The OntoREA Accounting and Finance

Model: Ontological Conceptualization of the Accounting and Finance

Domain

In this article ontological meta-properties of Onto UML are used to specify derivative
instruments and to derive the Onto REA© Accounting and Finance Model, which constitutes a
valid ontology-based conceptualization of the accounting and finance domain. Authors are
deepening the anchoring of REA-based accounting model in the accounting domain by
developing the Onto REA accounting model which represents the REA-based Asset-Liability-
Equity (ALE) accounting model in terms of the Onto UML language. Article is structured on a
way that in the first part of the article, the REA C accounting model is developed, then the Onto
REA Accounting Model is presented and discussed in more detailed way with respect to its
ontological meta-properties. Following these practice, the Onto REA© is developed by
modeling the REA© based ALE accounting model in terms of Onto UMLs ontological meta -
properties.

REA accounting framework becomes capable of modeling future events, especially

future commitments associated with financial instruments. But by side of the REA accounting
framework, there is another model with different extension, which is called REA©-based ALE
accounting model. The © sign is used in order to explicitly indicate its distinction from other
REAC model versions. REA©-based ALE accounting model covers all resources related to
assets, liabilities and equity instead of tangible assets and cash only. It features the value flow
relationship related to debit and credit event instead of relying on stock flow relationship related
to increment and decrement events. Regarding the conceptual modeling entity, types and
relationships types, which were derived from the UFO typification tree are the most
fundamental constructs and are of the significant importance for the Onto REA accounting
model. They are consisted out of Kinds, SubKinds, Roles, Phases, Relator Universals, Material
Relations & Formal Relations. Counted entities and relationship types of UFO are not needed
for the OntoREA accounting model. All subsequent Onto UML models are implemented in the
open-source tool Menthor Editor as well as the proprietary Enterprise Architect from Sparkx.
An important benefit of these support tools lies in their built in quality control functions.

Nobel laureates Merton and Black/Scholes have introduced the no-arbitrage theory
which can be easier accessed by the discrete time approach that was introduced by Cox, Ross
and Rubenstein. Applied to the stock forward instrument, it can be shown that the forward value
is equal to the sum of the values of the assets (A) and liabilities (L) in the forward hedging
portfolio. The A/L hedging portfolio representation underlying the no-arbitrage pricing
propositions explains the mecronymic uniqueness of derivative instruments.

In the Onto UML is very important to not confuse the personal identity with the identity
of the group. This distinction relates to the Member of the parthood-relationship. Due to the
different identities of the group as a whole and its individual members it is possible that group
member leave or join the group without changing the group identity.

In order to provide a deeper validation next to the current validation, two additional
steps will be taken in the future: a model simulation in the logic based Alloy language for
detecting possible misspecifications and the usage of real derivative instrument for
demonstrating and assessing the models adequacy. The resulting model can be used for usage
in the accounting information systems, or in the enterprise information systems. Such systems
could be implemented within a model-driven software development approach by establishing
the Onto REA © model first and subsequently transforming it into a software application.