Feedback ESEF preparation sessions

Earlier this month, right before COVID-19 put a stop to basically all social and professional events, XBRL Netherlands organized ESEF preparation sessions together with Dutch market supervisor AFM and auditors association NBA. These sessions were organized for issuers, to raise awareness and provide an opportunity to raise questions around the implementation of ESMA’s ESEF requirement.

In separate sessions in Den Bosch and Zeist, all parties that are touched by ESEF gathered, to share information and experiences, and to address specific questions and concerns. In this article I will try to summarize relevant feedback from the meeting in Den Bosch.

AFM

The AFM introduced the ESEF requirement and put it in its legal context. A good overview of ESEF can also be found on the ESMA website.

AFM surveyed the awareness/readiness of companies in scope of the ESEF requirements at the end of last year and found that a large part of the test group still has to start the implementation project. A small fraction was not aware of the requirement, at the end of last year.

Other interesting feedback from the survey: only 16% of the companies questioned indicated that they would tag notes to the financial statements at a more granular level than required by ESEF. 41% of the population considered to extend ESEF reporting to quarterly- and semi-annual financial reports, once ESEF is implemented.

The project lead from AFM emphasized the scope of ESEF to include IFRS consolidated financial statements. Statutory accounts may be prepared using ESEF on a voluntary basis, only if local Market Supervisor has provided a taxonomy for that.

A substantial part of the AFM time slot was dedicated to a review of the ESEF requirement in more detail. I am referring to an earlier article to get up to speed on that.

The key challenges according to AFM are:

1. Technical implementation, i.e. selection and implementation of the software that will facilitate iXBRL (block) tagging and generate XHTML output file
2. Correctness tagging of primary financial statements, especially when extensions to the ESEF taxonomy are needed

Contrary to the current filing process, AFM wants to validate uploaded ESEF files before they are filed in its database. Depending on the nature and magnitude of an error in the file (if any), AFM will give a formal warning to the issuer, or reject the file all-together. See validation examples in these slides.

AFM expects that it can start testing the upload-portal with issuers at the earliest by Q3-2020. Realistically, that will slip into Q4 however. AFM will ask issuers to participate in the testing, by uploading test files based on FY19.

The AFM testing of their upload portal in H2-2020 is a great opportunity for companies to test the completeness and correctness of their tagging!

XBRL Netherlands

During this session the focus was on the technical aspects of XBRL-based reporting. The main elements of (Inline) XBRL were discussed (taxonomies, instances) and how they interact.

Then we looked into specifics of the ESEF Taxonomy. This taxonomy is based on the IFRS taxonomy and will be updated every year. As this update process starts with updates on the IFRS taxonomy and all changes to the ESEF taxonomy need to go through an EC approval process, the updated ESEF taxonomy will become available only towards the end of a given year.

When the ESEF taxonomy does not provide a proper element to use for a company-specific line item, the issuer will have to “anchor” a self-made element to an ESEF taxonomy element.

As an example, a company can add an element called “Revenue from cloud and software” and anchor it to the ESEF element “Revenue”.

Clever extensions to the ESEF taxonomy will allow companies to maintain their existing aggregation in the primary financial statements. Be careful to avoid duplications with ESEF elements!

Issuer perspective

To provide insights from the issuer’s perspective, the Philips financial reporting team shared their experience with Digital Reporting. As a foreign private issuer in the US due to its secondary listing on the NYSE, Philips has been filing XBRL-based reporting to the SEC since FY2017.

During the presentation, the Philips team walked the audience through their digital reporting journey, which provided a great insight for companies in the EU facing ESEF:

Philips choose to take the opportunity of XBRL reporting requirement to implement a Content Management System (CMS). That triggered a discussion on the various strategies to deal with ESEF for companies:

1. Fully outsource to a printing agency or other service provider: simply send the annual financial report in pdf to the service provider and receive back the XHTML file including iXBRL tagging of the financial statements. The benefits will be clear, however companies will have to thoroughly check completeness and correctness of the tagging as they are ultimately responsible for the document. Also, companies will not benefit from building up ESEF/XBRL knowledge internally.
2. Embed the XBRL tagging into existing reporting process, by buying a license to an inline XBRL software. Although this will lead to building up solid ESEF/XBRL knowledge internally, it will increase workload and add complexity to already challenging production process of the annual financial report.
3. Use ESEF requirement to radically change the production of annual financial reporting, by implementing a CMS. This CMS not only manages the iXBRL tagging but also significantly improves the way annual financial reports (and other company reporting) are produced.

For Philips, the implementation of a CMS meant that they are fully in charge of the XBRL process and have flexibility in timing of testing and production of XBRL reports. This translates in significant savings in terms of time, resources and money.

Based on their experiences with SEC EDGAR reporting, Philips team urged AFM to assure that the filing portal is user- and IT friendly and includes a sound validation mechanism. Also, to avoid missing deadlines due to technical constraints, AFM was asked to apply a “grow-in” period for filing first annual financial reports in ESEF.

One of the key takeaways from Philips experience with XBRL-based reporting: start the process in time, to avoid last-minute anxiety and missed filing deadlines!

User’s perspective

EUMEDION provided feedback on behalf of users of financial information. EUMEDION is an organization that represents institutional investors, focusing on topics of corporate governance.

The benefits of ESEF for investors and other users of financial information are evident. Due to its 100% coverage of all listed companies in the EU, investors and analysts can have a complete coverage of audited, tagged and detailed information. This ensures the availability of cheaper and faster information.

EUMEDION sees ESEF implementation for the financial statements as a very good first step but proposes to have it expanded to other parts of the annual financial statements (directors’ report, ESG, audit opinion) as well as to other reporting (quarterly reports, prospectuses).

Finally, EUMEDION expects that only very large investors will be looking to directly replicate the full ESEF database themselves. All others will be relying on third-party data providers to get to the information they need.

ESEF reporting will be very beneficial for investors and analysts, and will put digital reporting in Europe ahead of that in the US

External audit

The external audit profession was represented by the Dutch Auditors Association NBA. They shared with the audience some of the uncertainties around audit assurance on ESEF.

1. What kind of assurance should be provided? The audit of compliance with ESEF regulation is considered part of the statutory audit requirements, according to guidance by the European Commission. This means in practice that auditors should provide assurance on the compliance of ESEF requirements.
2. Materiality and risks to be covered? Materiality concept is the same as for the financial statements. The risks to be covered by auditors are in the areas of
   • Completeness: all figures disclosed are tagged, company ID is included
   • Accuracy: tagged information equals the human readable information, tagged information has the correct context (debet/credit, period), correctness of extensions
3. How to include an audit opinion? Three possible scenarios are being discussed:
   • separate XHTML file with iXBRL tags (linked to NBA Assurance Taxonomy)
   • iXBRL tag file (NBA Tax) included in the other information of the XHTML financial statements
   • untagged text in the other information section of the XHTML financial statements
4. How to sign off on financial statements? For that, two scenarios are considered:
   • Digital Linking and signing with the “PKI” government certificate. This is how currently auditors sign off on SBR filings of companies in the Netherlands
   • Hardcopy autorisation included in the text of the auditors opinion in the XHTML financial statements.

As to the “how” of assurance on ESEF, the procedures can include an inspection of mark-up’s and anchoring, and the development of an independent expectation to compare with the issuer’s marked-up financial statements. NBA is working on a worksteps guidance document.

As for form and format of audit opinion and sign-off, the Ministry of Finance will make the final decision.

ESEF is putting some practical challenges to audit firms, that still need to be sorted out

Conclusion

Of course, the above is just a high-level summary of a very useful and informative ESEF seminar. Plenty questions were raised during and after the presentations and you will likely have questions yourself. Do not hesitate to raise them, by adding a comment to this article or sending me a message.

Thanks to XBRL Netherlands, AFM and NBA for hosting this event!