport financial statements
• hasFinancialPosition some
FinancialPosition The chapter on the Reporting Entity in the
CFfFR is still outstanding.
• hasManagement some Management The information in the CFfFRO was
• hasObligation some Obligation obtained by analysing a financial report.
RegisteredReportingEntity • is_a type of ReportingEntity Entities registered according to legal
• is_a type of hasRegistrationNumber some requirements.
string
• is_a type of publishFinancialReport some The information in the CFfFR was
FinancialReport obtained by analysing a financial report.
• hasFinancialPosition some
FinancialPosition
• hasManagement some Management
• hasObligation some Obligation
FinancialPosition • is_a type of Thing
• is_a type of isReportedOnBy some
359
Appendices

StatementOfFinancialPosition
Information • is_a type of Thing Used to capture the “other information”
other than statements that is part of a
financial report, such as information about
the entity or “notes to statements”.
This is a very vague class at present but it

is mentioned prominently within the
CFfFR.
EntityInformation • is_a type of Information Under EntityInformation is categorised all
additional entity information included in
financial reports e.g. biographical
information, legal status, management
information, statement of responsibility,
reports of the independent auditor and
report of the directors etc.
FinancialStatementInformation • is_a type of Information This class includes all additional
information to financial statements in
financial reports.
NotesToFinancialStatements • is_a type of FinancialStatementInformation This is the notes to financial statements
• hasStatementDate some PresentReportingDate that are included in financial reports.
• hasTimePeriod some PastReportingPeriod
Instrument • is_a type of Thing
DebtInstrument • is_a type of Instrument
EquityInstrument • is_a type of Instrument
Management • is_a type of Thing OB4 - according to footnote 2 of the
• is Equivalent To GoverningBoard or Management CFfFR management refers to
management and the governing board of
an entity.
Board • is_a type of Management
• is_a type of GoverningBoard or Management
GoverningBoard • is_a type of Board
• is_a type of GoverningBoard or Management
Report • is-type of Thing
FinancialReport • is_a type of Report Even though the concepts “financial
• hasFinancialReportDate some PresentReportingDate statement” and “financial report” are used
• hasReportPart some EntityInformation as synonyms in the CFfFR, there are
• hasReportPart some FinancialStatement distinct differences. Financial statements
• hasReportPart some NotesToFinancialStatements can exist separate from a financial report
360
Appendices

• hasTimePeriod some PastReportingPeriod e.g. cash flow statement. A financial report
always contains a set of financial
statements so the PartOf relationship
holds.
The FinancialReportDate is the present

reporting date, which is the end date of the
past reporting period. This is the date
printed on the title of the financial report.
This information was obtained from a

financial report and is not mentioned in the
CFfFR thus an indication of some
incompleteness in the CFfFR.
AnnualFinancialReport • is_a type of FinancialReport This is the final year-end financial report
• hasTimePeriod some PastFinancialYear that has to be approved.
• hasReportPart some EntityInformation
• hasReportPart some FinancialStatement This information was obtained from a
• hasReportPart some NotesToFinancialStatements financial report and is not mentioned in the
• hasTimePeriod some PastReportingPeriod CFfFR thus an indication of some
• hasFinancialReportDate some PresentReportingDate incompleteness in the CFfFR.
Resource • is_a type of Thing
ControlledResource • is_a type of Resource
• is Equivalent To EconomicResource
• is_a type of isControlledBy some Control
EconomicResource • is_a type of Resource
• is Equivalent To ControlledResource
Asset • is Equivalent To ControlledResource and From CFfFR p. A34: An asset is a
(fromWhichInflow some EFEB) resource controlled by the entity as a
• is_a type of hasAssetValue some decimal result of past events and from which future
• is_a type of ControlledResource economic benefits are expected to flow to
• is_a type of EconomicResource the entity.
• is Disjoint With Liability Many assets, for example, property, plant
and equipment, have a physical form.
However, physical form is not essential to
the existence of an asset; hence patents
and copyrights, for example, are assets if
future economic benefits are expected to
361
Appendices

flow from them to the entity and if they are
controlled by the entity.
Responsibility • is_a type of Thing
MangementResponsibility • is_a type of Responsibility
Settlement • is_a type of Thing A definition of settlement in the CFfFR is
needed.
This is an indication of an omission of a

basic concepts in the CFfFR.
ExpectedSettlement • is_a type of Settlement
• is_a type of and (expectedBy some Entity)
Statement • is_a type of Thing The class Statement is not defined in the
CFfFRO. The assertion of Statement and
the sub classes of Statement was obtained
from an example of a financial report.
The class Statement is essential in the

CFfFRO in order to comply with the
competency question to provide decision-
useful information to the users of financial
reports.

basic class in the CFfFR.
FinancialStatement • is_a type of Statement
• hasElement some FinancialStatementElement
• hasStatementDate some PresentReportingDate
StatementOfCashFlows • is_a type of FinancialStatement
StatementOfChangesInEquity • is_a type of FinancialStatement
StatementOfFinancialPosition • is_a type of FinancialStatement Same as Balance sheet still mentioned in
• hasElement some the current CFfFR
362
Appendices

StatementOfProfitOrLossAndOtherC • is_a type of FinancialStatement Equivalent to Income Statement as
omprehensiveIncome • hasTimePeriod some PastReportingPeriod referred to in the current CFfFR
TemporalConcept • is_a type Thing The class TemporalClass is not defined in
• is Equivalent To TemporalInstant or TemporalInterval the CFfFR. The assertion of
TemporalClass and the sub classes of
TemporalClass was obtained from an
example of a financial report.
The class TemporalClass is essential in

the CFfFRO in order to comply with the
competency question to provide decision-
useful information to the users of financial
reports.

basic concept in the CFfFR.
TemporalInstant • is_a type of TemporalInstant or Temporalinterval A temporal instant is an exact instance in
• Disjoint With TemporalInterval time - for financial reporting purposes this
is exactly the end of a date e.g. 23:59:59
on a specific date such as 31/3/2015.
ConsiderationDate • is_a type of TemporalInstant or Temporalinterval
ReportingDate • is_a type of TemporalInstant or Temporalinterval
FutureReportingDate • is_a type of ReportingDate
• is_a type of TemporalInstant or Temporalinterval
• Disjoint With PastReportingDate,
PresentReportingDate
PastReportingDate • is_a type of ReportingDate
• Disjoint With FutureReportingDate,
PresentReportingDate • is_a type of ReportingDate
• Disjoint With FutureReportingDate, PastReportingDate
• Disjoint With PastTemporalInterval,
FutureTemporalInterval
TemporalInterval ≡ TimePeriod • Equivalent to TimePeriod
363
Appendices

• is_a type of temporalBegins some TemporalInstant
• is_a type of TemporalConcept
• is_a type of temporalEnds some TemporalInstant
• is_a type of TemporalInstant or TemporalInterval
• Disjoint With TermporalInstant
FutureTemporalInterval • is_a type of TimePeriod
• is_a type of TemporalInterval
• is_a type of TemporalInstant or TemproalInterval
• is_a temporalEnds some TemporalInstant
• Disjoint With PresentReportingDate,
PastTemporalInterval
FutureReportingPeriod • is_a type of TimePeriod
• is_a type of ReportingPeriod
• is_a type of FutureTemporalInterval
CurrentFutureReportingPeriod • is_a type of TimePeriod This is the financial reporting period
• is_a type of FutureReportingPeriod between the present reporting date and
• is_a type of TemporalInterval the future reporting date
• is_a type of temporalBegins some
• is_a temporalEnds some FutureReportingDate
LongtermFutureReportingPeriod • is_a type of TimePeriod
• is_a type of FutureReportingPeriod
FutureReportingDate or PresentReportingDate)
364
Appendices

• Disjoint With CurrentFutureReportingPeriod
PastTemporalInterval • is_a type of TimePeriod
• Disjoint With PresentReportingDate,
FutureTemporalInterval
PastReportingPeriod • is_a type of TimePeriod
• is_a type of PastTemporalInterval
• is_a type of temporalBegins some PastReportingDate
• is_a type of temporalEnds some PresentReportingDate
PastFinancialYear • is_a type of TimePeriod
• is_a type of PastReportingPeriod
ReportingPeriod • is_a type of TimePeriod
FutureReportingPeriod • is_a type of TimePeriod
• is_a type of FutureTemporalInterval
CurrentFutureReportingPeriod • is_a type of TimePeriod
365
Appendices

• is_a type of temporalEnds some FutureReportingDate
LongtermFutureReportingPeriod • is_a type of TimePeriod
(FutureReportingDate or PresentReportingDate)
PastReportingPeriod • is_a type of TimePeriod
• is_a type of PastTemporalInterval
PastFinancialYear • is_a type of TimePeriod
• is_a type of PastReportingPeriod
TimePeriod ≡ TemporalInterval • Equivalent To TemporalInterval
• is_a type of TemporalConcept
• is_a type of TimePeriod
366
Appendices

User • is_a type of Thing
ExternalUser • is_a type of User User external to entity that uses financial
statements.
Creditor • is_a type of ExternalUser OB2: PotentialCreditor, ExistingCreditor.
PotentialCreditor is not an ExistingCreditor
(disjoint)
ExistingCreditor • is_a type of Creditor
• Disjoint With PotentialCreditor
PotentialCreditor • is_a type of Creditor
• Disjoint With ExistingCreditor
Lender • is_a type of Creditor OB2: A Lender is a Creditor
Two types: PotentialLender,
ExistingLender
PotentialLender is not a ExistingLender
(disjoint)
ExistingLender • is_a type of Lender
• Disjoint with PotentialLender
PotentialLender • is_a type of Lender
• Disjoint with ExistingLender
Investor • Equivalent To ExistingInvestor or PotentialInvestor OB2: PotentialInvestor, ExistingInvestor
• Is-a type of ExternalUser PotentialInvestor is not a ExistingInvestor
(disjoint)
ExistingInvestor • is_a type of Investor
• is_a type of ExistingInvestor or PotentialInvestor
• Disjoint With PotentialInvestor
PotentialInvestor • is_a type of Investor
• is_a type of ExistingInvestor or PotentialInvestor
• Disjoint With ExistingInvestor
Shareholder • is_a type of User
Value • is_a type of Thing To be recognised, an item meets the
definition of an element and has cost or
value that can be measured with reliability,
CFfFR par 4.38 p.A40
ResidualValue ≡ Equity • Equivalent To Equity
• is_a type of Value
• is_a type of ResidualValue
TotalAssetValue • is_a type of Value Sum value of all asset values
TotalLiabilityValue • is_a type of Value Sum value of all liability values
367
Appendices
This page is intentionally left blank.
368
The Conceptual Framework for
Financial Reporting Represented in a
Formal Language
by
Marthinus Cornelius Gerber
Dissertation presented in fulfilment of the requirements for the degree
Doctor of Philosophy (Ph.D.): Accounting Sciences
in the
FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES
at the
UNIVERSITY OF PRETORIA
Supervisor:
Prof A.J. van der Merwe
Department of Informatics, University of Pretoria
Co-supervisor:
Prof N. Stegmann
Accountancy Department, University of Johannesburg
Date of submission
15 September 2015
1
TABLE OF CONTENTS
12 APPENDICES 3
12.1 Appendix A - Some of the Major World Crises in the Twentieth

and Twenty-first Centuries 3
12.2 Appendix B – Major Corporate Collapses 4
12.3 Appendix C – List of Stock Market Crashes and Bear Markets 10
12.4 Appendix D – CFfFR Working Document 15
12.5 Appendix E – Ontology Engineering Decisions 63
13 REFERENCES 64
2
Appendix A - Some of the Major World Crises in the Twentieth and Twenty-first Centuries
12 APPENDICES
12.1 Appendix A - Some of the Major World Crises in the Twentieth and
Twenty-first Centuries
• Wall Street Crash of 1929, followed by the Great Depression – the largest and
most important economic depression in the 20th century
• 1973–1973 oil crisis – oil prices soared, causing the 1973–1974 stock market
crash
• Secondary banking crisis of 1973–1975 – United Kingdom
• 1987 – Black Monday (1987) – the largest one-day percentage decline in stock
market history
• 1989–91 – United States Savings & Loan crisis
• 1990 – Japanese asset price bubble collapsed
• Early 1990s recession
• 1992–93 – Black Wednesday – speculative attacks on currencies in
the European Exchange Rate Mechanism
• 1997–98 – 1997 Asian Financial Crisis – devaluations and banking crises
across Asia
• 1998 Russian financial crisis
• 2000 – early 2000s recession
• 1999-2002 – Argentine economic crisis (1999-2002)
• 2001 – Bursting of dot.com bubble – speculations concerning internet
companies crashed
• 2007–08 – Global financial crisis
• 2010 European sovereign debt crisis
Source (Wikipedia, 2014a)

Appendix B – Major Corporate Collapses
12.2 Appendix B – Major Corporate Collapses
Name Date Business Causes
Owned by the Medici family, it ran up large debts

Medici Bank 1494 Banking
due to the family's profligate spending,
extravagant lifestyle, and failure to control the
managers, their bank went insolvent.
After the War of Spanish Succession, the UK

South Sea Sep 1720 Slavery and colonialis
signed the Treaty of Utrecht 1713 with Spain,
Company m
ostensibly allowing it to trade in the seas
near South America. In fact, barely any trade took
place as Spain renounced the Treaty, however
this was concealed on the UK stock market. A
speculative bubble saw the share price reach over
£1000 in August 1720, but then crash in
September. A Parliamentary inquiry revealed
fraud among members of the government,
including the Tory Chancellor of the
Exchequer John Aislabie, who was sent to prison.
Scottish economist John Law convinced the

Mississippi Sep 1720 Colonialism
French government to support a monopoly trade
Company
venture in Louisiana. He marketed shares based
on great wealth, which was highly exaggerated. A
speculative bubble grew and then collapsed, and
Law was expelled.
After Samuel Gurney's retirement, the bank

Overend, June 1866 Banking
invested heavily in railway stocks. It went public in
Gurney & Co
1865, but was badly affected by a general fall in
stock prices. The Bank of England refused to
advance money, and it collapsed. The directors
were sued, but exonerated from fraud.
Krupp's business over-expanded, and had to take

Friedrich 1873 Steel, metals
a 30m Mark loan from the Preußische Bank, the
Krupp AG
Bank of Prussia.
At the start of the Great Depression, after rumours

Danatbank 13 July Banking
about the solvency of the Norddeutsche
1931
Wollkämmerei & Kammgarnspinnerei, there was
a bank run, and Danatbank was forced into
insolvency.
Commodities trade Tino De Angelis defrauded

Allied Crude 16 Nov Commodities
clients, including the Bank of America, into
Vegetable Oil 1963
thinking he was trading vegetable oil. He got loans
Refining Corp
and made money using the oil as collateral. He
4
showed inspectors tankers of water, with a bit of

oil on the surface. When the fraud was exposed,
the business collapsed.
After a legal battle with Pennzoil, whereby it was

Texaco 13 April Oil
found to owe a debt of $10.5 bn, Texaco went into
1987
bankruptcy. It was later resurrected and taken
over by Chevron.
Qintex CEO Christopher Skase was found to have

Qintex 1989 Real Estate
improperly used his position to obtain
management fees prior to the $1.5 billion collapse
of Qintex including $700m unpaid debts. Skase
absconded to the Spanish resort island of
Majorca. Spain refused extradition for 10 years
during which time Skase became a citizen of
Dominica.
After a raid by the UK Serious Fraud Office in

Polly Peck 30 Oct Electronics,
September 1990, the share price collapsed.
1990 food, textiles
The CEO Asil Nadir was convicted of stealing the
company's money.
Following market deregulation, there was a

Nordbanken 1991 Banking
housing price bubble, and it burst. As part of a
general rescue as the Swedish banking
crisis unfolded, Nordbanken was nationalised for
64 billion kronor. It was later merged with
Götabanken, which itself had to write off 37.3% of
its creditors, and is now known as Nordea.
Breach of US law, by owning another bank. Fraud,

Bank of Credit 5 July Banking
money laundering and larceny.
and 1991
Commerce
International
Accounting fraud. An auditor was murdered, an

Carrian Group 1993 Real estate
adviser committed suicide. The largest collapse
in Hong Kong history.
An employee in Singapore, Nick Leeson,

Barings Bank 26 Feb Banking
traded futures, signed off on his own accounts and
1995
became increasingly indebted. The London
directors were subsequently disqualified as being
unfit to run a company in Re Barings plc. (No 5).
5
After purporting to have discovered a scientific

Long-Term 23 Sep Hedge fund
method of calculating derivative prices, LTCM lost
Capital 1998
$4.6bn in the first few months of 1998, and
Management
required state assistance to remain afloat.
The insurance company's directors unlawfully

Equitable Life 8 Dec Insurance
used money from people holding guaranteed
Assurance 2000
annuity rate policies to subsidise people with
Society
current annuity rate policies. After a House of
Lords judgment in Equitable Life Assurance
Society v Hyman, the Society closed. Though
never technically insolvent, the UK government set
up a compensation scheme for policyholders
under the Equitable Life (Payments) Act 2010.
In early 2000, after increase in size of the

HIH Insurance 15 March Insurance
business, it was determined that the insurance
2001
company's solvency was marginal, and a small
asset price change could see the insurance
company become insolvent. It did. Director
Rodney Adler, CEO Ray Williams and others were
sentenced to prison for fraudulent activity.
After a change in regulation in California, the

Pacific Gas 6 April Energy
company determined it was unable to continue
and Electric 2001
delivering power, and despite the California Public
Company
Utility Commission's efforts, it went into
bankruptcy, leaving homes without energy. It
emerged again in 2004.
After becoming one of the largest Australian public

One.Tel 29 May Telecomms
companies, losses of $290m were reported, the
2001
share price crashed, and it entered administration.
[1]
In ASIC v Rich the directors were found not to
have been guilty of negligence.
After falling share prices, and a failed share

WorldCom 21 July Telecomms
buyback scheme, it was found that the directors
2001
had used fraudulent accounting methods to push
up the stock price. Rebranded MCI Inc., it
emerged from bankruptcy in 2004 and the assets
were bought by Verizon.
Directors and executives fraudulently concealed

Enron 28 Nov Energy
large losses in Enron's projects. A number were
2001
sentenced to prison.[2][3]
6
Accumulated debts, after a series of accusations

Chiquita 28 Nov Food
relating to breaches of labour and environmental
Brands Int 2001
standards. It entered a pre-packaged insolvency,
and emerged with similar management in 2002.[4]
After widespread reports that Bre-X had found a

Bre-X 2002 Mining
gold mine in Indonesia, the stories were found to
be fraudulent.
After difficult competition, the store was put

Kmart 22 Jan Retail
into Chapter 11 bankruptcy proceedings, but soon
2002
re-emerged.
Internal corruption. The Directors were sentenced

Adelphia 13 Feb Cable television
to prison.[3][5]
Communicatio 2002
ns
A US court convicted Andersen of obstruction of

Arthur 15 June Accounting
justice by shredding documents relating to Enron
Andersen 2002
scandal.
The company's finance directors concealed large

Parmalat 24 Dec Food
debts.
2003
After diminishing demand, and getting a £6.5m

MG Rover 15 April Automobiles
loan from the UK government in April 2005, the
Group 2005
company went into administration. After the loss of
30,000 jobs, Nanjing Automobile Group bought the
company's assets.
Samuel Israel III defrauded his investors into

Bayou Hedge 29 Sep Hedge fund
thinking there were higher returns, and
Fund Group 2005
orchestrated fake audits. The Commodity Futures
Trading Commission filed a court complaint and
the business was shut down after the directors
were caught attempting to send $100m into
overseas bank accounts.
After becoming a public company in August 2005,

Refco 17 Oct Brokering
it was revealed that Phillip R. Bennett, the
2005
company CEO and chair, had concealed $430m of
bad debts. Its underwriters were Credit Suisse
First Boston, Goldman Sachs, andBank of
America Corp. The company entered Chapter
11 and Bennett was sentenced to 16 years prison.
7
Northern Rock had invested in the international

Northern 22 Feb Banking
markets for sub-prime mortgage debt, and as
Rock 2008
more and more people defaulted on their home
loans in the US, the Rock's business collapsed. It
triggered the first bank run in the UK since
Overend, Gurney & Co in 1866, when it asked the
UK government for assistance. It was nationalised,
and then sold to Virgin Money in 2012.
Bearn Stearns invested in the sub-prime mortgage

Bear Stearns 14 Mar Banking
market from 2003 after the US government had
2008
begun to deregulate consumer protection and
derivative trading. The business collapsed as more
people began to be unable to meet mortgage
obligations. After a stock price high of $172 a
share, it was bought by JP Morgan for $2 a share
on 16 March 2008, with a $29bn loan facility
guaranteed by the US Federal Reserve.
Lehman Brothers' financial strategy from 2003 was

Lehman 15 Sep Banking
to invest heavily in mortgage debt, in markets
Brothers 2008
which were being deregulated from consumer
protection by the US government. Losses
mounted, and Lehman Brothers was forced to file
for Chapter 11 bankruptcy after the US
government refused to extend a loan. The
collapse triggered a global financial market
meltdown. Barclays, Nomura and Bain
Capital purchased the assets which were not
indebted.
Out of $441 billion worth of securities originally

AIG 16 Sep Insurance
rated AAA, as the US sub-prime mortgage crisis,
2008
unfolded AIG found it held $57.8 billion of these
products. It was forced to take a 24 month credit
facility from the US Federal Reserve Board.
Following the sub-prime mortgage crisis, there

Washington 26 Sep Banking
was a bank run on WaMu, and pressure from the
Mutual 2008
FDIC forced closure.
After a takeover battle

ABN-Amro Oct 2008 Banking
between Barclays and RBS, which RBS won,
ABN-Amro was found to be heavily indebted due
to the sub-prime mortgage crisis. It was split and
taken under government ownership by the UK and
Netherlands.
8
Following the takeover of ABN-Amro, and the

Royal Bank of 13 Oct Banking
collapse of Lehman Bros, RBS found itself
Scotland 2008
insolvent as the international credit market seized
Group
up. 58% of the shares were bought by the UK
government.
Following the 2007-2008 financial crisis, and

Nortel 14 Jan Telecomms
allegations over excessive executive pay, demand
2009
for products dropped.
After the financial crisis of 2007-2008, the bank

Anglo Irish 15 Jan Banking
was forced to be nationalised by the Irish
Bank 2009
government.
After struggling to maintain business levels at its

Arcandor 9 June Retail
brand names Karstadt and KaDeWe, Arcandor
2009
sought help from the German government, and
then filed for insolvency.
After continual losses mounting from 2011

Schlecker 23 Jan Retail
Schlecker, with 52,000 employees, was forced into
2012
insolvency, though continued to run.
After a series of attempted takeover bids, and a

Dynegy 6 July Energy
finding of fraud in a subsidiary's purchase of
2012
another subsidiary, it filed for Chapter
11 bankruptcy. It emerged from bankruptcy on 2
October 2012.
Source (Wikipedia, 2014b).
9
Appendix C – List of Stock Market Crashes and Bear Markets
12.3 Appendix C – List of Stock Market Crashes and Bear Markets
Name Dates Causes
Financial crisis during the start of the Thirty Years'

Kipper und Wipper 1623 War (1621-1623)
A bubble (1633–37) in Netherlands during which contracts

Tulip mania Bubble 1637 for bulbs of tulips reached extraordinarily high prices, and
suddenly collapsed
Banque Royale by John Law stopped payments of its note

The Mississippi Bubble 1720 in exchange for specie and as result caused economic
collapse in France.
Affected early European stock markets, during early days

South Sea Bubble of 1720 of chartered joint stock companies
1720
Primarily caused by the British East India Company,

Bengal Bubble of 1769 1769 whose shares fell from £276 in December 1768 to £122 in
1784
Panic of 1796–1797 1796
Panic of 1819 1819
Panic of 1837 10 May 1837
Panic of 1847 1847
Panic of 1857 1857
Black Friday 24 Sep 1869
Initiated the Long Depression in the United States and

Panic of 1873 9 May 1873 much of Europe
10
Name Dates Causes
Paris Bourse crash of 19 Jan 1882

1882
Panic of 1884 1884
Lasting 3 years, 1890-1893, a Boom and bust process

Encilhamento 1890 that boomed in late 1880s and burst in the early 1890s,
causing a collapse in the Brazilian economy and
aggravating an already unstable political situation.
Panic of 1893 1893
Panic of 1896 1896
Lasting 3 years, the market was spooked by the

Panic of 1901 17 May 1901 assassination of President McKinley in 1901, coupled with
a severe drought later the same year.
Lasting over a year, markets took fright after U.S.

Panic of 1907 Oct 1907 President Theodore Roosevelt had threatened to rein in
the monopolies that flourished in various industrial sectors,
notably railways.
Lasting over 4 years, the bursting of the speculative

Wall Street Crash of 24 Oct 1929 bubble in shares led to further selling as people who had
1929 borrowed money to buy shares had to cash them in, when
their loans were called in. Also called the Great Crash or
the Wall Street Crash, leading to the Great Depression.
Lasting around a year, this share price fall was triggered

Recession of 1937– 1937 by an economic recession within the Great
1938(U.S.) Depression and doubts about the effectiveness of Franklin
D. Roosevelt's New Deal policy.
Lasting through the 1970s and early-1980s, this was the

1971 Brazilian Markets July 1971 end of a boom that started in 1969, compounded by
Crash the 1970s energy crisis coupled with early 1980s Latin
American debt crisis.
Lasting 23 months, dramatic rise in oil prices, the miners'

1973–1974 stock Jan 1973 strike and the downfall of the Heath government.
11
Name Dates Causes
market crash
Silver price crash

Silver Thursday 27 March 1980
Souk Al-Manakh stock Aug 1982

market crash
Black Monday 19 Oct 1987
Rio Stock Exchange Crash, due to its weak internal

Rio de Janeiro Stock June 1989 controls and absence of credit discipline, that led to its
Exchangecollapse collapse, and of which it never recovered
Failed leveraged buyout of United Airlines causes crash

Friday the 13th mini- 13 Oct 1989
crash
Iraq invaded Kuwait in July 1990, causing oil prices to

1990-1991 Recession July 1990 increase. The Dow dropped 18% in three months, from
2,911.63 on July 3 to 2,381.99 on October 16,1990. This
recession lasted approximately 8 months.
Lasting approximately twenty years, through at least to the

Japanese asset price 1991 end of 2011, share and property price bubble bursts and
bubble turns into a long deflationary recession. Some of the key
economic events during the collapse of the Japanese
asset price bubble include the 1997 Asian financial crisis
and the Dot.com bubble. In addition, more recent
economic events, such as the late-2000s financial crisis
and August 2011 stock markets fall have prolonged this
period.
The Conservative government was forced to withdraw

Black Wednesday 16 Sep 1992 the pound sterling from the European Exchange Rate
Mechanism (ERM) after they were unable to keep sterling
above its agreed lower limit.
Investors deserted emerging Asian shares, including an

1997 Asian financial 2 July 1997 overheated Hong Kong stock market. Crashes occur
crisis in Thailand, Indonesia, South Korea, Philippines, and
elsewhere, reaching a climax in the October 27, 1997
mini-crash.
12
Name Dates Causes
Global stock market crash that was caused by

October 27, 1997 mini- 27 Oct 1997 an economic crisis in Asia. The points loss that the Dow
crash Jones Industrial Average suffered on this day still ranks as
the eighth biggest point loss in its 117-year existence.
The Russian government devalues the rouble, defaults on

1998 Russian financial 17 Aug 1998 domestic debt, and declares a moratorium on payment to
crisis foreign creditors.
Collapse of a technology bubble, world economic effects

Dot-com bubble 10 March 2000 arising from the September 11 attacks and the stock
market downturn of 2002.
The September 11 attacks caused global stock markets to

Economic effects 11 Sep 2001 drop sharply. The attacks themselves caused
arising from the approximately $40 billion in insurance losses, making it
September 11 attacks one of the largest insured events ever.
Downturn in stock prices during 2002 in stock

Stock market downturn 9 Oct 2002 exchanges across the United States, Canada, Asia,
of 2002 and Europe. After recovering from lows reached following
the September 11 attacks, indices slid steadily starting in
March 2002, with dramatic declines in July and September
leading to lows last reached in 1997 and 1998.
The SSE Composite Index of the Shanghai Stock

Chinese stock bubble of 27 Feb 2007 Exchange tumbles 9% from unexpected selloffs, the
2007 largest drop in 10 years, triggering major drops in
worldwide stock markets.
Up until June 2009, the Dow Jones Industrial Average,

United States bear 11 Oct 2007 Nasdaq Composite and S&P 500 all experienced declines
market of 2007–2009 of greater than 20% from their peaks in late 2007.
On September 16, 2008, failures of large financial

Late-2000s financial 16 Sep 2008 institutions in the United States, due primarily to exposure
crisis of securities of packaged subprime loans and credit
default swaps issued to insure these loans and their
issuers, rapidly devolved into a global crisis resulting in a
number of bank failures in Europe and sharp reductions in
the value of equities (stock) and commodities worldwide.
The failure of banks in Iceland resulted in a devaluation of
the Icelandic krónaand threatened the government with
bankruptcy. Iceland was able to secure an emergency
loan from the IMF in November. Later on, U.S.
President George W. Bush signs the Emergency
Economic Stabilization Act into law, creating a Troubled
Asset Relief Program (TARP) to purchase failing
13
Name Dates Causes
bank assets.
Dubai requests a debt deferment following its massive

2009 Dubai debt November 27, renovation and development projects, as well as the late-
standstill 2009 2000s recession. The announcement causes global stock
markets to drop.
Standard & Poor's downgrades Greece's sovereign

European sovereign 27 April 2010 credit rating to junk four days after the activation of a €45-
debt crisis billion EU–IMF bailout, triggering the decline of stock
markets worldwide and of the Euro's value, and furthering
a European sovereign debt crisis.
The Dow Jones Industrial Average suffers its worst intra-

2010 Flash Crash 6 May 2010 day point loss, dropping nearly 1,000 points before
partially recovering.
Stock markets around the world plummet during late July

August 2011 stock Aug 2011 and early August, and are volatile for the rest of the year.
markets fall
(Wikipedia, 2014c)
14
Appendix D – CFfFR Working Document
12.4 Appendix D – CFfFR Working Document
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
The Conceptual Framework was issued by the IASB in September 2010. It superseded
the Framework for the Preparation and Presentation of Financial Statements.
CONTENTS
FOREWORD
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
INTRODUCTION
Purpose and status Scope
CHAPTERS
1 The objective of general purpose financial reporting OB1
2 The reporting entity to be added
3 Qualitative characteristics of useful financial information QC1
4 The Framework (1989): the remaining text
15
Foreword
The International Accounting Standards Board is currently in the process of

updating its conceptual framework. This conceptual framework project is
conducted in phases.
As a chapter is finalised, the relevant paragraphs in the Framework for the

Preparation and Presentation of Financial Statements that was published in 1989 will
be replaced. When the conceptual framework project is completed, the Board will
have a complete, comprehensive and single document called the Conceptual
Framework for Financial Reporting.
This version of the Conceptual Framework includes the first two chapters the Board
published as a result of its first phase of the conceptual framework project—
Chapter 1 The objective of general purpose financial reporting and Chapter 3
Qualitative characteristics of useful financial information. Chapter 2 will deal with the
reporting entity concept. The Board published an exposure draft on this topic in
March 2010 with a comment period that ended on 16 July 2010. Chapter 4
contains the remaining text of the Framework (1989). The table of concordance, at
the end of this publication, shows how the contents of the Framework (1989) and the
Conceptual Framework (2010) correspond.
16
The Introduction has been carried forward from the Framework (1989). This will be
updated when the IASB considers the purpose of the Conceptual Framework. Until
then, the purpose and the status of the Conceptual Framework are the same as
before.
Introduction
CONCEPTUAL FRAMEWORK FOR FINANCIAL ANALYSIS OF THE

REPORTING – NATURAL TEXT AS PUBLISHED NATURAL TEXT FOR THE
BY THE IASB PURPOSE OF THE
ONTOLOGY
KEY TO ANALYSIS and
ABBREVIATIONS USED:
CQ = Competency Question:
forms part of the requirements
to be addressed by the
ontology.
Ontology:
Classes and relations identified
for the ontology.
Issues:
Problems identified in the text
that can either not be modeled,
is ambiguous or require further
research beyond the scope of
this study.
CFfFR: Conceptual Framework
for Financial Reporting
CFfFRO: Conceptual
Framework for Financial
Reporting Ontology
FR: Financial Report.
Financial statements are prepared and presented for external CQ:
users by many entities around the world. Although such financial Users (external to the reporting
statements may appear similar from country to country, there are entity) require financial
differences, which have probably been caused by a variety of information that is useful for
social, economic and legal circumstances and by different decision-making under a variety
countries having in mind the needs of different users of financial of social, economic and legal
statements when setting national requirements. circumstances.
How can the ontology assist to
provide decision-useful
information to users of financial
reports?
Ontology:
Financial Report, Financial
17

ONTOLOGY
Statement,
Issues:
Financial statements vs financial
reports. The two terms are used
interchangeable, but they are
not the same.
Terminology is not used
consistently in the CFfFR: Entity
vs. reporting entity; information
vs financial information vs
decision-useful information.
External users implies other
users such as “internal users”.
Are they to be treated the
same? Who are internal users?
These different circumstances have led to the use of a variety of CQ:
definitions of the elements of financial statements: for example, How can the basic concepts be
assets, liabilities, equity, income and expenses. They have also modeled or formalised so that
resulted in the use of different criteria for the recognition of items they are consistent and
in the financial statements and in a preference for different bases unambiguous?
of measurement. The scope of the financial statements and the Ontology:
disclosures made in them have also been affected. Element, asset, liability, equity,
The International Accounting Standards Board is committed to income, expense, measurement
narrowing these differences by seeking to harmonise and recognition criteria.
regulations, accounting standards and procedures relating to Classes identified in the
the preparation and presentation of financial statements. It definitions of the elements.
believes that further harmonisation can best be pursued by Issues:
focusing on financial statements that are prepared for the Recognition criteria forms part
purpose of providing information that is useful in making of the formalisation of the
economic decisions. elements. Recognition criteria is
not identified as a separate
class to be formalised.
Different definitions but the
ontology should standardize on
one definition for a concept to
be unambiguous and consistent.
What is meant by economic
decisions? It should be clearly
defined, as it must determine
the scope of the information that
should be provided in a financial
report.
The Board believes that financial statements prepared for this CQ:
purpose meet the common needs of most users. This is because Common needs of most users
nearly all users are making economic decisions, for example: to make economic decisions.
to decide when to buy, hold or sell an equity investment. This CQ needs to be broken
down:
to assess the stewardship or accountability of management. • Who are ‘most users’?
18

ONTOLOGY
• What information is needed
to assess the ability of the entity to pay and provide other for these economic decisions
benefits to its employees. (as listed)? The ontology
should then ensure that the
to assess the security for amounts lent to the entity. information captured about
basic concepts answers
to determine taxation policies. these questions
Ontology:
to determine distributable profits and dividends. Issues:
to prepare and use national income statistics.
to regulate the activities of entities.

The Board recognises, however, that governments, in CQ:
particular, may specify different or additional requirements for Scope is fixed and not altered
their own purposes. These requirements should not, however, when external requirements are
affect financial statements published for the benefit of other imposed.
users unless they also meet the needs of those other users. Ontology:
Issues:
Board in this case is the IASB.
Conflict of information needed
by users is identified by the
IASB Board.
Financial statements are most commonly prepared in CQ:
accordance with an accounting model based on recoverable Does the ontology adequately
historical cost and the nominal financial capital maintenance capture the classes and
concept. Other models and concepts may be more relations required for such
appropriate in order to meet the objective of providing economic models used for
information that is useful for making economic decisions financial reports?
although there is at present no consensus for change. This Ontology:
Conceptual Framework has been developed so that it is Issues:
applicable to a range of accounting models and concepts of
capital and capital maintenance.
19
Purpose and status

ONTOLOGY
This Conceptual Framework sets out the concepts that underlie CQ:
the preparation and presentation of financial statements for • What are the classes that
external users. The purpose of the Conceptual Framework is: underlie the preparation and
• to assist the Board in the development of future IFRSs and in presentation of financial
its review of existing IFRSs; reports for external users?
• to assist the Board in promoting harmonisation of regulations, (this is the core
accounting standards and procedures relating to the competency question for
presentation of financial statements by providing a basis for the CFfFRO).
reducing the number of alternative accounting treatments • Each of the bullets should be
permitted by IFRSs; translated into a requirement
• to assist national standard-setting bodies in developing / CQ.
national standards; • Does the CFfFRO assist the
• to assist preparers of financial statements in applying IFRSs Board in the development of
and in dealing with topics that have yet to form the subject of future IFRSs and in its review
an IFRS; of existing IFRSs; (the
• to assist auditors in forming an opinion on whether financial criteria to measure this
statements comply with IFRSs; should be established e.g.
• to assist users of financial statements in interpreting the standardized definitions
information contained in financial statements prepared in could assist with this and if
compliance with IFRSs; and the ontology provide those, it
• to provide those who are interested in the work of the IASB fulfils this purpose)?
with information about its approach to the formulation of • Does the CFfFRO assist the
IFRSs. Board in promoting
harmonisation of regulations,
accounting standards and
procedures relating to the
presentation of financial
statements by providing a
basis for reducing the
number of alternative
accounting treatments
permitted by IFRSs?
• Does the CFfFRO assist
national standard-setting
bodies in developing national
standards?
preparers of financial
statements in applying IFRSs
and in dealing with topics
that have yet to form the
subject of an IFRS?
auditors in forming an
opinion on whether financial
20

ONTOLOGY
statements comply with
IFRSs?
users of financial statements
in interpreting the information
contained in financial
statements prepared in
compliance with IFRSs?
• Does the CFfFRO provide
those who are interested in
the work of the IASB with
information about its
approach to the formulation
of IFRSs?
Ontology:
Issues:
Criteria for measurements to
fulfill the objectives and CQs to
be established. What does it
mean to ‘assist national
standard-setting bodies in
developing national standards’?
This Conceptual Framework is not an IFRS and hence does not CQ:
define standards for any particular measurement or disclosure The CFfFRO does not define
issue. Nothing in this Conceptual Framework overrides any standards for any particular
specific IFRS. measurement or disclosure
issue.
The Board recognises that in a limited number of cases there Nothing in this CFfFRO
may be a conflict between the Conceptual Framework and an overrides any specific IFRS.
IFRS. In those cases where there is a conflict, the requirements
of the IFRS prevail over those of the Conceptual Framework. As, Ontology:
however, the Board will be guided by the Conceptual Framework
Issues:
in the development of future IFRSs and in its review of existing
IFRSs, the number of cases of conflict between the Conceptual The CFfFR should contain the
Framework and IFRSs will diminish through time basic principles and concepts
and inform decision making, and
IFRSs should actually not
override the CFfFR. See the
discussion on the CFfFR as a
meta-metamodel.
The Conceptual Framework will be revised from time to time on CQ:
the basis of the Board’s experience of working with it. The CFfFRO should provide
mechanisms for revision and
versioning.
Issues:
Versioning in ontologies that
maintain consistency is a
challenge.
21
Scope

ONTOLOGY
The Conceptual Framework deals with: CQ:
• the objective of financial reporting; Ensure that the objective of
• the qualitative characteristics of useful financial information; financial reporting is met
• the definition, recognition and measurement of the elements Qualitative characteristics of
from which financial statements are constructed; and useful information is integrated
• concepts of capital and capital maintenance. into the CFfFRO construction
(so that it actually provides
useful financial information and
construct reports that does this).
Ontology:
The definition, recognition and
measurement of the elements
from which financial statements
are constructed; and concepts
of capital and capital
maintenance.
Issues:
• What is useful financial
information?
• How can it be measured to
ensure that the ontology and
subsequent financial report
fulfills this objective?
22
CONTENTS
from paragraph
CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE

FINANCIAL REPORTING
Introduction OB1
Objective, usefulness and limitations of general purpose Financial reporting OB2
Information about a reporting entity’s economic resources, claims, and
changes in resources and claims OB12
Economic resources and claims OB13
Changes in economic resources and claims OB15
Financial performance reflected by accrual accounting OB17
Financial performance reflected by past cash flows OB20
Changes in economic resources and claims not resulting from Financial
performance OB21
23
Chapter 1: The objective of general purpose financial reporting Introduction

REPORTING – NATURAL TEXT AS PUBLISHED BY NATURAL TEXT FOR
THE IASB THE PURPOSE OF THE
ONTOLOGY
OB1 The objective of general purpose financial reporting forms CQ:
the foundation of the Conceptual Framework. Other aspects of • Scope is FR (financial
the Conceptual Framework—a reporting entity concept, the reporting) and what should
qualitative characteristics of, and the constraint on, useful financial be contained therein and
information, elements of financial statements, recognition, how it should be
measurement, presentation and disclosure—flow logically from represented?
the objective. • Financial information
reported in a Financial
Report must adhere to the
qualitative characteristics
and disclosure
requirements.
Ontology:
Element, financial statement,
financial report, reporting
entity, measurement.
Issues:
• Financial information is
defined as what is provided
by FR as well as its parts
and elements. It is
therefore not a concept in
the CFfFRO.
• A definition and description
of a reporting entity is still
outstanding.
• Qualitative characteristics
are requirements that
financial information must
adhere to in order to be
included in a financial
report.
• The section on disclosure
requirements is still
outstanding.
• The section on
measurement is under
revision as the current
section is considered to be
insufficient (Barth, 2013).
24
Objective, usefulness and limitations of general purpose financial reporting

ONTOLOGY
OB2 The objective of general purpose financial reporting is CQ:
to provide financial information about the reporting entity that is CFfFRO should assist with
useful to existing and potential investors, lenders and other providing decision-useful
creditors in making decisions about providing resources to the information to identified users.
entity. Those decisions involve buying, selling or holding equity
Ontology:
and debt instruments, and providing or settling loans and other
forms of credit. Equity
Issues:
Decisions of users are based
on financial information.
Whether this information is
useful is vague, factors that
influence this could be based
on the profile of the user, his /
her context and how he/she
makes decisions. What is
meant with decision
usefulness needs to be
explored.
OB3 Decisions by existing and potential investors about CQ:
buying, selling or holding equity and debt instruments depend
Ontology:
on the returns that they expect from an investment in those
instruments, for example dividends, principal and interest Users (are these external
payments or market price increases. Similarly, decisions by users?) = Investors’, lenders’
existing and potential lenders and other creditors about providing and other creditors
or settling loans and other forms of credit depend on the principal Issues:
and interest payments or other returns that they expect. • See issue of OB2 above –
Investors’, lenders’ and other creditors’ expectations about same holds here.
returns depend on their assessment of the amount, timing and • Decisions flow from the use
uncertainty of (the prospects for) future net cash inflows to the of the CFfFRO and thus
entity. Consequently, existing and potential investors, lenders inform the criteria the
and other creditors need information to help them assess the CFfFRO should fulfill.
prospects for future net cash inflows to an entity. Decisions are not part of
the model.
• Users use FR – for now
they are included in the
CFfFRO model, but since
use is excluded, the case
may be made that users
are also excluded and just
give the CQ or criteria for
the ontology.
OB4 To assess an entity’s prospects for future net cash inflows, CQ:
existing and potential investors, lenders and other creditors need
Ontology:
information about the resources of the entity, claims against the
Users of the CFfFR - existing
25

ONTOLOGY
entity, and how efficiently and effectively the entity’s and potential investors,
management and governing board2 have discharged their lenders and other creditors.
responsibilities to use the entity’s resources. Examples of such Issues:
responsibilities include protecting the entity’s resources from See issues above
unfavourable effects of economic factors such as price and Users use FR – for now they
technological changes and ensuring that the entity complies are included in the CFfFRO
with applicable laws, regulations and contractual provisions. model, but since use is
Information about management’s discharge of its responsibilities excluded, the case may be
is also useful for decisions by existing investors, lenders and made that users are also
other creditors who have the right to vote on or otherwise excluded and just give the CQ
influence management’s actions. or criteria for the ontology.
OB5 Many existing and potential investors, lenders and other CQ:
creditors cannot require reporting entities to provide information
Ontology:
directly to them and must rely on general purpose financial
reports for much of the financial information they need. Issues:
Consequently, they are the primary users to whom general See issues above
purpose financial reports are directed.
OB6 However, general purpose financial reports do not and CQ:
cannot provide all of the information that existing and potential
Ontology:
investors, lenders and other creditors need. Those users need to
consider pertinent information from other sources, for example, Issues:
general economic conditions and expectations, political events Beyond the scope of the CF
and political climate, and industry and company outlooks. and CFfFRO – how users use
information and make
decisions cannot be
constrained by either the
CFfFR or the CFfFRO.
Therefore – decision-
usefulness given the CFfFR
should be defined with
measurable criteria.
OB7 General purpose financial reports are not designed to CQ:
show the value of a reporting entity; but they provide
Ontology:
information to help existing and potential investors, lenders and
other creditors to estimate the value of the reporting entity. Issues:
OB8 Individual primary users have different, and possibly CQ:

conflicting, information needs and desires. The Board, in
Ontology:
developing financial reporting standards, will seek to provide the
information set that will meet the needs of the maximum number Issues:
of primary users. However, focusing on common information Board here is IASB.
needs does not prevent the reporting entity from including Also beyond the scope – what
additional information that is most useful to a particular subset of information is provided above
primary users. and in conjunction with FR
guided by the CFfFR and
CFfFRO cannot be
constrained, neither how
26

ONTOLOGY
decisions are made. It must
just be clear exactly what is
provided by FR and how this
information could be used to
make decisions (e.g. decision
usefulness definition and
criteria)
OB9 The management of a reporting entity is also interested in CQ:
financial information about the entity. However, management
Ontology:
need not rely on general purpose financial reports because it is
able to obtain the financial information it needs internally. Reporting Entity
Management
Issues:
See above.
Is management also a user
but not an external user? The
information needed by
management falls outside the
scope of the CFfFR.
OB10 Other parties, such as regulators and members of the CQ:
public other than investors, lenders and other creditors, may also
Ontology:
find general purpose financial reports useful. However, those
reports are not primarily directed to these other groups. Issues:
See above.
Are these other ‘external
users’?
OB11 To a large extent, financial reports are based on estimates, CQ:
judgements and models rather than exact depictions. The • High level goal of CFfFR is
Conceptual Framework establishes the concepts that underlie to provide concepts to
those estimates, judgements and models. The concepts are the support judgements.
goal towards which the Board and preparers of financial reports • High level goal of the
strive. As with most goals, the Conceptual Framework’s vision of CFfFRO is to provide
ideal financial reporting is unlikely to be achieved in full, at least classes that would support
not in the short term, because it takes time to understand, accept judgements.
and implement new ways of analysing transactions and other
events. Nevertheless, establishing a goal towards which to strive Ontology:
is essential if financial reporting is to evolve so as to improve its Issues:
usefulness. • Hopefully the CFfFRO
could assist with reaching
this goal.
• What Board are referred to,
IASB Board, or Board of
the reporting entity?
Footnote 1. Throughout this Conceptual Framework, the terms CQ:
financial reports and financial reporting refer to general purpose Definitions of FR
financial reports and general purpose financial reporting unless Ontology:
specifically indicated otherwise. Issues:
27

ONTOLOGY
Footnote 2. Throughout this Conceptual Framework, the term CQ:

management refers to management and the governing board of Ontology:
an entity unless specifically indicated otherwise. Issues:
Information about a reporting entity’s economic resources, claims against

the entity and changes in resources and claims

ONTOLOGY
OB12 General purpose financial reports provide information CQ:
about the financial position of a reporting entity, which is
Ontology:
information about the entity’s economic resources and the claims
against the reporting entity. Financial reports also provide FR provide information about
FinancialPosition
information about the effects of transactions and other events
EconomicResource
that change a reporting entity’s economic resources and
Claim
claims. Both types of information provide useful input for
decisions about providing resources to an entity. Issues:
• Is a EconomicResource the
same as a Controlled
Resource as per asset
definition?
• Decisions are not part of
the CFfFR or the CFfFRO,
it is the result of using the
CFfFR and the CFfFRO.
Economic resources and claims

ONTOLOGY
OB13 Information about the nature and amounts of a reporting CQ:
entity’s economic resources and claims can help users to identify
Ontology:
the reporting entity’s financial strengths and weaknesses. That
EconomicResource
information can help users to assess the reporting entity’s liquidity
Claim
and solvency, its needs for additional financing and how
28

ONTOLOGY
successful it is likely to be in obtaining that financing. Information
Issues:
about priorities and payment requirements of existing claims helps
users to predict how future cash flows will be distributed among • Is a EconomicResource the
those with a claim against the reporting entity. same as a Controlled
Resource as per asset
definition?
• Where is the ‘priorities and
payment requirements of
existing claims’ information
provided?
• Is it part of statements?
• Derived information from
statements or additional
information on statements?
OB14 Different types of economic resources affect a user’s CQ:
assessment of the reporting entity’s prospects for future cash FR must contain information
flows differently. Some future cash flows result directly from on the different types of
existing economic resources, such as accounts receivable. Other Resources and claims, nature
cash flows result from using several resources in combination to and amount of resources and
produce and market goods or services to customers. Although claims available for the entity’s
those cash flows cannot be identified with individual economic operations.
resources (or claims), users of financial reports need to know the
Ontology:
nature and amount of the resources available for use in a
EconomicResource
reporting entity’s operations.
Claim
Issues:
• What are ‘different types of
Economic Resources’?
• Nature of resources the
same as type of resources?
• In the current ontology only
Asset is a Controlled
Resource
29
Changes in economic resources and claims

REPORTING – NATURAL TEXT AS PUBLISHED BY NATURAL TEXT FOR THE
THE IASB PURPOSE OF THE
ONTOLOGY
OB15 Changes in a reporting entity’s economic resources and CQ:
claims result from that entity’s financial performance (see Users need to asses economic
paragraphs OB17–OB20) and from other events or transactions resources and claims result
such as issuing debt or equity instruments (see paragraph OB21). from that entity’s financial
To properly assess the prospects for future cash flows from the performance from use of FR
reporting entity, users need to be able to distinguish between both
Ontology:
of these changes.
EconomicResouce
Claim
Issues:
Economic resource is not clearly
defined in the CFfFR.
OB16 Information about a reporting entity’s financial CQ:
performance helps users to understand the return that the entity
Ontology:
has produced on its economic resources. Information about the
Resource,
return the entity has produced provides an indication of how well
Management,
management has discharged its responsibilities to make efficient
Past,
and effective use of the reporting entity’s resources. Information
Future
about the variability and components of that return is also
FinancialPerformance.
important, especially in assessing the uncertainty of future cash
flows. Information about a reporting entity’s past financial Issues:
performance and how its management discharged its • Is entity and reporting entity
responsibilities is usually helpful in predicting the entity’s future the same? Terminology must
returns on its economic resources. be standardized.
• See previous comments on
reporting entity, not yet
defined.
• See previous comments on
information.
• Prediction of future returns
falls outside the scope of the
CFfFR or the CFfFRO. See
comments on users
decisions.
30
Financial performance reflected by accrual accounting

REPORTING – NATURAL TEXT AS PUBLISHED BY NATURAL TEXT FOR THE
THE IASB PURPOSE OF THE
ONTOLOGY
OB17 Accrual accounting depicts the effects of transactions CQ:
and other events and circumstances on a reporting entity’s The CFfFRO must support the
economic resources and claims in the periods in which those idea of accrual accounting.
effects occur, even if the resulting cash receipts and payments
Ontology:
occur in a different period. This is important because
information about a reporting entity’s economic resources and The modeling of time and
claims and changes in its economic resources and claims principles related to time
during a period provides a better basis for assessing the supports accrual accounting.
entity’s past and future performance than information solely about Resource, claim, past
future,
cash receipts and payments during that period.
Issues:
Does performance refers to
financial performance (Income
and expense)?
performance during a period, reflected by changes in its
Ontology:
economic resources and claims other than by obtaining additional
FinancialPerformance,
resources directly from investors and creditors (see paragraph
EconomicResource,
OB21), is useful in assessing the entity’s past and future ability
CashFlow
to generate net cash inflows. That information indicates the
extent to which the reporting entity has increased its available Issues:
economic resources, and thus its capacity for generating net See issues regarding
cash inflows through its operations rather than by obtaining information / financial
additional resources directly from investors and creditors. information earlier
performance during a period may also indicate the extent to The CFfFRO should result in
which events such as changes in market prices or interest rates information regarding changes
have increased or decreased the entity’s economic resources in market prices.
and claims, thereby affecting the entity’s ability to generate net
Ontology:
cash inflows.
EconomicResource, claim,
CashFlow, time, past,
future.
Issues:
• Information regarding
changes in market prices can
only be provided if the
measurement of the
elements of a FR is aligned
with market prices.
• Measurement is not defined
accordingly in the CFfFR.
(Barth, 2013).
31
Financial performance reflected by past cash flows

ONTOLOGY
OB20 Information about a reporting entity’s cash flows during CQ:
a period also helps users to assess the entity’s ability to See comments in OB19. See
generate future net cash inflows. It indicates how the reporting comments on how information is
entity obtains and spends cash, including information about its provide via the CFfFRO.
borrowing and repayment of debt, cash dividends or other cash
Ontology:
distributions to investors, and other factors that may affect the
CashFlow, ReportingEntity,
entity’s liquidity or solvency. Information about cash flows helps
Time, Future,
users understand a reporting entity’s operations, evaluate its
FinancialPerformance.
financing and investing activities, assess its liquidity or
solvency and interpret other information about financial Issues:
performance. Understanding by users of a
reporting entity’s operations is
related to the individual users’
goals and purpose. It cannot be
modelled and falls outside the
scope of the CFfFRO.
Changes in economic resources and claims not resulting from financial

performance

ONTOLOGY
OB21 A reporting entity’s economic resources and claims CQ:
may also change for reasons other than financial performance,
Ontology:
such as issuing additional ownership shares. Information
EconomicResource, Claim,
about this type of change is necessary to give users a
complete understanding of why the reporting entity’s
Shareholder
economic resources and claims changed and the
implications of those changes for its future financial Issues:
performance.
32
CHAPTER 2: THE REPORTING ENTITY

ONTOLOGY
CQ:
[to be added]
Ontology:
Issues:
The CFfFR is incomplete as a
critical class definition for
Reporting Entity is not provided.
33
CHAPTER 3: QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL

INFORMATION
INTRODUCTION QC1
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION QC4
Fundamental qualitative characteristics QC5
Relevance QC6
Faithful representation QC12
Applying the fundamental qualitative characteristics QC17
Enhancing qualitative characteristics QC19
Comparability QC20
Verifiability QC26
Timeliness QC29
Understandability QC30
Applying the enhancing characteristics QC33
THE COST CONSTRAINT ON USEFUL FINANCIAL REPORTING QC35
34
Introduction

REPORTING – NATURAL TEXT AS PUBLISHED NATURAL TEXT FOR
BY THE IASB THE PURPOSE OF THE
ONTOLOGY
QC1 The qualitative characteristics of useful financial CQ:
information discussed in this chapter identify the types of The information provided by
information that are likely to be most useful to the existing and the CFfFRO should adhere to
potential investors, lenders and other creditors for making the qualitative characteristics
decisions about the reporting entity on the basis of information in of useful financial information.
its financial report (financial information). Ontology:
Issues:
The “class” qualitative
characteristics cannot be
modeled as it is a competency
question. If the ontology is well
structured and the definitions
clear and unambiguous the
information as a result of the
CFfFRO should adhere to the
qualitative characteristics.
QC2 Financial reports provide information about the reporting CQ:
entity’s economic resources, claims against the reporting entity Ontology:
and the effects of transactions and other events and conditions Issues:
that change those resources and claims. (This information is
referred to in the Conceptual Framework as information about
the economic phenomena.) Some financial reports also include
explanatory material about management’s expectations and
strategies for the reporting entity, and other types of forward-
looking information.
QC3 The qualitative characteristics of useful financial CQ:

information3 apply to financial information provided in financial Ontology:
statements, as well as to financial information provided in other Issues:
ways. Cost, which is a pervasive constraint on the reporting
entity’s ability to provide useful financial information, applies
similarly. However, the considerations in applying the qualitative
characteristics and the cost constraint may be different for
different types of information. For example, applying them to
forward-looking information may be different from applying them
to information about existing economic resources and claims and
to changes in those resources and claims.
Qualitative characteristics of useful financial information

ONTOLOGY
QC4 If financial information is to be useful, it must be relevant CQ:
and faithfully represent what it purports to represent. The Ontology:
usefulness of financial information is enhanced if it is Issues:
comparable, verifiable, timely and understandable.
35
Fundamental qualitative characteristics

ONTOLOGY
QC5 The fundamental qualitative characteristics are relevance CQ:
and faithful representation. The CFfFRO concepts,
relations and model should
provide information that is
relevant and a faithful
representation.
Ontology:
Issues:
The criteria for information to
be relevant and a faithful and
how to measure it (some of
this is provided below)
Relevance

ONTOLOGY
QC6 Relevant financial information is capable of making a CQ:
difference in the decisions made by users. Information may be Relevance forms part of the
capable of making a difference in a decision even if some users competency questions.
choose not to take advantage of it or are already aware of it from
Ontology:
other sources.
Issues:
QC7 Financial information is capable of making a difference in CQ:

decisions if it has predictive value, confirmatory value or both.
Ontology:
Issues:
QC8 Financial information has predictive value if it can be CQ:

used as an input to processes employed by users to predict
Ontology:
future outcomes. Financial information need not be a prediction
or forecast to have predictive value. Financial information with Issues:
predictive value is employed by users in making their own
predictions.
QC9 Financial information has confirmatory value if it provides CQ:
feedback about (confirms or changes) previous evaluations.
Ontology:
Issues:
QC10 The predictive value and confirmatory value of financial CQ:
information are interrelated. Information that has predictive value
Ontology:
often also has confirmatory value. For example, revenue
information for the current year, which can be used as the basis Issues:
for predicting revenues in future years, can also be compared
with revenue predictions for the current year that were made in
past years. The results of those comparisons can help a user to
correct and improve the processes that were used to make those
previous predictions.
36
Materiality

ONTOLOGY
QC11 Information is material if omitting it or misstating it could CQ:
influence decisions that users make on the basis of financial Materiality forms part of the
information about a specific reporting entity. In other words, competency questions.
materiality is an entity-specific aspect of relevance based on the Ontology:
nature or magnitude, or both, of the items to which the Issues:
information relates in the context of an individual entity’s financial
report. Consequently, the Board cannot specify a uniform
quantitative threshold for materiality or predetermine what could
be material in a particular situation.
Faithful representation

ONTOLOGY
QC12 Financial reports represent economic phenomena in CQ:
words and numbers. To be useful, financial information must Faithful representation forms
not only represent relevant phenomena, but it must also part of the competency
faithfully represent the phenomena that it purports to questions.
represent. To be a perfectly faithful representation, a depiction
would have three characteristics. It would be complete, neutral Ontology:
and free from error. Of course, perfection is seldom, if ever, Issues:
achievable. The Board’s objective is to maximise those
qualities to the extent possible.
QC13 A complete depiction includes all information necessary CQ:
for a user to understand the phenomenon being depicted, Ontology:
including all necessary descriptions and explanations. For Issues:
example, a complete depiction of a group of assets would
include, at a minimum, a description of the nature of the assets
in the group, a numerical depiction of all of the assets in the
group, and a description of what the numerical depiction
represents (for example, original cost, adjusted cost or fair
value). For some items, a complete depiction may also entail
explanations of significant facts about the quality and nature of
the items, factors and circumstances that might affect their
quality and nature, and the process used to determine the
numerical depiction.
QC14 A neutral depiction is without bias in the selection or CQ:
presentation of financial information. A neutral depiction is not Ontology:
slanted, weighted, emphasised, de-emphasised or otherwise Issues:
manipulated to increase the probability that financial information
will be received favourably or unfavourably by users. Neutral
information does not mean information with no purpose or
no influence on behaviour. On the contrary, relevant financial
information is, by definition, capable of making a difference in
users’ decisions.
QC15 Faithful representation does not mean accurate in all CQ:
respects. Free from error means there are no errors or Ontology:
omissions in the description of the phenomenon, and the Issues:
process used to produce the reported information has been
37

ONTOLOGY
selected and applied with no errors in the process. In this
context, free from error does not mean perfectly accurate in all
respects. For example, an estimate of an unobservable price or
value cannot be determined to be accurate or inaccurate.
However, a representation of that estimate can be faithful if the
amount is described clearly and accurately as being an estimate,
the nature and limitations of the estimating process are
explained, and no errors have been made in selecting and
applying an appropriate process for developing the estimate.
QC16 A faithful representation, by itself, does not necessarily CQ:
result in useful information. For example, a reporting entity may Ontology:
receive property, plant and equipment through a government Issues:
grant. Obviously, reporting that an entity acquired an asset at no
cost would faithfully represent its cost, but that information would
probably not be very useful. A slightly more subtle example is an
estimate of the amount by which an asset’s carrying amount
should be adjusted to reflect an impairment in the asset’s value.
That estimate can be a faithful representation if the reporting
entity has properly applied an appropriate process, properly
described the estimate and explained any uncertainties that
significantly affect the estimate. However, if the level of
uncertainty in such an estimate is sufficiently large, that estimate
will not be particularly useful. In other words, the relevance of the
asset being faithfully represented is questionable. If there is no
alternative representation that is more faithful, that estimate may
provide the best available information.
Applying the fundamental qualitative characteristics

ONTOLOGY
QC17 Information must be both relevant and faithfully CQ:
represented if it is to be useful. Neither a faithful representation Ontology:
of an irrelevant phenomenon nor an unfaithful representation of Issues:
a relevant phenomenon helps users make good decisions.
QC18 The most efficient and effective process for applying the CQ:
fundamental qualitative characteristics would usually be as The CFfFRO should be able to
follows (subject to the effects of enhancing characteristics and assist with the execution of the
the cost constraint, which are not considered in this example). steps in this proposed process
First, identify an economic phenomenon that has the potential to with clear definitions,
be useful to users of the reporting entity’s financial information. classification and adherence
Second, identify the type of information about that phenomenon criteria given the definition of
that would be most relevant if it is available and can be faithfully concepts through
represented. Third, determine whether that information is characteristics and the
available and can be faithfully represented. If so, the process of relations between concepts.
satisfying the fundamental qualitative characteristics ends at that
Ontology:
point. If not, the process is repeated with the next most relevant
type of information. Issues:
What constitutes ‘types of
information’? For the prupose
of the CFfFR this should be all
the elements and parts in a
FR.
38
Enhancing qualitative characteristics

ONTOLOGY
QC19 Comparability, verifiability, timeliness and CQ:
understandability are qualitative characteristics that enhance the Comparability, verifiability,
usefulness of information that is relevant and faithfully timeliness and
represented. The enhancing qualitative characteristics may also understandability are
help determine which of two ways should be used to depict a characteristics that the
phenomenon if both are considered equally relevant and information provided in and
faithfully represented. from the CFfFRO should have.
Ontology:
Issues:
How to measure
comparability, verifiability,
timeliness and
understandability to ensure
that these requirements are
met.
Comparability

ONTOLOGY
QC20 Users’ decisions involve choosing between alternatives, CQ:
for example, selling or holding an investment, or investing in one Comparability forms part of the
reporting entity or another. Consequently, information about a competency questions.
reporting entity is more useful if it can be compared with similar Ontology:
information about other entities and with similar information Issues:
about the same entity for another period or another date.
QC21 Comparability is the qualitative characteristic that enables CQ:
users to identify and understand similarities in, and differences Ontology:
among, items. Unlike the other qualitative characteristics, Issues:
comparability does not relate to a single item. A comparison
requires at least two items.
QC22 Consistency, although related to comparability, is not the CQ:
same. Consistency refers to the use of the same methods for the Ontology:
same items, either from period to period within a reporting entity Issues:
or in a single period across entities. Comparability is the goal;
consistency helps to achieve that goal.
QC23 Comparability is not uniformity. For information to be CQ:
comparable, like things must look alike and different things must Ontology:
look different. Comparability of financial information is not Issues:
enhanced by making unlike things look alike any more than it is
enhanced by making like things look different.
QC24 Some degree of comparability is likely to be attained by CQ:
satisfying the fundamental qualitative characteristics. A faithful Ontology:
representation of a relevant economic phenomenon should Issues:
naturally possess some degree of comparability with a faithful
representation of a similar relevant economic phenomenon by
another reporting entity.
QC25 Although a single economic phenomenon can be faithfully
39

ONTOLOGY
represented in multiple ways, permitting alternative accounting
methods for the same economic phenomenon diminishes
comparability.
Verifiability

ONTOLOGY
QC26 Verifiability helps assure users that information faithfully CQ:
represents the economic phenomena it purports to represent. Verifiability forms part of the
Verifiability means that different knowledgeable and independent competency questions.
observers could reach consensus, although not necessarily Ontology:
complete agreement, that a particular depiction is a faithful Issues:
representation. Quantified information need not be a single point
estimate to be verifiable. A range of possible amounts and the
related probabilities can also be verified.
QC27 Verification can be direct or indirect. Direct verification CQ:
means verifying an amount or other representation through Ontology:
direct observation, for example, by counting cash. Indirect Issues:
verification means checking the inputs to a model, formula or
other technique and recalculating the outputs using the same
methodology. An example is verifying the carrying amount of
inventory by checking the inputs (quantities and costs) and
recalculating the ending inventory using the same cost flow
assumption (for example, using the first-in, first-out method).
QC28 It may not be possible to verify some explanations and CQ:
forward-looking financial information until a future period, if at all. Ontology:
To help users decide whether they want to use that information, Issues:
it would normally be necessary to disclose the underlying
assumptions, the methods of compiling the information and other
factors and circumstances that support the information.
Timeliness

ONTOLOGY
QC29 Timeliness means having information available to CQ:
decision-makers in time to be capable of influencing their This requirement has to do
decisions. Generally, the older the information is the less useful with the information contained
it is. However, some information may continue to be timely long within a FR as well as when
after the end of a reporting period because, for example, some the FR was made available /
users may need to identify and assess trends. published.
Ontology:
For the purpose of the
ontology, formally defining
what is means with time
concepts such as Present,
40

ONTOLOGY
DateOfReporting etc will
assist with the requirement of
timeliness.
Issues:
Timeliness is relative – even is
some information is ‘old’ it may
still be relevant and timely.
Understandability

ONTOLOGY
QC30 Classifying, characterising and presenting information CQ:
clearly and concisely makes it understandable. Understandability is one of the
basic competency questions of
the CFfFRO
Ontology:
Issues:
QC31 Some phenomena are inherently complex and cannot be CQ:

made easy to understand. Excluding information about those Ontology:
phenomena from financial reports might make the information in Issues:
those financial reports easier to understand. However, those
reports would be incomplete and therefore potentially
misleading.
QC32 Financial reports are prepared for users who have a CQ:
reasonable knowledge of business and economic activities and Ontology:
who review and analyse the information diligently. At times, even Issues:
well-informed and diligent users may need to seek the aid of an
adviser to understand information about complex economic
phenomena.
41
Applying the enhancing qualitative characteristics

ONTOLOGY
QC33 Enhancing qualitative characteristics should be maximised CQ:
to the extent possible. However, the enhancing qualitative Ontology:
characteristics, either individually or as a group, cannot make Issues:
information useful if that information is irrelevant or not faithfully
represented.
QC34 Applying the enhancing qualitative characteristics is an CQ:

iterative process that does not follow a prescribed order. Ontology:
Sometimes, one enhancing qualitative characteristic may have Issues:
to be diminished to maximise another qualitative characteristic.
For example, a temporary reduction in comparability as a result
of prospectively applying a new financial reporting standard may
be worthwhile to improve relevance or faithful representation in
the longer term. Appropriate disclosures may partially
compensate for non-comparability.
The cost constraint on useful financial reporting

ONTOLOGY
QC35 Cost is a pervasive constraint on the information that can CQ:
be provided by financial reporting. Reporting financial Ontology:
information imposes costs, and it is important that those costs
Issues:
are justified by the benefits of reporting that information. There
are several types of costs and benefits to consider. Outside the scope of the
CFfFRO but assisting with the
process of constructing FR
should assist with addressing
the cost constraint.
QC36 Providers of financial information expend most of the effort CQ:
involved in collecting, processing, verifying and disseminating Ontology:
financial information, but users ultimately bear those costs in the Issues:
form of reduced returns. Users of financial information also incur
costs of analysing and interpreting the information provided. If
needed information is not provided, users incur additional costs
to obtain that information elsewhere or to estimate it.
QC37 Reporting financial information that is relevant and CQ:
faithfully represents what it purports to represent helps users to Ontology:
make decisions with more confidence. This results in more Issues:
efficient functioning of capital markets and a lower cost of capital
for the economy as a whole. An individual investor, lender or
other creditor also receives benefits by making more informed
decisions. However, it is not possible for general purpose
financial reports to provide all the information that every user
finds relevant.
QC38 In applying the cost constraint, the Board assesses CQ:
whether the benefits of reporting particular information are likely Ontology:
to justify the costs incurred to provide and use that information. Issues:
When applying the cost constraint in developing a proposed
financial reporting standard, the Board seeks information from
providers of financial information, users, auditors, academics
and others about the expected nature and quantity of the
42

ONTOLOGY
benefits and costs of that standard. In most situations,
assessments are based on a combination of quantitative and
qualitative information.
QC39 Because of the inherent subjectivity, different individuals’ CQ:
assessments of the costs and benefits of reporting particular Ontology:
items of financial information will vary. Therefore, the Board Issues:
seeks to consider costs and benefits in relation to financial
reporting generally, and not just in relation to individual reporting
entities. That does not mean that assessments of costs and
benefits always justify the same reporting requirements for all
entities. Differences may be appropriate because of different
sizes of entities, different ways of raising capital (publicly or
privately), different users’ needs or other factors.
43
CONTENTS
CHAPTER 4: THE FRAMEWORK (1989): THE REMAINING TEXT
UNDERLYING ASSUMPTION 4.1

Going concern 4.1
THE ELEMENTS OF FINANCIAL STATEMENTS 4.2
Financial position 4.4
Assets 4.8
Liabilities 4.15
Equity 4.20
Performance 4.24
Income 4.29
Expenses 4.33
Capital maintenance adjustments 4.36
RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS 4.37
The probability of future economic benefit 4.40
Reliability of measurement 4.41
Recognition of assets 4.44
Recognition of liabilities 4.46
Recognition of income 4.47
Recognition of expenses 4.49
MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS 4.54
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE 4.57
Concepts of capital 4.57
Concepts of capital maintenance and the determination of profit 4.59
44
Chapter 4: The Framework (1989): the remaining text
The remaining text of the Framework for the Preparation and Presentation of
Financial Statements (1989) has not been amended to reflect changes made by
IAS 1 Presentation of Financial Statements (as revised in 2007).
The remaining text will also be updated when the Board has considered the elements of financial
statements and their measurement bases.
UNDERLYING ASSUMPTION
Going concern

ONTOLOGY
4.1. The financial statements are normally prepared on the CQ:
assumption that an entity is a going concern and will continue in The CFfFRO should assist in
operation for the foreseeable future. Hence, it is assumed that the going concern concept
the entity has neither the intention nor the need to liquidate or
Ontology:
curtail materially the scale of its operations; if such an intention
or need exists, the financial statements may have to be prepared Issues:
on a different basis and, if so, the basis used is disclosed.
The elements of financial statements

ONTOLOGY
4.2. Financial statements portray the financial effects of CQ:
transactions and other events by grouping them into broad Financial transactions should be
classes according to their economic characteristics. These broad grouped in classes according to
classes are termed the elements of financial statements. The their unique characteristics.
elements directly related to the measurement of financial Elements of the financial
position in the balance sheet are assets, liabilities and equity. statements should be defined
The elements directly related to the measurement of unambiguously and inherently
performance in the income statement are income and expenses. consistent.
The statement of changes in financial position usually reflects Measurement of elements
income statement elements and changes in balance sheet (value) should be defined
elements; accordingly, this Conceptual Framework identifies no unambiguously and inherently
elements that are unique to this statement. consistent.
Ontology:
Element,
FinancialPosition,
Asset, Liability, Equity
Issues:
Measurement of elements is not
unambiguously defined and
inherently consistent.
Terminology is not
standardised, e.g. Balance
sheet and Statement of
Financial Position.
45

ONTOLOGY
4.3. The presentation of these elements in the balance sheet CQ:
and the income statement involves a process of sub- Sub-classes should form part of
classification. For example, assets and liabilities may be the CFfFRO.
classified by their nature or function in the business of the entity
Ontology:
in order to display information in the manner most useful to users
Claims, Liability,
for purposes of making economic decisions.
Equity
Issues:
Financial position

ONTOLOGY
4.4. The elements directly related to the measurement of CQ:
financial position are assets, liabilities and equity. These are The CFfFRO should define
defined as follows: exactly what is meant with the
• An asset is a resource controlled by the entity as a result of concepts identified below
past events and from which future economic benefits are
Ontology:
expected to flow to the entity.
Financial Position
• A liability is a present obligation of the entity arising from past Measurement
events, the settlement of which is expected to result in an Asset
outflow from the entity of resources embodying economic Resource
benefits. Past Event
• Equity is the residual interest in the assets of the entity after Future Economic Benefit
deducting all its liabilities. Economic Benefit
Flow
Liability
Settlement
Outflow
Equity
Issues:
As defined when modeling asset,
liability and equity.
4.5. The definitions of an asset and a liability identify their CQ:
essential features but do not attempt to specify the criteria that
Ontology:
need to be met before they are recognised in the balance sheet.
Asset
Thus, the definitions embrace items that are not recognised as
Liability
assets or liabilities in the balance sheet because they do not
FutureEconomicBenefit
satisfy the criteria for recognition discussed in paragraphs 4.37–
4.53. In particular, the expectation that future economic benefits Issues:
will flow to or from an entity must be sufficiently certain to meet • The definition of asset and
the probability criterion in paragraph 4.38 before an asset or liability should be complete
liability is recognised. enough that its recognition is
clear?
• The notion is future economic
benefit seems to be too
ambiguous?
4.6. In assessing whether an item meets the definition of an CQ:
asset, liability or equity, attention needs to be given to its Definitions of asset, liability and
underlying substance and economic reality and not merely its equity should be based on
legal form. Thus, for example, in the case of finance leases, the ‘economic reality’ and not ‘just’
substance and economic reality are that the lessee acquires the legal form.
economic benefits of the use of the leased asset for the major
part of its useful life in return for entering into an obligation to pay
46

ONTOLOGY
for that right an amount approximating to the fair value of the
Ontology:
asset and the related finance charge. Hence, the finance lease
Asset
gives rise to items that satisfy the definition of an asset and a
Liability
liability and are recognised as such in the lessee’s balance
Equity
sheet.
Issues:
Notion of ‘economic reality’, ‘fair
value’ is not defined precisely.
4.7. Balance sheets drawn up in accordance with current IFRSs CQ:
may include items that do not satisfy the definitions of an asset
Ontology:
or liability and are not shown as part of equity. The definitions set
out in paragraph 4.4 will, however, underlie future reviews of Issues:
existing IFRSs and the formulation of further IFRSs. Unresolved issues in the domain
of financial reporting.
Assets

ONTOLOGY
4.8. The future economic benefit embodied in an asset is the CQ:
potential to contribute, directly or indirectly, to the flow of cash
Ontology:
and cash equivalents to the entity. The potential may be a
FutureEconomicBenefit,
productive one that is part of the operating activities of the entity.
Cash, CashEquivalents,
It may also take the form of convertibility into cash or cash
Flow, Entity
equivalents or a capability to reduce cash outflows, such as
when an alternative manufacturing process lowers the costs of Issues:
production.
4.9. An entity usually employs its assets to produce goods or CQ:
services capable of satisfying the wants or needs of customers;
Ontology:
because these goods or services can satisfy these wants or
needs, customers are prepared to pay for them and hence Issues:
contribute to the cash flow of the entity. Cash itself renders a Usually too vague to model in
service to the entity because of its command over other an ontology
resources.
4.10. The future economic benefits embodied in an asset may CQ:
flow to the entity in a number of ways. For example, an asset
Ontology:
may be:
• used singly or in combination with other assets in the
production of goods or services to be sold by the entity; Issues:
• exchanged for other assets; Future economic benefit is
• used to settle a liability; or vague. See the discussion on
• distributed to the owners of the entity. the ontology
4.11. Many assets, for example, property, plant and equipment, CQ:
have a physical form. However, physical form is not essential to All classes of assets should be
the existence of an asset; hence patents and copyrights, for included in the CFfFRO
example, are assets if future economic benefits are expected to
Ontology:
flow from them to the entity and if they are controlled by the
entity. Asset defined in the ontology
Issues:
See the discussion on the
problem with the asset
definition.
Many assets, for example, receivables and property, are CQ:
associated with legal rights, including the right of ownership. In
47

ONTOLOGY
determining the existence of an asset, the right of ownership is
Ontology:
not essential; thus, for example, property held on a lease is an
Asset
asset if the entity controls the benefits which are expected to
flow from the property. Although the capacity of an entity to Issues:
control benefits is usually the result of legal rights, an item may • Asset not necessarily have
nonetheless satisfy the definition of an asset even when there is right of ownership. What is
no legal control. For example, know-how obtained from a meant by this?
development activity may meet the definition of an asset when, • Tied into notion of ‘control’?
by keeping that know-how secret, an entity controls the benefits But an asset is a resource
that are expected to flow from it. under control of the entity?
The assets of an entity result from past transactions or other CQ:
past events. Entities normally obtain assets by purchasing or
Ontology:
producing them, but other transactions or events may generate
Asset
assets; examples include property received by an entity from
government as part of a programme to encourage economic Issues:
growth in an area and the discovery of mineral deposits. Is entity the same as reporting
Transactions or events expected to occur in the future do not in entity? Standardisation of
themselves give rise to assets; hence, for example, an intention terminology is needed
to purchase inventory does not, of itself, meet the definition of an
asset.
There is a close association between incurring expenditure and CQ:
generating assets but the two do not necessarily coincide.
Ontology:
Hence, when an entity incurs expenditure, this may provide
evidence that future economic benefits were sought but is not
Asset, Expense.
conclusive proof that an item satisfying the definition of an asset
has been obtained. Similarly the absence of a related Issues:
expenditure does not preclude an item from satisfying the The relation between
definition of an asset and thus becoming a candidate for expenditure and asset should
recognition in the balance sheet; for example, items that have be clear from the definitions of
been donated to the entity may satisfy the definition of an asset. asset and expenditure. If it is
not, it is an indication of an
ambiguity. The two classes
should be disjoint.
Liabilities

ONTOLOGY
An essential characteristic of a liability is that the entity has a CQ:
present obligation. An obligation is a duty or responsibility to act The CFfFRO should contain all
or perform in a certain way. Obligations may be legally the elements of financial
enforceable as a consequence of a binding contract or statutory statements.
requirement. This is normally the case, for example, with
Ontology:
amounts payable for goods and services received. Obligations
Claim, Liability,
also arise, however, from normal business practice, custom and
Obligation, Resource,
a desire to maintain good business relations or act in an
Asset, Present (time of
equitable manner. If, for example, an entity decides as a matter
consideration).
of policy to rectify faults in its products even when these become
apparent after the warranty period has expired, the amounts that Issues:
are expected to be expended in respect of goods already sold Present too vague, not clear
are liabilities. what it refers to. See discussion
on the modeling of time.
See the discussion on the
48

ONTOLOGY
issues with the liability definition
in the ontology.
A distinction needs to be drawn between a present obligation CQ:
and a future commitment. A decision by the management of an
Ontology:
entity to acquire assets in the future does not, of itself, give rise
Time, Present (time of
to a present obligation. An obligation normally arises only when
consideration),
the asset is delivered or the entity enters into an irrevocable
Obligation,
agreement to acquire the asset. In the latter case, the
EconomicOutflow
irrevocable nature of the agreement means that the economic
consequences of failing to honour the obligation, for example, Issues:
because of the existence of a substantial penalty, leave the Economic outflow is vague,
entity with little, if any, discretion to avoid the outflow of present obligation is vague, see
resources to another party. comments in the ontology. See
the discussion on the issues
with the liability definition in the
ontology.
The settlement of a present obligation usually involves the entity CQ:
giving up resources embodying economic benefits in order to
Ontology:
satisfy the claim of the other party. Settlement of a present
EconomicBenefit,
obligation may occur in a number of ways, for example, by:
Obligation.
• payment of cash;
• transfer of other assets; Issues:
• provision of services; See the discussion on the
• replacement of that obligation with another obligation; or issues with the liability definition
• conversion of the obligation to equity. in the ontology.
An obligation may also be extinguished by other means, such as

a creditor waiving or forfeiting its rights.
Liabilities result from past transactions or other past events. CQ:
Thus, for example, the acquisition of goods and the use of
Ontology:
services give rise to trade payables (unless paid for in advance
or on delivery) and the receipt of a bank loan results in an Liability, claim, past
obligation to repay the loan. An entity may also recognise future event.
rebates based on annual purchases by customers as liabilities; Issues:
in this case, the sale of the goods in the past is the transaction See the discussion on the
that gives rise to the liability. issues with the liability definition
in the ontology.
Some liabilities can be measured only by using a substantial CQ:
degree of estimation. Some entities describe these liabilities as
Ontology:
provisions. In some countries, such provisions are not regarded
Measurement, Liability,
as liabilities because the concept of a liability is defined narrowly
Claim, Obligation.
so as to include only amounts that can be established without
the need to make estimates. The definition of a liability in Issues:
paragraph 4.4 follows a broader approach. Thus, when a Discussion on measurement in
provision involves a present obligation and satisfies the rest of the CFfFR is still incomplete and
the definition, it is a liability even if the amount has to be not sufficient. Estimation must
estimated. Examples include provisions for payments to be be clearly defined.
made under existing warranties and provisions to cover pension
obligations.
49
Equity

ONTOLOGY
Although equity is defined in paragraph 4.4 as a residual, it may CQ:
be sub-classified in the balance sheet. For example, in a Definitions of elements should
corporate entity, funds contributed by shareholders, retained be clear and unambiguous.
earnings, reserves representing appropriations of retained
Ontology:
earnings and reserves representing capital maintenance
Claim, equity,
adjustments may be shown separately. Such classifications can
obligation, no-
be relevant to the decision-making needs of the users of
obligation, shareholder.
financial statements when they indicate legal or other restrictions
on the ability of the entity to distribute or otherwise apply its Issues:
equity. They may also reflect the fact that parties with ownership The current definition of equity
interests in an entity have differing rights in relation to the receipt cannot be modeled. See the
of dividends or the repayment of contributed equity discussion in the CFfFRO.
The creation of reserves is sometimes required by statute or CQ:
other law in order to give the entity and its creditors an added
Ontology:
measure of protection from the effects of losses. Other
Retained earnings
reserves may be established if national tax law grants
exemptions from, or reductions in, taxation liabilities when Issues:
transfers to such reserves are made. The existence and size of Retained earnings is not defined
these legal, statutory and tax reserves is information that can be in the CFfFR. A decision is
relevant to the decision-making needs of users. Transfers to made to classify it as a sub-
such reserves are appropriations of retained earnings rather class of equity.
than expenses.
The amount at which equity is shown in the balance sheet is CQ:
dependent on the measurement of assets and liabilities.
Ontology:
Normally, the aggregate amount of equity only by coincidence
Equity, Asset,
corresponds with the aggregate market value of the shares of
Liability, value
the entity or the sum that could be raised by disposing of either
the net assets on a piecemeal basis or the entity as a whole on a Issues:
going concern basis. • As a class equity is disjoint
from asset and liability. The
dependence of the value of
equity on the measurement
values of assets and liabilities
indicates an inconsistency in
the ontology.
• A decision is made that
amount and value refers to the
same class.
Commercial, industrial and business activities are often CQ:
undertaken by means of entities such as sole proprietorships,
Ontology:
partnerships and trusts and various types of government
business undertakings. The legal and regulatory framework for Issues:
such entities is often different from that applying to corporate As the section on reporting
entities. For example, there may be few, if any, restrictions on entity is still outstanding it is not
the distribution to owners or other beneficiaries of amounts possible to formalise the effect
included in equity. Nevertheless, the definition of equity and the of different types of reporting
other aspects of this Conceptual Framework that deal with equity entities.
are appropriate for such entities.
50
Performance

ONTOLOGY
Profit is frequently used as a measure of performance or as the CQ:
basis for other measures, such as return on investment or The CFfFRO should provide
earnings per share. The elements directly related to the information regarding the profit
measurement of profit are income and expenses. The of a reporting entity.
recognition and measurement of income and expenses, and
Ontology:
hence profit, depends in part on the concepts of capital and
Element, Income,
capital maintenance used by the entity in preparing its financial
Expense, Profit,
statements. These concepts are discussed in paragraphs 4.57–
4.65.
FinancialStatement,
FinancialReport,
Measurement, Value
Issues:
It is unclear if this section refers
to certain financial statements or
to the financial report.
See previous comments on
measurement and the absence
of the term “value” from the
CFfFR.
The elements of income and expenses are defined as follows: CQ:
• Financial transactions should
Income is increases in economic benefits during the accounting be grouped in classes
period in the form of inflows or enhancements of assets or according to their unique
decreases of liabilities that result in increases in equity, other characteristics.
than those relating to contributions from equity participants. • Elements of the financial
Expenses are decreases in economic benefits during the statements should be defined
accounting period in the form of outflows or depletions of assets unambiguously and inherently
or incurrences of liabilities that result in decreases in equity, consistent.
other than those relating to distributions to equity participants. • Measurement of elements
(value) should be defined
unambiguously and inherently
consistent.
Ontology:
Income, Economic
benefit, time, inflow,
asset, liability,
equity, shareholder,
expense, outflow,
increase, decrease.
Issues:
• See the issues in the CFfFRO
regarding the formalisation of
the definitions for income and
expense.
• The definitions of income and
expense resulted in
inconsistencies if they are
labelled as disjoint from asset,
liability and equity.
• It is not asset, liability or equity
that increase or decrease, but
the values of these elements.
• Standardisation of terminology
is needed.
51

ONTOLOGY
• Is an equity participant the
same as a shareholder or an
owner?
• What accounting period are
the definitions referring to?
• A decision was made that it
refers to the past accounting
period.
• Is it possible that it can refer to
a future accounting period
given the accrual accounting
concept?
• The definitions should be more
precise?
The definitions of income and expenses identify their essential CQ:
features but do not attempt to specify the criteria that would need Ontology:
to be met before they are recognised in the income statement. Issues:
Criteria for the recognition of income and expenses are
discussed in paragraphs 4.37–4.53.
Income and expenses may be presented in the income CQ:
statement in different ways so as to provide information that is Ontology:
relevant for economic decision-making. For example, it is
common practice to distinguish between those items of income Issues:
and expenses that arise in the course of the ordinary activities of • “Information that is relevant for
the entity and those that do not. This distinction is made on the economic decision making” is
basis that the source of an item is relevant in evaluating the not precise and can be
ability of the entity to generate cash and cash equivalents in the interpreted in various ways.
future; for example, incidental activities such as the disposal of a • Does entity refers to reporting
long-term investment are unlikely to recur on a regular basis. entity?
When distinguishing between items in this way consideration
needs to be given to the nature of the entity and its operations.
Items that arise from the ordinary activities of one entity may be
unusual in respect of another.
Distinguishing between items of income and expense and CQ:
combining them in different ways also permits several measures
Ontology:
of entity performance to be displayed. These have differing
degrees of inclusiveness. For example, the income statement
could display gross margin, profit or loss from ordinary activities Issues:
before taxation, profit or loss from ordinary activities after • New terminologies are
taxation, and profit or loss introduced without defining
them e.g. gross margin. It is an
indication of implied
knowledge.
• “Degrees of inclusiveness” is
ambiguous and should be
clearly defined.
52
Income

ONTOLOGY
The definition of income encompasses both revenue and gains. CQ:
Revenue arises in the course of the ordinary activities of an
Ontology:
entity and is referred to by a variety of different names including
sales, fees, interest, dividends, royalties and rent Issues:
• Is revenue the same as
income, sales, fees, interest,
dividends, royalties and rent?
• Is it the same class or sub-
classes of a super-class?
• Are these just different names
for the same class?
• The section is ambiguous and
the relation between the
classes must be indicated. A
lot of domain knowledge is
assumed.
Gains represent other items that meet the definition of income CQ:
and may, or may not, arise in the course of the ordinary activities
Ontology:
of an entity. Gains represent increases in economic benefits and
as such are no different in nature from revenue. Hence, they are Issues:
not regarded as constituting a separate element in this • The discussion on gains is
Conceptual Framework. ambiguous. It is not possible to
formalise the class gain from
the description provided.
• The document states that
“gains represent increases in
economic benefits and as such
are no different in nature from
revenue?
• Should gains be classified as a
sub-class of income?
• What is the relation between
gains, revenue, sales, fees,
interest, dividends, royalties
and rent?
• The concept gain should be
defined clearly.
• How was it determined that the
information related to gains will
provide useful information to
users?
Gains include, for example, those arising on the disposal of non- CQ:
current assets. The definition of income also includes unrealised
Ontology:
gains; for example, those arising on the revaluation of
marketable securities and those resulting from increases in the Issues:
carrying amount of long-term assets. When gains are recognised • A new concept “unrealized
in the income statement, they are usually displayed separately gains” is introduced. How it
because knowledge of them is useful for the purpose of making unrealized gains related to
economic decisions. Gains are often reported net of related gains?
expenses • A clear definition of gains and
unrealized gains are needed in
order to formalise the concept.
Various kinds of assets may be received or enhanced by CQ:
income; examples include cash, receivables and goods and
Ontology:
services received in exchange for goods and services supplied.
Income may also result from the settlement of liabilities. For Issues:
53

ONTOLOGY
example, an entity may provide goods and services to a lender • How is it possible that an asset
in settlement of an obligation to repay an outstanding loan. can be enhanced by income?
• Domain knowledge is
assumed.
• It should be the value of the an
asset that can be increased by
an increase in income value.
Expenses

ONTOLOGY
The definition of expenses encompasses losses as well as those CQ:
expenses that arise in the course of the ordinary activities of the
Ontology:
entity. Expenses that arise in the course of the ordinary activities
Expense, Asset.
of the entity include, for example, cost of sales, wages and
depreciation. They usually take the form of an outflow or Issues:
depletion of assets such as cash and cash equivalents, • See comments on the value of
inventory, property, plant and equipment. assets above.
• A new term “losses” is
introduced without any
explanation.
expenses and losses?
• How does the definition of
expenses “encompasses”
losses?
• Domain knowledge is
assumed.
Losses represent other items that meet the definition of CQ:
expenses and may, or may not, arise in the course of the
Ontology:
ordinary activities of the entity. Losses represent decreases in
EconomicBenefit, Expense
economic benefits and as such they are no different in nature
from other expenses. Hence, they are not regarded as a Issues:
separate element in this Conceptual Framework. • “Other items” is vague and not
defined.
• What are the meeting the
definition of expenses that are
not “other items”.
• The formulation should be
more specific.
Losses include, for example, those resulting from disasters such CQ:
as fire and flood, as well as those arising on the disposal of non-
Ontology:
current assets. The definition of expenses also includes
unrealised losses, for example, those arising from the effects of Issues:
increases in the rate of exchange for a foreign currency in • “Unrealised losses” is not
respect of the borrowings of an entity in that currency. When defined and cannot be
losses are recognised in the income statement, they are usually formalised.
displayed separately because knowledge of them is useful for
the purpose of making economic decisions. Losses are often
reported net of related income.
54
Capital maintenance adjustments

ONTOLOGY
The revaluation or restatement of assets and liabilities gives rise CQ:
to increases or decreases in equity. While these increases or
Ontology:
decreases meet the definition of income and expenses, they are
not included in the income statement under certain concepts of This concept is not formalised at
capital maintenance. Instead these items are included in equity this stage.
as capital maintenance adjustments or revaluation reserves. Issues:
These concepts of capital maintenance are discussed in
paragraphs 4.57–4.65 of this Conceptual Framework.
Recognition of the elements of financial statements

ONTOLOGY
Recognition is the process of incorporating in the balance sheet CQ:
or income statement an item that meets the definition of an
Ontology:
element and satisfies the criteria for recognition set out in
Value,
paragraph 4.38. It involves the depiction of the item in words and
by a monetary amount and the inclusion of that amount in the Issues:
balance sheet or income statement totals. Items that satisfy the Terminology is not standardised
recognition criteria should be recognised in the balance sheet or with the new sections of the
income statement. The failure to recognise such items is not CFfFR.
rectified by disclosure of the accounting policies used nor by
notes or explanatory material.
An item that meets the definition of an element should be CQ:
recognised if:
Ontology:
• it is probable that any future economic benefit associated with
Probable,
the item will flow to or from the entity; and FutureEconomicBenefit,
• the item has a cost or value that can be measured with Reporting Etity, Inflow
reliability. (flow to), Measure.
Issues:
In assessing whether an item meets these criteria and therefore CQ:
qualifies for recognition in the financial statements, regard needs The competency questions
to be given to the materiality considerations discussed in should ensure that information
Chapter 3 Qualitative characteristics of useful financial complies with the qualitative
information. The interrelationship between the elements means characteristics.
that an item that meets the definition and recognition criteria for
Ontology:
a particular element, for example, an asset, automatically
requires the recognition of another element, for example, income Issues:
or a liability.
55
The probability of future economic benefit

ONTOLOGY
The concept of probability is used in the recognition criteria to CQ:
refer to the degree of uncertainty that the future economic
Ontology:
benefits associated with the item will flow to or from the entity.
The concept is in keeping with the uncertainty that characterises Issues:
the environment in which an entity operates. Assessments of The concept probability is vague
the degree of uncertainty attaching to the flow of future economic and difficult to formalise.
benefits are made on the basis of the evidence available when
the financial statements are prepared. For example, when it is
probable that a receivable owed to an entity will be paid, it is
then justifiable, in the absence of any evidence to the contrary,
to recognise the receivable as an asset. For a large population of
receivables, however, some degree of non-payment is normally
considered probable; hence an expense representing the
expected reduction in economic benefits is recognized.
Reliability of measurement

ONTOLOGY
The second criterion for the recognition of an item is that it CQ:
possesses a cost or value that can be measured with reliability.
Ontology:
In many cases, cost or value must be estimated; the use of
Measurement, Value
reasonable estimates is an essential part of the preparation of
financial statements and does not undermine their reliability. Issues:
When, however, a reasonable estimate cannot be made the item • See comments on value and
is not recognised in the balance sheet or income statement. For measurement. The information
example, the expected proceeds from a lawsuit may meet the regarding value and
definitions of both an asset and income as well as the probability measurement is incomplete in
criterion for recognition; however, if it is not possible for the claim the CFfFR.
to be measured reliably, it should not be recognised as an asset
or as income; the existence of the claim, however, would be
disclosed in the notes, explanatory material or supplementary
schedules.
An item that, at a particular point in time, fails to meet the CQ:
recognition criteria in paragraph 4.38 may qualify for recognition
Ontology:
at a later date as a result of subsequent circumstances or
events. Issues:
An item that possesses the essential characteristics of an CQ:
element but fails to meet the criteria for recognition may
Ontology:
nonetheless warrant disclosure in the notes, explanatory
material or in supplementary schedules. This is appropriate Issues:
when knowledge of the item is considered to be relevant to the
evaluation of the financial position, performance and changes in
financial position of an entity by the users of financial
statements.
56
Recognition of assets

ONTOLOGY
An asset is recognised in the balance sheet when it is probable CQ:
that the future economic benefits will flow to the entity and the
Ontology:
asset has a cost or value that can be measured reliably.
Issues:
• Asset is not recognised – the
value is recognised?
An asset is not recognised in the balance sheet when CQ:
expenditure has been incurred for which it is considered
Ontology:
improbable that economic benefits will flow to the entity beyond
the current accounting period. Instead such a transaction results Issues:
in the recognition of an expense in the income statement. This • How is this improbability
treatment does not imply either that the intention of management measured that results in the
in incurring expenditure was other than to generate future non-definition of an asset?
economic benefits for the entity or that management was
misguided. The only implication is that the degree of certainty
that economic benefits will flow to the entity beyond the current
accounting period is insufficient to warrant the recognition of an
asset.
Recognition of liabilities

ONTOLOGY
A liability is recognised in the balance sheet when it is probable CQ:
that an outflow of resources embodying economic benefits will
Ontology:
result from the settlement of a present obligation and the amount
Outflow, Elements,
at which the settlement will take place can be measured reliably.
Liability, Value
In practice, obligations under contracts that are equally
proportionately unperformed (for example, liabilities for inventory Issues:
ordered but not yet received) are generally not recognised as • Liability is not recognized – the
liabilities in the financial statements. However, such obligations value is recognised?
may meet the definition of liabilities and, provided the recognition • See the CFfFRO with the
criteria are met in the particular circumstances, may qualify for discussion on the definition of
recognition. In such circumstances, recognition of liabilities a liability regarding the
entails recognition of related assets or expenses. problem with outflow of
resources.
57
Recognition of income

ONTOLOGY
Income is recognised in the income statement when an increase CQ:
in future economic benefits related to an increase in an asset or
Ontology:
a decrease of a liability has arisen that can be measured reliably.
This means, in effect, that recognition of income occurs
Asset, Liability, Inflow
simultaneously with the recognition of increases in assets or
decreases in liabilities (for example, the net increase in assets Issues:
arising on a sale of goods or services or the decrease in
liabilities arising from the waiver of a debt payable).
The procedures normally adopted in practice for recognising CQ:
income, for example, the requirement that revenue should be Ontology:
earned, are applications of the recognition criteria in this Issues:
Conceptual Framework. Such procedures are generally directed
at restricting the recognition as income to those items that can
be measured reliably and have a sufficient degree of certainty.
Recognition of expenses

ONTOLOGY
Expenses are recognised in the income statement when a CQ:
decrease in future economic benefits related to a decrease in an
Ontology:
asset or an increase of a liability has arisen that can be
measured reliably. This means, in effect, that recognition of FutureEconomicBenefit,
expenses occurs simultaneously with the recognition of an Asset, Liability,
Decrease, Measurement
increase in liabilities or a decrease in assets (for example, the
accrual of employee entitlements or the depreciation of Issues:
equipment).
Expenses are recognised in the income statement on the basis CQ:
of a direct association between the costs incurred and the Ontology:
earning of specific items of income. This process, commonly Issues:
referred to as the matching of costs with revenues, involves the
simultaneous or combined recognition of revenues and
expenses that result directly and jointly from the same
transactions or other events; for example, the various
components of expense making up the cost of goods sold are
recognised at the same time as the income derived from the sale
of the goods. However, the application of the matching concept
under this Conceptual Framework does not allow the recognition
of items in the balance sheet which do not meet the definition of
assets or liabilities.
When economic benefits are expected to arise over several CQ:
accounting periods and the association with income can only be
Ontology:
broadly or indirectly determined, expenses are recognised in the
Time, Future, Past,
income statement on the basis of systematic and rational
Expense, Income,
allocation procedures. This is often necessary in
EconomicBenefit.
recognising the expenses associated with the using up of assets
such as property, plant, equipment, goodwill, patents and Issues:
trademarks; in such cases the expense is referred to as
depreciation or amortisation. These allocation procedures are
intended to recognise expenses in the accounting periods in
which the economic benefits associated with these items are
consumed or expire.
58

ONTOLOGY
An expense is recognised immediately in the income statement CQ:
when an expenditure produces no future economic benefits or
Ontology:
when, and to the extent that, future economic benefits do not
qualify, or cease to qualify, for recognition in the balance sheet
as an asset. Issues:
An expense is also recognised in the income statement in those CQ:
cases when a liability is incurred without the recognition of an
Ontology:
asset, as when a liability under a product warranty arises.
Expense, Liability
Issues:
Measurement of the elements of financial statements

ONTOLOGY
Measurement is the process of determining the monetary CQ:
amounts at which the elements of the financial statements are to Elements of the financial
be recognised and carried in the balance sheet and income statements must be measured
statement. This involves the selection of the particular basis of and a value allocated to them.
measurement.
Ontology:
Value
Issues:
• Decision, monetary amounts
represents the value of the
elements.
A number of different measurement bases are employed to CQ:
different degrees and in varying combinations in financial
Ontology:
statements. They include the following:
HistoricalCost,
Historical cost. Assets are recorded at the amount of cash or
CurrentCost
cash equivalents paid or the fair value of the consideration given
RealisableValue
to acquire them at the time of their acquisition. Liabilities are
PresentValue
recorded at the amount of proceeds received in exchange for
the obligation, or in some circumstances (for example, income Issues:
taxes), at the amounts of cash or cash equivalents expected • The measurement section is
to be paid to satisfy the liability in the normal course of business. under revision.
Current cost. Assets are carried at the amount of cash or cash • At this stage it is sufficient to
equivalents that would have to be paid if the same or an mention that elements should
equivalent asset was acquired currently. Liabilities are carried be measured in order to be
at the undiscounted amount of cash or cash equivalents that included in one of the financial
would be required to settle the obligation currently. statements.
Realisable (settlement) value. Assets are carried at the amount • See the issues with
of cash or cash equivalents that could currently be obtained by measurement during the
selling the asset in an orderly disposal. Liabilities are carried at formalisation of the elements
their settlement values; that is, the undiscounted amounts of of the SFP.
cash or cash equivalents expected to be paid to satisfy the
liabilities in the normal course of business.
Present value. Assets are carried at the present discounted
value of the future net cash inflows that the item is expected to
generate in the normal course of business. Liabilities are carried
at the present discounted value of the future net cash outflows
that are expected to be required to settle the liabilities in the
normal course of business.
The measurement basis most commonly adopted by entities in
59

ONTOLOGY
preparing their financial statements is historical cost. This is
usually combined with other measurement bases. For example,
inventories are usually carried at the lower of cost and net
realisable value, marketable securities may be carried at market
value and pension liabilities are carried at their present value.
Furthermore, some entities use the current cost basis as a
response to the inability of the historical cost accounting model
to deal with the effects of changing prices of non-monetary
assets.
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE
Concepts of capital

ONTOLOGY
A financial concept of capital is adopted by most entities in CQ:
preparing their financial statements. Under a financial concept of
Ontology:
capital, such as invested money or invested purchasing power,
capital is synonymous with the net assets or equity of the entity. Issues:
Under a physical concept of capital, such as operating capability, • Is the section on the concept
capital is regarded as the productive capacity of the entity based of capital and capital
on, for example, units of output per day. maintenance necessary if
equity is consistently and
unambiguously defined?
the concepts capital, equity
and net asset value?
• Should capital, equity and net
asset value be different
classes that needs to be
formalised?
• What is the meaning of “a
physical concept of capital”?
The selection of the appropriate concept of capital by an entity CQ:
should be based on the needs of the users of its financial
Ontology:
statements. Thus, a financial concept of capital should be
Financial Capital,
adopted if the users of financial statements are primarily
Physical Capital
concerned with the maintenance of nominal invested capital or
the purchasing power of invested capital. If, however, the main Issues:
concern of users is with the operating capability of the entity, a • Are these terms still relevant
physical concept of capital should be used. The concept chosen and how would it influence the
indicates the goal to be attained in determining profit, even financial report?
though there may be some measurement difficulties in making
the concept operational.
60
Concepts of capital maintenance and the determination of profit

ONTOLOGY
The concepts of capital in paragraph 4.57 give rise to the CQ:
following concepts of capital maintenance:
Ontology:
Financial capital maintenance. Under this concept a profit is
earned only if the financial (or money) amount of the net assets Issues:
at the end of the period exceeds the financial (or money) amount
of net assets at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period.
Financial capital maintenance can be measured in either
nominal monetary units or units of constant purchasing power.
Physical capital maintenance. Under this concept a profit is
earned only if the physical productive capacity (or operating
capability) of the entity (or the resources or funds needed to
achieve that capacity) at the end of the period exceeds the
physical productive capacity at the beginning of the period, after
excluding any distributions to, and contributions from, owners
during the period.
The concept of capital maintenance is concerned with how an CQ:
entity defines the capital that it seeks to maintain. It provides the
Ontology:
linkage between the concepts of capital and the concepts of
profit because it provides the point of reference by which profit is Issues:
measured; it is a prerequisite for distinguishing between an
entity’s return on capital and its return of capital; only inflows of
assets in excess of amounts needed to maintain capital may be
regarded as profit and therefore as a return on capital. Hence,
profit is the residual amount that remains after expenses
(including capital maintenance adjustments, where appropriate)
have been deducted from income. If expenses exceed income
the residual amount is a loss.
The physical capital maintenance concept requires the adoption CQ:
of the current cost basis of measurement. The financial capital
Ontology:
maintenance concept, however, does not require the use of a
particular basis of measurement. Selection of the basis under Issues:
this concept is dependent on the type of financial capital that the
entity is seeking to maintain.
The principal difference between the two concepts of capital CQ:
maintenance is the treatment of the effects of changes in the
Ontology:
prices of assets and liabilities of the entity. In general terms, an
entity has maintained its capital if it has as much capital at the Issues:
end of the period as it had at the beginning of the period. Any
amount over and above that required to maintain the capital at
the beginning of the period is profit.
Under the concept of financial capital maintenance where capital CQ:
is defined in terms of nominal monetary units, profit represents
Ontology:
the increase in nominal money capital over the period. Thus,
increases in the prices of assets held over the period, Issues:
conventionally referred to as holding gains, are, conceptually,
profits. They may not be recognised as such, however, until the
assets are disposed of in an exchange transaction. When the
concept of financial capital maintenance is defined in terms of
constant purchasing power units, profit represents the increase
in invested purchasing power over the period. Thus, only that
part of the increase in the prices of assets that exceeds the
increase in the general level of prices is regarded as profit. The
rest of the increase is treated as a capital maintenance
adjustment and, hence, as part of equity.
Under the concept of physical capital maintenance when capital CQ:
is defined in terms of the physical productive capacity, profit
61

ONTOLOGY
represents the increase in that capital over the period. All price
Ontology:
changes affecting the assets and liabilities of the entity are
viewed as changes in the measurement of the physical Issues:
productive capacity of the entity; hence, they are treated as
capital maintenance adjustments that are part of equity and not
as profit.
The selection of the measurement bases and concept of capital CQ:
maintenance will determine the accounting model used in the
Ontology:
preparation of the financial statements. Different accounting
models exhibit different degrees of relevance and reliability and, Issues:
as in other areas, management must seek a balance between
relevance and reliability. This Conceptual Framework is
applicable to a range of accounting models and provides
guidance on preparing and presenting the financial statements
constructed under the chosen model. At the present time, it is
not the intention of the Board to prescribe a particular model
other than in exceptional circumstances, such as for those
entities reporting in the currency of a hyperinflationary economy.
This intention will, however, be reviewed in the light of world
developments.
62
Appendix E – Onto0logy Engineering Decisions
12.5 Appendix E – Ontology Engineering Decisions
Included in the main document
63
References
13 REFERENCES
Wikipedia. (2014a). Financial crisis. Retrieved February 18, 2014, from

http://en.wikipedia.org/wiki/Financial_crisis#20th_century
Wikipedia. (2014b). List of corporate collapses and scandals. Retrieved

February 18, 2014, from
http://en.wikipedia.org/wiki/List_of_corporate_collapses_and_scandals
Wikipedia. (2014c). List of stock market crashes and bear markets. Retrieved
February 18, 2014, from
http://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_m
arkets
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The Conceptual Framework for Financial

Reporting Represented in a Formal

Marthinus Cornelius Gerber

Dissertation presented in fulfilment of the requirements for the degree

Doctor of Philosophy (Ph.D.): Accounting Sciences

Date: .15 September 2015

2 HISTORY OF THE DEVELOPMENT OF THE CONCEPTUAL FRAMEWORK

3 RESEARCH METHODOLOGY AND RESEARCH PLAN ........................................ 82

PART A: DATA COLLECTION PROCESS

PART B: DATA COLLECTED - ABSTRACTION OF REQUIREMENTS AND DEFINITION

5 THE ROLE OF A GLOBAL CFfFR AS A MODEL ................................................. 163

6 ONTOLOGIES AND FINANCIAL REPORTING ..................................................... 195

7 A FORMAL DOMAIN ONTOLOGY OF THE CFfFR............................................... 231

8 FINDINGS AND EVALUATION .............................................................................. 290

9 CONTRIBUTION .................................................................................................... 306

11 REFERENCES ....................................................................................................... 335

12 APPENDICES ........................................................................................................ 355

Figure 1.1: Chapter map – Chapter 1 2

This is a multi-disciplinary study, involving mainly the disciplines of accounting and

Hierdie is 'n multi-dissiplinêre studie wat hoofsaaklik die dissiplines van

Die hoofnavorsingsvraag is tydens OWN Siklus 4 beantwoord. In OWN Siklus 4 is 'n

Figure 1.1: Chapter map – Chapter 1

The predicament on how to develop a global CFfFR can be described as a wicked

1.3 Research Problem

The discussion in Chapter 2, follows a stimulus/response framework (Salvary, 1979)

Some technological developments related to computer technologies such as

1.4 Research Objective and Research Questions

In order to achieve the research objective, the main research question to be

How can a CFfFR consisting of logically formalised fundamental concepts be

The main research question is answered by posing three sub-research questions.

• Sub-research question 1 (SRQ1): What are the role, definition and

1.5 Research Design

This interdisciplinary, interpretative, qualitative study has an abductive approach

Figure 1.2: DSR as research strategy

Table 1.1: Matrix of research questions and DSR strategy

As indicated, the main research question is answered by answering SRQ 1 (Chapter

If essential information is not present in the CFfFR it is viewed as an indication of an

The following publications have already resulted from this study:

Gerber, M. C., A. J. Gerber, and A. J. Van der Merwe. 2014. An Analysis of

Gerber, M. C., A. J. Gerber, A. J. Van der Merwe, and N. Stegmann. 2015.

1.10 The Structure of the Research Project

In Section A consisting of Chapter 2, the literature review is structured around the

The implementation of the research design is reported on in Section C. The four

A schematic presentation of the research structure is provided in Figure 1.3.

Figure 1.4: Chapter map - Chapter 2

2 HISTORY OF THE DEVELOPMENT OF THE CONCEPTUAL FRAMEWORK

The importance of economic progress for the development of accounting is

According to Salvary (1979:2): “The accounting conceptual framework is

Chapter 2 broadly follows the four stages in accounting development as presented by

2.2 Pre-capitalist Period, 4000 B.C. to 1000 A.D.

2.2.1 Public Economy, 4000 B.C. to 700 B.C.

a) Sumerian temples and the development of writing

Writing as a system of complex tokens, was developed and practiced in ancient

The records (about 4000-year-old tablets) found in Mesopotamian ruins consist of

The changing economy resulted in a substantial increase in the population and a

Figure 2.1: Cuneiform symbols

Source: Western Washington University – Pandora Web Space

Figure 2.2: Sumerian syllabic glyphs

b) Development during the Minoan period and Greek Dynasty