Expressing Contracts and Equity Using REA Semantics (short paper)

This paper looks at how to represent equity using REA semantics: equity representing ownership, which is made up of a number of rights. To support this, we apply REA terms beyond transactions to contracts more generally. Using this extended treatment we look at how rights may be represented as an aspect of an REA Commitment, including general public rights, using the REA concepts to describe social contracts as a class of contract. Some edge cases are considered in which there appears to be something else going on with ownership, and these are disposed of within the same framework. Using the treatments outlined here, it is hoped that these concepts are able to be applied to the more specialized question of equity financial instruments. This is intended as a discussion paper and the language reflects this, however it is longer than would be expected since some prior work is described in some detail to support these discussions. Copyright © 2020 for this paper by its authors. Use permitted under Creative Commons License Attribution 4.0 International (CC BY 4.0). 209 Introduction One ambition in the work on the REA ontology has been to identify the disposition of equity in terms of REA constructs. Early explorations of this are given in [1] and [2]. In order to adequately deal with equity we need to define ontologically what is the nature of ownership, since equity represents (or is) a kind of ownership. Prior work within the EDM Council FIBO ecosystem [3] has been continued under the informal community known as the Semantic Shed [4] and as far as the disposition of REA terms is concerned has been two-fold: • Making use of the ‘aspects’ of Commitment to frame concepts that are necessarily partyspecific • Extending the REA framework itself from economic transactions to contracts and agreements as a whole In this paper we first look at equity and equity instruments, drawing a distinction between rights or obligations conferred by the equity instrument itself versus the broader set of rights that make up or contribute towards ownership. This takes us into the area of social contracts, where it is shown that these also may be framed in terms of REA primitive concepts once these have been extended to cover all contract types. The aim of this paper is to seed further discussions on how this whole set of concepts comes together to make up a complete, REA-based account of equity both in general and as understood in the context of equity financial instruments (shares). Equity Instruments Equity financial instruments include shares, fund equity units, equity in limited partnerships and so on. These confer upon the holder a part in the ownership of some concern. In addition, as typified by shares, these may confer voting rights or other rights upon the holder. Many of the rights conferred on the holder of an equity instrument are distinct from those rights that fall under the general heading of ‘ownership’. These rights can be many and varied and are defined in some contractual instrument, typically the Share Agreement. They are intended to accompany and complement the basic rights understood as being a part ownership of the entity. As such, these contractually defined voting rights and other rights may be removed from the equation in which we consider what is ‘equity’ itself. Prior Work Two pieces of prior work are brought together in this exploration: an extension of REA concepts to cover contracts as a whole rather than just those that relate to an economic transaction; and the notion of REA Commitment being describable as ‘sides’ or aspects from the perspective from one or another party, giving a formal basis for the notions of rights and obligations. Extending REA to All Contracts The terms given in the REA ontology provide the building blocks for an economic transaction, that is, a transaction between two or more parties in which some bundle of commitments is exchanged by each party to the other, and these commitments relate to some economic resource, such as goods or money.