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ESEF, The next step forward in financial reporting

ESEF marks a significant milestone in bringing financial reporting into the digital age. The European Single Electronic Format (ESEF) is ESMA's latest reporting mandate that requires all main-market listed companies in the EEA to prepare and submit their Annual Financial Reports (ARF) digitally in iXBRL format.

 

With ESEF, ESMA aims to improve analysis and comparability of financial statements and to make information more accessible for businesses and auditors alike. The newly introduced iXBRL format is an electronically tagged xHTML file that is different from the current PDF 'glossy' format and requires a specific iXBRL tagging or conversion technology.

 

For all main market listed companies Ireland and the UK, ESEF will apply to accounting periods starting ‘on or after 1st January 2021’, meaning 31st December 2021 year ends are the first in scope. Although this will be a different format to the existing PDF, we do not see the ESEF report replacing the need for the PDF. What we have experienced with our clients who have fallen in scope of the ESEF mandate across Europe this year, and with those who have completed a voluntary submission, is that the PDF will continue to be published in addition, as the xHTML ESEF compliant report does not print as well and is not as user friendly to view on mobile devices.

 

iXBRL isn’t new so what’s different about the ESEF mandate?

Let us take a step back from ESEF and talk about iXBRL which is not a new requirement for companies in Ireland and the UK. iXBRL is Inline eXtensible Business Reporting Language, which is essentially a way of barcoding data in a report to make it both human and machine-readable. In Ireland iXBRL was first introduced in 2013 and in the UK, it goes back to 2010. It was introduced to ease the analysis of information in the Company Tax Returns for regulators.

 

So, probably the most common question we are asked, what is different for the ESEF mandate? In comparison to standard Revenue filings, ESEF tagging has a higher degree of liability attached to it. The ESEF report will be submitted to Euronext Dublin for those listed in Ireland and to the National Storage Mechanism for those listed in the UK, within four months of the reporting period end date. ESEF applies to all main market listed companies in the EEA. For those companies listed on more than one stock exchange in the EEA, they will have to submit a report in each listed jurisdiction. From what we have experienced this year, each OAM can have their own rules for submission, and it may not be as simple as submitting the identical filling in each jurisdiction, especially when it comes for the UK’s introductions of UKSEF. In addition to this, the ESEF report will be made publicly available on the company’s website. This will enable investors, public authorities and issuers to carry out automated analysis of financial information across businesses, their peer groups and wider sectors. This also means that the tagged report will be open to public scrutiny, unlike your current iXBRL submissions.

 

Tagging, extensions and anchoring in ESEF

In terms of the tagging of the report, whilst it will only relate to the primaries in year one (for accounting periods 31st Dec 2021 to 30th Dec 2022), it still equates to significantly more tagging than what we have experienced with Revenue or HMRC submissions. From our iXBRL tagging experience, tagging over 5,000 reports annually; for Revenue submissions, a full report will have an average of 230 tags applied. For ESEF it will have 500+ tags applied for the primary statements alone. Also, unlike Revenue tagging, ESEF tagging requires the use of extensions and anchors. When an item in a financial statement does not have a corresponding tag in the ESEF taxonomy, an extension tag must be created. With this extension tag, the user will also need to ‘anchor’ to an existing ESEF taxonomy tag that has the closest accounting meaning. Creating this extension, finding the correct anchor and distinguishing the relationship can be a challenge as it requires complete accuracy. 

Our research shows that on average 20% of an ESEF file requires the creation of extension tags and we have seen this increase to over 50% of an annual report. This is a process much more time consuming than merely matching tags from the published taxonomy. As a result of this there is increased liability and subjectivity around these unique tags, meaning those tagging a report must have in-depth knowledge of the ESEF taxonomy to ensure that these extension tags are only created in-line with the EMSA rules and guidance.

Then for submissions in year two (for accounting periods 31st Dec 2022 to 30th Dec 2023), the mandate will require block tagging of notes in addition to the primary statements. Although some of the tags used on the report in year 1 can be ‘rolled-over’ to year two, the user will have to start from the beginning with the tagging of notes, which in some cases can come close to the number of tags in the primary statements.

In year three (for accounting periods 31st Dec 2023 to 30th Dec 2024), we are not anticipating any regulation changes but there are likely to be some taxonomy changes, as we’ve already seen an update to the ESEF taxonomy late last year. With the number of submissions over the coming 12 to 18 months and the feedback on these to ESMA, further updates to the taxonomy are expected. Then, considering this, updates to the UK extension of ESEF, UKSEF, are inevitable. We also must consider here the possibility of further regulation mandated in the UK as the UKSEF taxonomy already includes the tags for Streamlined Energy and Carbon Reporting (SECR).

To sum up, we have a pretty clear idea what is ahead for those submitting their ESEF compliant reports for the first two mandated years in Ireland and UK. But when it comes to year 3 onwards, only time will tell what effort will be required for those submissions as dictated by taxonomy and potential regulation updates.

 

In-house tagging technology vs iXBRL tagging provider

When it comes to choosing a solution for ESEF, companies have two options. You will either acquire and implement an iXBRL tagging technology in-house or you will outsource the process to a third-party iXBRL tagging provider. Choosing between these options will depend on a business’s individual needs in terms of budget, resources, and existing processes. 

When looking at an in-house solution, there are many factors to be considered. Do you have the expertise in-house to accurately tag and convert an ESEF compliant report? Do you have the capacity to add this into your annual report production timetable? We know that ESEF tagging is not straightforward, even for those with experience in tagging for Revenue/HMRC. The rules and guidance are different, and they can change on a regular basis. We have the addition of extension tags for ESEF; it requires calculations to be added and the use of members.

Many in-house solutions or software providers have the capability to tag the report as it is being produced. This is certainty a benefit as it means the work can be completed without the time pressure of your publication date looming. But you will have to consider how the tagged output from the software will merge with your InDesign annual report for publication.

A feature seen as a pro for in-house tagging is the idea of auto-tagging, the argument being that it can make the ESEF process easier and will help to alleviate the need to learn the taxonomy and guidance. Auto-tagging can provide a partial solution to ESEF but there are some specific nuances that will still require human input.

As previously mentioned, the requirement of extension and anchoring tags, means that human input for these is a must. There is more to these than just creating a label for a tag, the relationship with the anchor(s) tags must accurately reflect the line item in the report. Something else to consider is that in addition to data in the primary financial statements, ESEF also requires numbers in related footnotes to be tagged. That is likely to be another issue for auto-tagging as a) it will need to find the numbers in the text and then b) it’ll need to find out what they relate to. In the situation where those numbers would be extended/anchored, that will be practically impossible.

Even in a world where auto-tagging works perfectly, the tagging in an ESEF document needs to be 100% accurate. Therefore, companies would still need a human (an experienced one, who has an extensive knowledge of the ESEF taxonomy and the ESMA rules and guidance) to review the output before they put it on their website for the world to see.

Then we look at the service providers. When choosing the right service provider, you will have to take into account how they will fit into your annual report process. The ESEF publication is time restricted, and you must find the provider that will meet your needs without adding unwarranted additional work to your publication timeline.

Another thing to consider is what their experience is in the world of iXBRL? With many companies having completed an ESEF test run or voluntary submission this year, has this service provider had any experience with this and what would be their advice to those companies going through the ESEF process for the first time?

When relying on a third party to complete the tagging of your report you will need support when it comes to the reviewing of the tagging. The ESEF taxonomy has over 7,000 tags to choose from so you will need a team that can take your through your options, particularly when it comes to the use of the extension tags. You will need a partner that knows the taxonomy in a high level of detail, what the 7,000+ tags in the taxonomy are and when they should be used.

Something else to question is what support you will receive outside of the tagging? Will the team be on hand to assist with submission hiccups? Are they in your time zone? You need to ensure you are covered when you need assistance.

At ARKK we believe that your ESEF compliant report needs to be tagged by experts who understand the taxonomy and the ESMA and local Officially Appointed Mechanism (OAM) rules. We have designed a process that will have minimal impact on your year-end publication timetable with a standard turnaround of 24 hours to covert your final PDF into an ESEF compliant report, with quicker turnarounds available of as low as 4 hours. We have over 12 years’ experience in iXBRL tagging and apply over 1 million tags annually, meaning we have the knowledge and experience capable of handling the complexity of ESEF reports. Our support does not stop with the tagging of the report. We are there every step of the way to help ensure you receive a successful submission to your regional OAM.

As members of XBRL UK and partners of AMANA, ARKK have tagged over 200 ESEF compliant reports to date and that figure continues to grow so we are on hand to give advice on best practices given our experience to date. If you would like further information on our ESEF product, please visit our ESEF page.