ESEF offers an opportunity to improve the financial reporting process
Article first published on Executive Finance on November 20, 2019
Listed companies will have to deal with the European Single Electronic Format (ESEF) from 1 January 2020. That is the regulation of the European market regulator ESMA to prepare financial reports in XHTML and to tag specific data. This should ensure that the reports are easy (and machine) readable and comparable. More transparency in reporting. What are the implications for securities-issuing companies?
The regulation applies from the 2020 financial year. In practice, it means that the reports from 2021, which report on the previous year, must comply with the new rules. ESEF applies to all listed organizations that are active in the EU. The AFM states: “For the time being, the obligation only applies to the primary consolidated statements, such as the balance sheet and profit and loss account prepared on the basis of EU-IFRS. The obligation to tag the notes to the consolidated statements follows at a later stage. The latter is done via so-called block tags. "
All tags together form taxonomy
Tagging is the central concept in the ESEF regulation. Simply put, the items in an annual statement must have a tag created in inline XBRL (iXBRL). All these tags together form the taxonomy of reporting. This makes it easier to read and compare the annual accounts of listed organizations. The tags attached to items bring transparency and organization to the financial statements.
Add your own extension to taxonomy
The number of established tags is large. But if the closest core element of taxonomy were to misrepresent the accounting significance of the information provided, then it is necessary to add a personal extension to the taxonomy. Such an extension must then have a link with existing tags. Connecting an extension with the tag is called anchoring.
Closely linked to XBRL reporting
The ESEF system is closely linked to the regulations for XBRL reporting. XBRL tags have been used in the US for ten years. Extensions to taxonomy with extensions are also allowed there, although it was soon discovered that it is allowed to expand unlimited, leading to a proliferation of extensions. And that didn't work as well as it was hoped. In the ESEF, extensions now get a context with the anchors. The extension is anchored with the tag that comes closest.
Addition within the Transparency Directive
Companies that are subject to the ESEF regulation will, in principle, have another year to become ESEF-compliant. "ESEF is in itself a small addition to the overall structure of the Transparency Directive," said Andromeda Wood, senior director of data modeling at Workiva. Prior to joining Workiva, she worked for the International Accounting Standards Board in the area of IFRS taxonomy and technology. “ESEF only changes the format of the reporting. However, that can also have a major impact on internal processes and workflows. ”So her message is also: don't wait too long with measures to meet ESEF requirements.
During a specially organized ESEF workshop, Workiva demonstrated, among other things, how tagging, adding extensions and anchoring that extension works in the Workiva Platform. The roadshow, with which Workiva visits a number of European cities, is intended to make organizations aware of the new directive and the impact it has and to help customers implement it.
ESEF follows IFRS taxonomy
An important point for attention is also the annual update of the ESEF taxonomy. He will follow the update of the IFRS taxonomy quite closely. "In fact, the ESEF taxonomy differs only very little from that of the IFRS," says Wood. Because of that order, the final update of the ESEF taxonomy is not expected to be published until late in the year. Wood therefore recommends following the developments in the IFRS: “If you follow the rule changes in the year and look closely at the updates in the IFRS taxonomy, then you are well prepared for the updates in the ESEF taxonomy if they become published. Moreover, it is important to work with the right provider that makes the updated taxonomy available soon after publication. ”
Easily add tags
Timothy Melis, Euronav's finance manager, explained during the roadshow what the ESEF directive means for his company. Euronav is a large independent tanker company and the company transports crude oil. Euronav is listed on the NYSE. Melis: “The tags are easy to add in the system and the anchors for the extensions are created automatically. We are actually already ready for the ESEF and the adjustment itself has had little impact on the total accounting processes and workflows. ”The advantage is that the tags that are linked to items will be taken over the following year. That means you don't have to start blank every year.
Great reason for process improvement
Although the European Single Electronic Format is primarily a technical directive and only a small part of the total Transparency Directive, listed companies will have to devote time and attention to its implementation. Wood: “Take the time for the technical implementation, but also ensure that the financial and compliance teams know what is expected of them. Consider a dry run to test the workflows, also look at the design requirements and test whether the software solution supports easy tagging, adding extensions and anchoring. Relatively little has changed in the area of financial reporting in the EU in recent years. The new ESEF guidelines are therefore an excellent reason to improve the processes. So don't just see the ESEF as a new requirement.
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