ESEF Taxonomy Updates: How to Stay Ahead of the Process

With the publication of the Regulatory Technical Standard (RTS) on 29 May 2019, the European Single Electronic Format (ESEF) passed into law. Following this, the European Securities and Markets Authority (ESMA) published a draft amendment to the RTS to update the core taxonomy to the latest version published by the International Financial Reporting Standards (IFRS).

On 30 Sept 2019, the draft amendment was adopted by the European Commission (EC), which means that publication in the Official Journal of the European Union is expected to take place before the end of the year.

You might think that the ESEF taxonomy update process is something you do not need to concern yourself with. However, if you do not understand the process—and its inherent uncertainty—you may be faced with a lot of unnecessary work and a reporting timeline that is dramatically impacted.

What is the ESEF taxonomy?

The ESEF taxonomy provides a type of dictionary of financial reporting concepts for use in Extensible Business Reporting Language^TM (XBRL^®) tagging. It is based on the IFRS Taxonomy, as published by the International Accounting Standards Board (IASB). In fact, the ESEF taxonomy makes very few changes to the IFRS taxonomy.

The ESEF taxonomy is published in two ways:

1. A list of the items in that dictionary is included as a PDF in the RTS to form part of the law. That is why taxonomy updates require RTS updates.
2. The taxonomy is also published in XBRL for use by software vendors supporting the Inline XBRL^® creation.

Publishing the taxonomy labels in the RTS also ensures that the standard and documentation labels in the taxonomy are translated into 23 languages.

What is included in the ESEF taxonomy updates?

The core taxonomy originally included in the ESEF is the 2017 IFRS Taxonomy. The draft amendment replaces that version with the most recent one published by the IFRS Foundation in March 2019.

That is a jump of two years, which is a longer period of time than is usually seen in an update. The upcoming ESEF taxonomy includes updates for accounting changes, such as insurance contracts (IFRS 17 and IFRS 9), prepayment features with negative compensation and annual improvements from 2017 and 2018. It also includes new common practice items for fair value measurement (after the fair value measurement post-implementation review) and taxonomy improvements.

Going forward, the ESEF taxonomy will be amended on a yearly basis to reflect updates to the IFRS Taxonomy.

The uncertain timeline

Each year, the process of updating the ESEF taxonomy follows the (approximate) timeline below:

• March (approximately): An annual compilation is published by the IFRS Foundation
• June (approximately): The IFRS Foundation produces supporting validations (using a standard called XBRL Formula).
• Once the IFRS Foundation is finished: ESMA can begin to prepare updates to the ESEF taxonomy files. ESMA then updates the RTS with the new list of items and it goes through the EC approval process.
• Once the EC has approved the revised RTS: The process to provide translations into 23 languages can begin.
• By year-end: Depending on the timing of the translations, ESMA is able to publish an updated set of XBRL files toward the end of the year.

2019 is the first year that we will see this process in action.

Within this process, there are no firm dates and no guarantee in regard to how long the EC approval process will take. The entire process is loaded with uncertainty, to the degree that even the taxonomy is not guaranteed to be published by the end of each year.

Why is this process important?

Being aware of the timeline above, the accounting changes that are made over the year and the IFRS Taxonomy updates will help put you in good position to make the best use of the related ESEF taxonomy updates when they are published.

If it looks like the ESEF taxonomy will be published later than expected, it is very important to work with a solution provider who can promptly provide you with the taxonomy on their platform soon after it is released.

If you are not able to update the taxonomy in time, then you will need to create unnecessary extensions. Not only does this make a bad impression in the filing, you will also have to update the extensions with the following year’s taxonomy, creating more work in the process.

Additionally, if your solution provider is unable to quickly update their platform with the new taxonomy, then you may be forced to rush your tagging. This means that you may not be able to work in a disclosure management system and take advantage of features such as parallel tagging.

You will effectively be forced into bolting the tagging process on to your traditional workflow. This will dramatically impact your reporting timeline since you will not be able to tag right up to the end. Do not forget that whether you are using an outsourced service or not, you will need to review the tags which, again, will further impact your timeline.

Finally, for countries who do not speak English, it is important to understand the timeline above because they will not get the translated taxonomy in their native language until almost at the end of the process.

How to stay ahead?

The time between March and December, when ESMA is finalising the yearly amendments to the ESEF taxonomy, does not need to be a barrier to preparation. By understanding the process, there are things you can do to get ahead.

You know the ESEF taxonomy is based on the IFRS Taxonomy, which is released in March. You also know the XBRL formula is published around June. This formula provides additional guidance about how to interpret items in the IFRS Taxonomy, which items will be negative and much more.

If you have misinterpreted something, or if you are not entirely clear about the new accounting standards, Workiva will also keep you up to date so that when you are tagging with the new ESEF taxonomy (after it is published), you are not faced with multiple errors.

With the incredible amount of uncertainty in this process, it is very important to work with a solution provider who keeps you informed and quickly updates the taxonomy on its platform after it is released. Additionally, working with a solution provider that offers support, along with a great professional services team with accounting expertise, is crucial to a pain-free filing.

If you are looking to learn more about how Workiva can support your first ESEF filing, reach out to us and let us know how we can help.

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