ESEF reporting requirements explained

Great, you successfully implemented the “Big 3” IFRS Standards (9, 15 & 16) and expect to close the books on FY19 without too much trouble. Time to kick back and relax a bit in 2020? Not completely, if you are working for a company that is listed in the EU.

What it is about

European financial markets supervisor ESMA introduces the European Single Electronic Format (ESEF). 

The use of ESEF should make life easier for reporting entities and will improve accessibility, analyses and comparability of financial statements for users (analysts, investors and the like). 

To comply with the ESEF requirement, annual financial report documents will have to be prepared in XHTML format, which is human-readable and can be looked at using a standard web browser. Further, if a company includes consolidated financial statements under IFRS in its annual financial report, elements thereof will have to be tagged with an XBRL label, as part of ESEF.

Reporting using ESEF is mandatory for annual financial reports of companies that are listed on a EU market, over the first financial year that starts on, or after 1 January 2020.

XBRL tagging
XBRL, or eXtensive Business Reporting Language, is a software standard that makes communication of financial data possible between companies, and also between companies and public institutions such as regulators, tax authorities and chambers of commerce. We will leave it at that for now but I will dedicate an article to XBRL in the near future.

XBRL tagging of consolidated financial statements included in annual financial reports is mandatory if they are prepared under IFRS. 

XBRL tags need to be embedded in the XHTML document using a technology called Inline XBRL (iXBRL). This will make disclosures in financial statements structured and also machine-readable. 

A piece of good news: over the first two years, detailed XBRL mark-ups are only required for the primary financial statements (income statement, balance sheet and statements of cash flows and changes in equity). Footnote disclosures can be tagged by whole sections in once (“block tagging”). 

Starting 2022, footnote disclosures also have to be marked up in more detail.

What does it mean for preparers of financial statements

If ESEF sound like a complex technical challenge, don’t worry too much. We are among finance people here, and there are plenty of good tools that can help us with the technicalities (check out www.parseport.com, for example). Let’s focus on what is really important. Labeling data in your financial statements with XBRL tags will help people to compare it with similar data from other companies. How? Well, all annual financial reports of listed companies will be read and stored by machines, that can then report aggregated data for selections of companies upon request from users of financial data. As an example, an analyst following the construction industry can retrieve and compare all investments made in fixed assets during 2018 by listed construction companies.

It can only work however if companies use the same label for the same kind of data. The definitions of labels and the order in which data is presented is written up in dictionaries, called “taxonomies” in the XBRL world.

Taxonomies of different sorts exist, for various purposes. For example, companies in the US file their XBRL financials (10Q’s and 10K’s) with the SEC using a US GAAP taxonomy. The IFRS Foundation issues and maintains a dedicated taxonomy for IFRS appliers, which ESMA took as basis for its ESEF taxonomy. That makes ESEF compliant with IFRS. Preparers of financial statements will have to include a reference to the corresponding label in ESEF taxonomy for each and every number in the primary financial statements, as well as for large blocks of footnote disclosures.

Milestones for preparers of financial statements

The key steps to bear in mind, ahead of your 2020 annual financial reporting process are the following:

1. Find an iXBRL software solution that can bring your IFRS consolidated financial statements (including XBRL mark-ups) into the obligatory XHTML format. Consolidary’s partner ParsePort provides companies with tested iXBRL software. A good overview of other available solutions can be found at eurofiling.info/portal/ixbrl-solutions/

2. Start identifying the relevant labels from the ESEF taxonomy that cover the items in your primary financial statements (fixed assets, intangible assets, turnover etc). Note that it is allowed to extend (yes this is the X in XBRL) the ESEF taxonomy if no appropriate label is available to suit your specific needs. 

Expect a more detailed review of the ESEF taxonomy soon.

3. Have your tagging checked by your external auditor. At the moment there is no formal audit requirement of ESEF tagging at European level but regulators at country level may ask for it. Of course, companies can involve their auditors in the validation process on a voluntary basis. This can all be done well in advance of January-February 2021, to avoid last-minute anxiety!

Need a hand? Consolidary Financial Reporting Solutions can provide support in this process if needed, every step of the way.

Don’t hesitate to contact us at Consolidary with any question, suggestion or request for support you may have.

What’s in it for you

Finally, we get back to the objectives of ESEF reporting and more specifically to the goal of making the life of reporting entities easier. How did the folks at EU level figure that? Clearly ESEF brings benefits to companies, as in enhances transparency, which in turn attracts analysts and investors to the benefit of share price performance. ESEF will also make it possible to compare your company’s performance with that of your peers more easily.

Does it make reporting itself easier? Not sure, unless ESEF takes away a more complex legacy way of filing financial statements with regulators.

But I am happy to take your views on that!