As a quick recap of the last two articles — we zoomed in on quality with a specific reference to ESEF reporting. Towards that, we looked at what companies must submit to their regulators under the ESEF mandate, namely an instance document and a company taxonomy. Then we considered tagging or the task of mapping the line items in your annual report with their corresponding accounting concepts in the ESEF taxonomy. We closed with a brief note about the issue of reversing values or signs that companies can avoid.
Extension elements, and how they aid quality
The ESEF taxonomy is an exhaustive list of over 5,000 accounting concepts, out of which companies must narrow down to 100-200 concepts that pertain to their disclosures. In case of disclosures for which companies do not find a ready taxonomy concept to tag with, they may create what is known as custom tags or extension elements.
Here’s an example of an extension element: xyz_CrudeOilAndElectricityRevenue.
While a tag from the ESEF taxonomy comes with the prefix ‘ifrs-full’, a custom tag needs to carry the company code or symbol as its prefix (‘XYZ in the example above).
Extension elements can enhance the quality of financial reports by helping companies convey information beyond the concepts in a taxonomy. And they aid a company’s investor communication when used correctly. However, companies must make sure not to use an extension element at times when a right fit element is already available in the ESEF taxonomy.
In the early years of the US SEC’s XBRL mandate, it was found that companies were using extension elements in their financial statements even when they did not need to. In fact, some companies had begun using extensions with literally 50% of their tags. Not only do regulators frown upon such a practice, but it also raises questions about the quality of reporting.
The IRIS Quality Study findings on extensions
In the very first article of our ESEF Quality Series, we mentioned the IRIS Quality Study in which the primary financial statements of 707 companies in 27 European Union countries and 27 business sectors were converted into iXBRL.
While the primary purpose of this study was to understand if EU listed companies could leverage the iXBRL standard in ESMA’s ESEF mandate to raise the quality of their financial reporting, one leg of the study was an assessment of the ESEF taxonomy — to understand how “complete” the ESEF taxonomy was, and how many custom tags filers would need to create.
A group of 50 XBRL experts in IRIS, who are extremely familiar with the ESEF taxonomy, IFRS standards, and XBRL conversions around the world, conducted the study. Here are some of our findings on extensions –
- Companies made an average of 142 disclosures in their primary financial statements, with 15 of those disclosures needing extension elements. So, 10% of the disclosures in the primary financial statements needed custom tags or extensions.
- For some industry sectors with unique disclosures – for instance, BFSI and real estate – the disclosures averaged at 160, and extensions at 12-15%.
Our findings are a good indication of what percentage companies should aim to keep their extension elements at. It would serve companies well to check the ESEF taxonomy thoroughly for appropriate elements that would cover their disclosures and go for extensions only when satisfied that no such elements exist in the taxonomy.
Anchoring for easy comparability
ESMA is the first regulator to require companies to ‘anchor’ any extension or custom elements they create to their nearest accounting concepts within the ESEF taxonomy. While companies use extensions to make unique disclosures, anchoring serves the critical purpose of making such disclosures across a group of companies comparable.
Here’s an example of anchoring:
The custom tag ‘xyz_CrudeOilAndElectricityRevenue’ could be anchored to the tag that represents revenue in the ESEF taxonomy — ‘ifrs-full_Revenue’.
Custom tags can be anchored to ESEF taxonomy concepts with an accounting meaning that is broader or narrower in scope. A taxonomy concept with a broader scope is one that covers the meaning of the custom tag in its entirety, while a concept with a narrow scope is one that relates to the custom tag to a limited extent only. The task of choosing the right taxonomy concepts to anchor custom tags with requires utmost care so that these company-specific disclosures lend themselves to comparability when third-party XBRL tools analyze a large number of documents.
That brings us to the end of a note on extensions and anchoring. Extensions are a great way to proactively make disclosures that go beyond concepts in the ESEF taxonomy. However, companies must not use extensions indiscriminately, because that would bring down the quality of annual reports, while also hurting comparability across companies.
In our next article, we will talk about how you could ensure that your company taxonomy, which is read along with your instance document, is also of top quality.