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What You Need to Know About the ESMA Mandate and ESEF Reporting

ESEF Reporting
XBRL
What You Need to Know About the ESMA Mandate & ESEF Reporting
6 min read
AUTHOR:

Liv Watson

Senior Advisor and Digitisation Lead
Published: 20 August 2020
Last Updated: 30 June 2022

Digital transformation is everywhere, including on the agenda of the European Securities and Markets Authority (ESMA). The EU's broader goal for a single digital market strategy includes requiring issuers to prepare their annual financial reports in a single electronic reporting format. Any new requirements from ESMA impacts issuers' regulatory compliance teams, and the mandate for a standardised EU single electronic data format is no different.

This presents an opportunity for compliance teams to enhance their business reporting processes. Below are some key facts every compliance officer and reporting team should know about the single electronic reporting format rule.

The European Single Electronic Format, or ESEF, is a rule mandating that issuers on EU regulated markets use a single electronic reporting data format in preparing their annual financial reports. With this rule, EU issuers will be required to produce annual financial reports that are machine-readable and more easily discoverable, bringing EU capital markets into the digital information age.

The 2013 EU Transparency Directive (TD) sets the rules for ESMA and the transparency requirements of issuers. The EU Transparency Directive assigned ESMA the responsibility of developing regulatory technical standards (RTS) for the single digital reporting format. On Dec. 18, 2017, ESMA published the final draft for the RTS, setting the groundwork for ESEF reporting.

Starting Jan. 1, 2020, all EU issuers (approximately 5,300 EU companies) will be required to use the global open source XBRL electronic data reporting format when drawing up their financial reports. According to the directive, each EU member state must provide an Officially Appointed Mechanism (OAM) that is responsible for the storage and dissemination of regulated data. Therefore, additional requirements may be required on a national level.

  • All issuers of EU regulated markets must prepare their annual financial reports in XHTML, which can be opened with standard web browsers and displayed as intended by the issuer. As a result, reports will be more consumable by the general public.

  • All IFRS financial statements within the annual financial report shall be labeled with eXtensible Business Reporting (XBRL) standard tags, which make the labeled disclosures structured and machine-readable.

  • The XBRL tags will be embedded in the XHTML document using the Inline XBRL (iXBRL) technology. XBRL tags are encapsulated in the XHTML document within a single document set, which reduces duplicative efforts.

  • ESEF reporting using XBRL requires the existence of a taxonomy, which is a given hierarchical structure used to classify financial information. The IFRS consolidated primary financial statements—such as income statement, balance sheet, etc.—will be marked up in detail, whereas the notes to these financial statements will carry markups that apply to whole sections (i.e., block-tagging). This makes the report easier to scan and organise by both machines and people.

The ESEF mandate will add a new layer to traditional XBRL tagging. But first: What is XBRL, and how does it work? What is the difference between XBRL and Inline XBRL? Here is a brief primer on the three main components of XBRL:

  1. XBRL specification
    The XBRL specification provides the fundamental technical definition of how XBRL works. The XBRL Specification Documentation, published by XBRL International, sets out the technical guidelines for XBRL and is aimed primarily at software professionals who are seeking to build tools that will directly create or consume XBRL documents.

  2. XBRL taxonomy
    XBRL taxonomies are dictionaries of business terms and their corresponding tags—for example, the IFRS Taxonomy. The enormous advantage of universally accepted taxonomies, such as IFRS, is that they allow for a systematic way of naming and organising financial information into groups that share similar characteristics, thereby enriching the user experience and streamlining the preparation processes.

    The idea behind this is simple. Instead of treating information as a block of text, an XBRL taxonomy provides an identifying tag for each individual item. These tags are standardised regardless of company, industry, country, or accounting regulation. Business information reported in XBRL can be easily extracted for reuse in other reports, analytical software, and databases while retaining its original, meaningful context.

  3. Inline XBRL or iXBRL specification
    The Inline XBRL or iXBRL specification provides a mechanism for embedding XBRL tags in XHTML documents. This allows the XBRL benefits of tagged data—such as consistency and accuracy—to be combined with a reader-friendly presentation of a report, which is under the control of the preparer.

With the ESEF regulation, forward-thinking issuers have an opportunity to assess their current reporting processes. An issuer can implement the mandate in ways that substantially change its reporting processes and thus improve financial reporting quality. Specifically, a cloud-based XBRL implementation strategy will improve reporting reliability as well as efficiency and sustainability, which, in turn, leads to better data governance.

With the economic uncertainty that 2020 has brought with it, for some organisations, it may not be the right time to think about process transformation. However, you should still be looking to implement the ESEF in a way that adds value to your process and changes it for the better while still offering the option to upgrade to a more complete platform when you are ready.

Alternatively, an issuer could choose to only meet the requirements with a minimum amount of disruption, opting to maintain outdated, manual efforts and undermining the goal of the single digital market strategy. This would still require preparing the XBRL document at the end of the existing process. However, without actually transforming the business reporting process, it could result in unnecessary costs and complexity, whether due to outsourcing the XBRL tagging or adding redundant steps.

Annual reports remain a crucial component for a full understanding of a company's financial standing. Moving to an electronic reporting environment will facilitate analysis, comparability, and accessibility of issuers’ annual financial statements for internal and external stakeholders alike.

Compliance teams should embrace the adoption of the new ESEF standard as an opportunity to take a leap forward in digitalising the business reporting process, rather than seeing the new ESMA regulation as a reporting burden.

Check out the helpful tips and guidance in these resources:

Editor's note: This blog post was originally published 6 April 2018, and has been updated.

About the Author
Liv Watson
Liv Watson

Senior Advisor and Digitisation Lead

Liv is on secondment to the IMP, leading the IMP’s facilitation on digitisation. She also chairs the IMP’s Non-financial Digital Transformation Working Group, an initiative aiming to determine if and how non-financial reporting lends itself to structured data using the open international standard for digital business reporting, XBRL.

As the co-founder of XBRL and the XBRL International consortium, Liv works globally with leading market regulators, accounting associations and institutions. She has held several speaking engagements on financial and business reporting standards, its benefits, potential applications and adoption in corporate governance and social responsibility reporting. Liv has also held several leadership positions related to XBRL, including as a member of the IFRS XBRL Advisory Committee, the XBRL International Steering Committee and the XBRL Standing Committee.

Liv has authored one of the Institute of Management Accountants (IMA)’s most successful professional courses, “Accounting System Technology for the 21st Century”, and published numerous articles for international publications and journals. She is an editorial board member of the “International Journal of Disclosure and Governance”, as well as the co- and contributing author to several books, including “XBRL for Dummies”, and the “Governance, Risk and Compliance Handbook”, “The Landscape of Integrated Reporting,” and “Effective Auditing for Corporations”.

For the past 10 years, Liv has also been the Senior Director of Strategic Customer Initiatives at Workiva Inc., which has served over 70% of fortune 500 companies and more than 200 EU companies with their statutory reporting requirements.

Liv is a long-standing member of the IMA and is an Advisory Board Member to the University of Southern Indiana and the University of Albany. She is Norwegian and currently based in Amsterdam.

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