Following on from our previous blog on ESEF’s comparability issues with the anchoring and extension concepts, today we’re going to further look at its effectiveness on financial analysis and investment research.
The key objective of ESMA’s new digital reporting mandate ESEF is to “facilitate accessibility, analysis and comparability of annual financial reporting”. While electronic reporting certainly provides better data accessibility, it doesn’t necessarily mean easier analysis and improved comparability.
Currently, the majority of annual reports are produced and submitted in PDF format that requires analysts and investors to process reported data manually. The lack of data uniformity, simplicity and extensibility in PDF reporting makes it very difficult for automatic reading and analysis. In that sense, with the introduction of a uniform machine-readable format (iXBRL), we should expect ESEF to make financial reporting more accessible and open for data users. However, that doesn’t automatically imply better and easier analysis.
According to Javier de Frutos, Chairman-IFRS of The European Federation of Financial Analysts Societies (EFFAS), the effectiveness of ESEF on financial analysis will still be highly dependent on the quality of reporting that lies in the hands of reporting issuers. With issues like limitations in anchoring and extensions comparability and discrepancies in definitions of key performance concepts such as “operating profit” or “net debt”, ESEF can’t really guarantee full data transparency and comparability and therefore more efficient scoring and analysis.
To solve that, ESMA should really focus their efforts on providing clear guidance and specific requirements for data quality and disclosure of relevant financial information as part of ESEF’s technical implementation.
Javier also believes that there hasn’t been enough effort from the regulator to actively involve the analysts and investors’ party in the ESEF dialogue, especially during the initial phase of its implementation. In result, although the majority of the industry are aware of the new regulation, they don’t seem to have a full understanding of the pending changes and its actual impact on financial analysis.
So, even though ESEF is definitely a positive thing and a step towards greater financial stability and transparency in capital markets, there’s still a long way to go to unleash its full potential in providing adequate and reliable financial information as required by analysts
and investors.
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