Following our recent blog introducing ESEF, we take a look at the filing requirements in more detail, and how firms can get ready for tagging their end of year reports.
Companies with debt or equity listed on any of the European securities markets will soon need to prepare their annual reports in electronic format, instead of simply publishing them as a PDF. While this does not require any additional financial disclosure, it does bring another layer of complexity to the reporting process.
XBRL, Taxonomies and Tagging
ESMA have confirmed that the electronic format will be an iXBRL tagged webpage known as xHTML. Whilst this tagging language will be familiar to UK and Irish filers, it’s the first time a European regulator has implemented this standard across the EEA.
Before fully understanding iXBRL, companies must ensure they understand the notions around XBRL, and where ESEF fits in. Put simply, XBRL, which stands for eXtensible Business Reporting Language, is a standard used to translate any human-readable information into machine language.
Like any translation, this requires a dictionary, which in the XBRL world is called a taxonomy. The preparers use financial concepts from the taxonomy to map and tag against their reports with the help of a tagging software. The taxonomy for ESMA’s requirement and the colloquial name for the whole disclosure is ESEF.
Since there are several accounting frameworks available worldwide, there can be as many taxonomies available, but it’s up to the policymakers to decide which one is officially accepted under their specific mandate.
Custom Tagging and Anchoring
The new taxonomy is based on the IFRS Foundation’s IFRS taxonomy but unlike the original, ESEF allows filers to use company-specific tags. This means that when preparing electronic accounts, the choice of tags will not be limited to the IFRS taxonomy and the company can extend the taxonomy by creating custom tags to better describe financial concepts within their disclosures.
In order to make sure that companies don’t start abusing this option by creating more custom tags in a report than required, ESMA introduced an anchoring mechanism. Every time a custom element is created, filers must anchor this to an existing taxonomy element which is closest in meaning, either as a higher or lower level in the hierarchy.
ESEF Field Test Results
But to what extent will the companies need to use this anchoring mechanism?
To answer that, we had a look at the ESEF Field Test results, which were published with the final version of the Regulatory Technical Standard.
Within the 22 reports analysed, we found a wide range of extendibility – from 1% (Nelja Energia) to 46% (Generali). This was mainly due to the fact that some companies were disclosing more information on the face of the financial statements than the typical IFRS report. This could be as a result of either specific accounting treatments or due to disclosure of industry-specific concepts.
Therefore, the broad conclusions we can get out of the ESEF Field Test is that anchoring and custom tagging will vary on a case by case basis and it will be industry specific. As ESEF becomes more mature, it will most likely follow the US model and issue industry-specific extension taxonomies on the back of the most commonly used custom tags.
This could be addressed in the near future by the XBRL International’s Entity Specific Disclosures Task Force, which is specifically dedicated to improving comparability between custom tags and facilitate industry-specific extension taxonomies.
What comes after tagging?
It’s worth clarifying what happens towards the end of the tagging process with ESEF. After applying all the tags, the final output to submit on the national gateways will be in xHTML format. This is a web page that includes both the human-readable information, the presentation of the report, and the machine-readable information, with the inline XBRL (iXBRL) code in the back end.
This xHTML file will be then pushed by the filer through the national competent authority’s gateway and the file will be checked against the ESEF filing rules and accepted or rejected.