Reporting reform: implementing the ESEF

October 2021  |  FEATURE | CAPITAL MARKETS

Financier Worldwide Magazine

October 2021 Issue

Intended to increase transparency and comparability, the European Single Electronic Format (ESEF) is the new digital financial reporting standard for companies admitted to trading in European Union (EU) and European Economic Area (EEA) regulated markets.

Introduced by the European Commission (EC) and the European Securities and Markets Authority (ESMA), the ESEF introduces a structured format for annual financial reports (AFR), including the ability to ‘tag’ (i.e., label) individual disclosures in the AFR according to a published taxonomy.

Compared to an unstructured format, such as portable document format (PDF), structured files allow the contents of an AFR to be readable using specialist software tools and improve the accessibility, analysis and comparability of the information. In the long term, this will make capital markets more efficient and could therefore help lower the cost of capital for issuers.

Companies in scope will publish their AFRs in an XHTML web browser format, replacing the current PDF format, for financial years starting on or after 1 January 2021, for publication from 1 January 2022. Issuers that prepare consolidated accounts in line with EU international financial reporting standards (IFRS) will also use that capability to mark up those financial statements with digital tags selected from a published taxonomy.

In terms of applicability, the ESEF affects around 7500 companies across Europe, and around 5300 of these must carry out tagging for their IFRS consolidated financial statements as part of their annual financial report.

“The objective of the ESEF is to give a more transparent view of financial reporting among issuers and to make it easier to produce, facilitate, distribute and compare financial reports,” says Kim Eriksen, chief executive of ParesPort. “Under the scope of the ESEF initiative, companies are required to align the human and machine readability of their annual financial reports.

“In short, not only are they required to make sure that reports are both human and machine readable, they must also ensure that information presented to human readers is identical to the information presented to machine readers,” he continues. “And how does one go about that? The answer is iXBRL.”

An open standard that enables a single document to provide both human and machine readable data, iXBRL is used by millions of companies around the world to prepare financial statements in a format that provides the structured data that regulators and analysts require. At the same time, iXBRL allows preparers to retain full control over the layout and presentation of their report.

“The ESEF requires companies to submit their annual and consolidated financial statements in the ESEF format to national officially appointed mechanisms (OAMs),” explains Sven Schenkluhn, managing director of compliance services at the EQS Group. “In addition, certain information in the primaries and notes must be tagged with iXBRL tags.”

Implementation challenges

In order to implement the ESEF successfully, companies all over Europe need to understand the practical implications of the new format so that regulatory expectations are met, and implementation is as smooth and timely as possible.

In the view of Mr Schenkluhn, the challenges are manifold. “First of all, companies have to decide whether they want to convert to the ESEF format themselves or commission a service provider,” he says. “The most important thing, whatever the choice, is to choose the right software and have the right people to implement the tagging. In addition, one should work out a timetable together with the auditor to have the ESEF format implemented in time for the audit date.”

Another key challenge to be overcome is to align expectations with auditors reviewing the ESEF taxonomy for the first time. According to Mr Eriksen, companies should start their preparations early, collaborate with their auditor when preparing the mapping of their annual report and compare as many vendors as possible.

Reform in the long term

Given the opportunities, challenges and practical considerations surrounding the new ESEF reporting standard, it comes as little surprise that work is ongoing to ensure companies are ready on time, making it difficult to determine the overall efficiency and effectiveness of implementation.

“Discussions about different technical aspects of ESEF are currently taking place, which makes it near impossible to form a qualified guess about the impact of the ESEF reporting reform,” contends Mr Eriksen. “Different groups are currently lobbying to allow transformable facts within the hidden section of the iXBRL files, which would ease the task of verifying the identicality of the visual and technical layer of iXBRL files. This, in turn, would reduce the inherent transparent qualities of the new format.”

The sense of a general lack of clarity is shared by Mr Schenkluhn. “The long-term impact cannot be foreseen at this stage,” he concludes. “Many issuers do not see the benefit but only another obligation in the ESEF regulation. Above all, the additional costs and the additional effort are considerable.”

© Financier Worldwide

BY

Fraser Tennant