The European Single Electronic Format (ESEF) mandate is now in its third year of implementation. The ESEF mandate, ever since its inception, has made a great deal of decision-useful financial information available to investors and various other stakeholders. And now, the financial information is set to achieve greater granularity for ESEF as it enters Phase 2.
In Phase 1, European companies had to tag their five primary financial statements with XBRL tags from the ESEF taxonomy. Phase 2 ushers in a new change in the form of Block Tagging. The issuers are now required to block-tag their notes and accounting policies submitted as a part of their financial reports.
Phase 2 adds a layer of complexity to the ESEF filing process but is bound to bring the stakeholders a whole new set of material financial information to help decision making.
In this blog, we will offer you five things that companies like yours must have in place before your 2022 ESEF reporting. But before we do that, it will be helpful to look at the recent changes in the latest ESEF reporting manual.
Changes in ESEF Reporting Manual 2022
- Status of AFRs prepared in the ESEF Format – The AFRs prepared in the ESEF format are the only official version of regulated information that meets TD obligations and can be filed with OAMs.
- AFR presented in More Than One Language – In countries with a legal or mandatory requirement to provide AFR in more than one language, the second language AFR needs to be in the same format as the first language and tagged relevantly. However, a different language version of the AFR will be considered a separate XHTML report contained within an isolated ESEF report package.
- Tagging of Disclosures – If the disclosure present in issuer’s annual report is not listed in Annex II, it should not be tagged.
- Text-Block Tagging – The notes and accounting policies accompanying the financial reports need to be tagged using text-block tagging. In text block tagging, the content of an entire section is tagged as a single block of text with one single tag and includes text and numeric data. We discuss block tagging in detail further in this blog.
- Duplicate Tags – In the past, numeric tags were identified as duplicates. The new guideline has expanded the scope to include non-numeric tags as well. Multiple parts of the section marked with the same tag should follow the iXBRL specification relating to continuation and concatenation.
- Tagging of Dashes and Empty Fields – The dashes and empty fields in the report need to be tagged appropriately. The issuer needs to define the meaning of the dash, if it represents “zero” fixed zero transformation is applied. When the information is nil or not applicable, the As Nil property needs to be set to true.
- ESEF Core Taxonomy Labels -Issuers are no longer allowed to override or replace standard labels of core taxonomy elements. If the standard label of core taxonomy is used, the issuer’s extension taxonomy label cannot have the same standard label of core taxonomy.
ESMA provides resources on its website to help the issuers meet the ESEF implementation requirements.
- ESEF Reporting Manual– Guidelines regarding the common issues faced during ESEF reporting.
- Example of Annual Financial Report in the ESEF format
ESEF Filing Deadline 2022
ESEF advises: “Stakeholders are encouraged to follow the guidance provided in this document as soon as possible but no later than for financial reporting periods starting on or after 1 January 2022.”
Now, moving on to the five things to have in place for your ESEF reporting 2022.
ESEF Reporting 2022: 5 Things to Have in Place
There are several stakeholders involved in the ESEF filing process, the compliance team, accountants, external auditors, designing agencies, and regulators.
Phase 2 of the mandate will be obligatory starting from financial reporting periods starting on or after 1 January 2022. Every stakeholder involved in this filing process must adhere to the new requirements of Block text tagging.
Let’s, look at 5 things to consider that can make the ESEF filing easy for issuers.
1. Ensure the Quality of Your Financial Statements
XBRL can find errors, discrepancies, and inadequacies in the financial statement. Issuers are, therefore, compelled to take a closer look at the quality of their financial reports. Financial data are public information, and incorrect financial facts can impact an organization’s reputation. Experienced XBRL professionals, well-versed in ESEF taxonomy, ensure that the financial information provided by a company is accurate and transparent. They also make the ESEF filing much smoother.
Some of the considerations concerning financial statements within the context of ESEF filing are
- Incorrect Use of Signs – A value in the financial statement is either positive or negative based on the contribution it makes. In the XBRL format, a value is interpreted based on the definition of the concept it is being reported against.
- Inconsistent Duplicates – In a financial report, one financial fact is used in multiple sections, but their value should be the same throughout the document. Tagging ensures that identical facts and their values are consistent across the document. If they are not, a case of inconsistent duplicates arises.
- Calculation Inconsistencies – When the numbers don’t add up in the financial report, calculation inconsistencies arise. It can be due to human error, a rounding error, or a simple typo. The limitation of XBRL is its inability to make a distinction in the rounding error accurate to the nearest thousand or million, which leads to inconsistencies.
- TRR – Transformation Rules Registry- A financial report as an iXBRL file published in the ESEF consists of two layers, the technical and the visual layer. If a financial fact is only available in the technical layer it will be consigned to the hidden section. However, there is a limitation on what can go in the hidden section determined by the Transformation Rules Registry (TRR). If no transformation rules apply the fact can go to the hidden section. However, monetary values cannot be in the hidden layer.
- Redundant Labels – We elaborated on this point in the previous section. The standard labels of core taxonomy should not find a presence in the extended taxonomy of the issuer. This approach not just creates redundancy but may also compromise the transparency of the document.
- Reporting Dates and Periods – Annual reports created in ESEF format with XBRL tagging often face the problem of tagging facts with the wrong date. XBRL has different conventions to report dates and periods for tagging purposes.
2. Adhere to a Time Frame
Time is of the essence when it comes to ESEF filing. The involvement of multiple stakeholders and multi-stepped processes at each stage requires defined time frames to meet the ESEF deadline. It is important to avoid last-minute rush and ensure auditor feedback and changes get accommodated.
ESEF requires documents in the XHTML format. Design agencies need to follow the Design Reporting Guidelines to ensure IDML file-generated renders correctly in the XHTML format. The ESEF mandate will have further specifications like the type of image and hyperlinks allowed.
There should be a scope of buffer time to accommodate feedback and suggested changes and correct any errors.
3. Learn all About the Block Tagging Requirements
As per the latest addition to the ESEF reporting manual, issuers are required to tag the notes and accounting principles accompanying their IFRS consolidated financial report. Annex II of the RTS of ESEF contains a list of elements defined within the “textBlockItemsType” to be referred to for marking up large pieces of information like accounting principles and notes.
But Block Tagging in ESEF Reporting is a little different. Let’s understand how.
- 250 Mandatory Tags – The tagging process is extremely granular with an extensive list of 250 mandatory tags. These tags will apply to corresponding disclosures in the financial statements. Consequently, information pieces must be multi-tagged if they correspond to more than one tag from the mandatory tag list.
- Non-Contagious Text Block Tags – Multiple tagging will lead to a greater degree of overlapping and text block tags which are non-contiguous
- Appropriate Tagging – To select the appropriate tag, ESEF Reporting Manual advises considering the accounting meaning of the tags, especially when multiple tags are used. When tagging the contents of a table, ESMA recommends using the lowest level of graduality for block tagging.
A preliminary markup or the first draft of tagging using the previous year’s financial data that can be reviewed, validated, and converted by your service provider can help catch errors and plan better for the busy season.
4. Plan for Validation and Test Filing
Testing and validation before the actual filing can reduce stress for the issuers. Most exchanges have a pilot program that helps issuers test their XBRL tagging or the entire ESEF report. The Italian Business Register allows Italian filers to check for data quality issues before submitting their reports to OAM.
If there is no pilot program, several independent validation tools in the market can ensure your report meets the ESEF requirements. A simple conversion of the document from PDF to XHTML can display errors and issues that need fixing.
If choosing an ESEF Filing service solution, a platform with inbuilt validation and testing ensures zero errors before the final submission. Test filing at least three days before the actual filing helps avoid last-minute surprises.
5. Timely Auditor Involvement
Diverse group of stakeholders use Annual Financial Reports to make critical business and investment decisions. Therefore, ESEF requires qualified external statutory auditors or audit firms to examine the credibility and authenticity of the financial information provided before the final filing takes place.
Auditors get involved at the last stage of the ESEF report sign-off. Planning together, establishing timelines, and communicating well can make the filing process smooth for the finance and accounts teams.
Audit firms will be undertaking audits within the purview of the new ESMA ESEF mandates for the first time. Therefore, we circle back to the point of early involvement to avoid delays and hassles and to accommodate last-minute changes and feedback.
European audit firms follow the regulations and guidelines of the Committee of European Auditing Oversight Bodies (CEAOB). Learn more here.
Choosing the right ESEF Reporting Solution
There are two aspects to be considered while choosing the ESEF Reporting solution for your organization.
A Focused Solution – The ESEF financial reports are to be submitted in XHTML and inline XBRL should be applied to consolidated IFRS financial statements. There are software solutions in the market that specifically cater to this need, and offer a point solution for iXBRL and XHTML-related requirements. However, these solutions are not integrated with your existing tools or workflows and lead to lower efficiency and quality. The pro is that they are easy to implement.
An Integrated Solution – A second option is to choose a Disclosure Management solution supporting ESEF filing requirements. A good disclosure management solution has features:
- Help automate the financial process with valuable features like collaborative workflows, real-time data collection, validation, visualization, and version controls.
- Support ESEF’s Phase 2- Block Tagging
- Integrated validator and test filing
- Credibility as a platform with XBRL expertise that offers consistent support
Choosing either option relies on specific requirements and the kind of support the finance and accounting team of a company requires for their ESEF filing.
Conclusion
The ESEF filing process is still new, and the new Block Tagging mandate may appear complex, but planning well can streamline the process and reduce last-minute stress.
Establishing effective timelines, preparing high-quality financial reports, choosing the right platform solution with XBRL/iXBRL expertise, test filing, and validation, can help your organization meet the ESEF reporting mandate.
IRIS CARBON ® is a cloud-based SaaS platform with two decades of XBRL expertise with features like Block Tagging, test filing, integrated validator with competitive TAT, and unlimited support to help you meet your ESEF compliance mandates.
