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ESEF Updates: New ‘Warnings’ guidance released

Earlier in the month, we ran through the highly sought-after guidance for ‘block tagging’ in ESMA’s ESEF Updates. Now, we’re taking a look at the new ‘Warnings’ guidance, and what that means for filers.

    1. The main focus from consumers in the new ESEF reporting manual (2022) was on the guidance for block tagging. However, there have been many updates in the reporting manual outside block tagging. There have been a few important changes that ESMA have made relating to the guidance of some common ‘Warnings’ that show on ESEF validation and submission.

      ‘Warnings’ have caused some alarm in the first year of ESEF filings. Whilst everyone would prefer an A*, 10/10, error-free file, Warnings should be treated as ‘double check you actually meant to report it this way’, rather than a Validation Error, which will prevent you from filing.

      As a result, ESMA’s update brings clarification on previous Warning labels, explaining how filers can avoid them.

      Naming conventions for extension taxonomy elements

      ESMA’s original guidance in 2021 explained that “Extension taxonomy element names should represent the standard label of this element in the Label CamelCase Concatenation [LC3] convention unless it violates XML element naming rules.”

      This means that when creating extensions elements, preparers will need to decide the element name, element label, balance type, item type, anchor and other element properties. To keep element names and labels consistent with the ESEF taxonomy element names and labels, it was required that an extension element name should be the Label CamelCase Concatenation (LC3) convention of the element label. Although for consistency reasons this made sense, sometimes the LC3 convention did not work:

      1. 1. Acronyms: In financial statements, there can be a surprising amount of acronyms, (e.g. EBDITA, FVTPL, EPS, etc.). The LC3 convention of these labels would expect these element names to be Ebitda, Fvtpl, Eps, although acronyms should be shown as uppercase.

      2. 2. Use of symbols: If a preparer had to create an extension name based on the LC3 of a label, for example, ‘Profit/Loss before exceptional items’, the element name would be ‘ProfitlossBeforeExceptionalItems’, The symbol ‘/’ does not replace a space, so the l in loss is lowercase when you would expect it to be uppercase.

      3. 3. Multi-language reports: Element names must be in English, but the label should be in the same language as the report. Of course, this creates a problem for reports in a language other than English, as the name will never be the LC3 version of the label.

      2022 guidance changes:

      ESMA knew there would be cases when the element name would need adjusting which is why ignoring the LC3 format only caused a Warning, not an Error. Although Warnings are okay, it is understandable that issuers want as few of these as possible, which made the LC3 convention Warnings a nuisance. In the new Reporting Manual, ESMA has decided to remove this rule.

      Definition of abstract concepts in extension taxonomies

      In 2021, ESMA’s guidance stated that “In general, it is not required and ESMA therefore discourages issuers to define abstract concepts in their extension taxonomy.”

      Creating an extension tag should only ever occur if there is no tag that accurately represents the accounting meaning of the disclosure you are tagging. For the same reason, if an abstract concept exists, it should always be used before considering the creation of an abstract concept. However, sometimes it may be necessary.

      For example, picture an Income Statement split into six columns, rather than two. The columns represent the disclosures before exceptional items, the disclosures relating to exceptional items, and the disclosures after the exceptional items. In this case, we need to create an extension axis and members to define the new columns. Since now an abstract concept will be defined in the extension taxonomy, a validation Warning appears.

      2022 guidance changes:

      As you can see in this example, there are times when there is no other way to represent the financial data. ESMA has decided, like the LC3 naming convention, to remove this rule as well.

      Extension elements must be equipped with an appropriate balance type.

      For Year One filings “It should be noted that there are some limited scenarios where numeric elements need to be defined without a balance attribute, such as for example the tags for basic or diluted Earnings Per Share. ESMA deems that these should be assessed on a case-by-case basis and, provided that the no balance attribute is appropriate, they should be deemed acceptable."

      A common Warning that may appear states that extension elements must be equipped with an appropriate balance type. This Warning will appear if an extension has no assigned balance type, however sometimes no balance type is appropriate. There are times that while an extension could be considered as a debit or credit balance type, it must be given neither due to calculation rules.

      In a normal calculation, debits and credits are given opposite weightings (+1, -1). This means that the calculation will automatically know to subtract credits from debits or debits from credits depending on the calculation. In the case of an indirect cash flow statement, adjustments are used to reconcile profit (loss) to net cash flow from (used in) operating activities.

      In this scenario, adjustments for expenses are added back to the profit (loss) (debit is being added to a credit) and adjustments for incomes are being subtracted (credits are being subtracted from a credit). For this reason, the subtotal of this calculation needs to have no balance type so the +1, -1 weightings are not forced.

      2022 guidance changes:

      ESMA has therefore widened this explanation to include restrictions relating to calculations. This will allow for more scenarios where this Warning will appear but should be accepted and ignored.

      “It should be noted that there are some limited scenarios where numeric elements (specifically elements of monetaryItemType) need to be defined without a balance attribute because of the restrictions on calculation weights and balances, such as for example Net cash flows from (used in) operations. ESMA deems that these should be assessed on a case-by-case basis and, provided that the no balance attribute is appropriate, they should be deemed acceptable.”

      ESEF reports can contain two important types of Validation; Warnings and Errors. There is a big difference between the two types of validations, but many preparers mistakenly group them together as the same thing. Validation Warnings are common and can usually be ignored as long as they are assessed. Validation Errors, however, are more serious, will make your report invalid and need to be addressed.

      If you’ve got questions on the new guidance or want to make your next ESEF filing one less thing to worry about, get in touch with our team today. And don’t forget to keep an eye on the ARKK blog as we continue our series on the new ESEF guidance.