Ever since the European Single Electronic Format (ESEF) regulation was introduced, companies in the EU have been filing highly accessible and comparable annual reports in Inline XBRL. The new, digital format is said to have improved the quality of financial reporting in the EU region. However, errors continue to creep into ESEF reports. An analysis of 1,760 EU companies’ annual reports by IRIS CARBON® reveals that many financial reporting teams in the region are yet to make the best use of the resources and technology at their disposal to prepare high-quality ESEF reports. In this blog, we bring you specific insights and learnings from our analysis to improve your ESEF performance.
Where Are We with the ESEF Mandate?
The European Single Electronic Format (ESEF) regulation, which companies in the EU began to comply with for reporting periods beginning on or after January 1, 2020, is now in its third year of implementation. Phase I of ESEF, which involved the XBRL tagging of companies’ five primary financial statements, is now over. Phase II of ESEF, which requires companies to block-tag the notes to their financial statements, kicked in on January 1, 2022.
Scope of the IRIS CARBON® Analysis
Our XBRL experts analyzed the 2021 annual reports of 1,760 companies from 22 European countries and 27 industries. The companies included 264 large caps, 357 mid-caps, 1,022 small caps, and 117 others. Overall, these companies used XBRL tags to represent 210,225 concepts in their annual reports. They formed a total of 31,954 extension elements or customized XBRL tags.
To refresh the reader’s memory, we explain the ESEF report preparation process in brief. Companies can tie up with ESEF software or service providers to convert their annual reports into the iXBRL format. Teams involved in the reporting process need to understand the ESEF taxonomy and the XBRL tags that apply to their disclosures. The tagging process is carried out using special software which can generate reports in xHTML format. The specialist of an xHTML report is that it has a human-readable layer as well as a machine-readable layer. The human-readable layer retains the properties of a PDF annual report, with all its design elements, while the machine-readable layer contains the embedded XBRL tags. For high-quality ESEF reports, write to us at firstname.lastname@example.org.
About ESEF Errors and Warnings
Here’s a word about the mistakes possible in ESEF reports. The mistakes are of two types: Errors and Warnings. Errors can prevent ESEF files from being submitted to the regulator. They need to be dealt with promptly so that the ESEF filing is not jeopardized. Warnings are less serious but must be addressed if a company’s ESEF filing must be of high quality.
Country-wise Summary of ESEF Reporting Quality
Of the companies whose ESEF reports, IRIS CARBON® analyzed,
- 414 were from the UK,
- 217 from France,
- 142 from Finland,
- 132 from Denmark, and
- 119 from Sweden.
The rest were from various other countries in Europe. The top five countries with the most errors in ESEF annual reports were
- Latvia (100%),
- Denmark (99%),
- Germany (92%),
- France (80%), and
- Malta (73%).
Country-wise Quality Summary
Industry-wise Summary of ESEF Reporting Quality
Our analysis revealed that companies into financial services had the most errors (3238), followed by Industrials (1878), Information Services (1462), Consumer Staples (1136), and Oil and Energy (1019).
Industry-wise Summary across EU and UK
An Overview of ESEF Errors
The most common ESEF errors we noticed in 2021 are Extension Taxonomy Guideline error, Technical errors, Label Guideline error, Calculation Linkbase error, and Anchoring Guideline error. Over 400 companies had the Extension Taxonomy Guideline error in their annual reports, while 135 companies made Technical Errors, 55 companies had the Label Guideline Error, 106 companies failed to prepare a Calculation Linkbase, and 93 companies had the Anchoring Guideline error.
- The extension taxonomy guideline error occurs when there are schema errors due to invalid characters in an iXBRL document and wrong are units assigned to numeric facts. Non-dimensional values must be present in the ‘Line items not dimensionally qualified’ section defined under the definition linkbase.
- Technical errors include hidden fact values in the iXBRL document which do not get displayed and the Language of the report not being defined in the iXBRL file. Inline XBRL documents must not contain any references to resources outside the reporting package
- Label Guideline Errors occur when duplicate labels are defined in the extension taxonomy.
- Taxonomy Package errors occur due to non-compliance with the latest taxonomy package specification.
ESEF 2021 Error Report Overview
An Overview of ESEF Warnings
The top five reasons why companies received validation warnings in their ESEF reports were Calculation Inconsistencies, Label Guideline warnings, Extension Taxonomy guidelines, Taxonomy Package warnings, and missing mandatory tags. Over 530 companies had calculation inconsistencies, 313 had Label Guideline warnings, 744 had Extension Taxonomy Guideline warnings, 695 had Taxonomy Package warnings, and 848 missed mandatory tags.
- Calculation Inconsistencies occur when the numbers in the financial statements do not sum up.
- Label Guideline warnings occur when standard labels do not correspond to the language in the financial report.
- Extensions Taxonomy Guideline warnings occur when extension taxonomy elements do not follow the LC3 convention or when the extension taxonomy defines abstract concepts.
- Taxonomy Package warnings occur due to non-conformance with XBRL Taxonomy Packages 1.0 specification.
ESEF 2021 Warning Report Overview
An Overview of Extensions
Companies can form Extensions or custom XBRL elements when they do not find elements that correctly represent their disclosures in the ESEF Taxonomy. Extensions must be formed sparingly – only when companies are sure that no appropriate ESEF Taxonomy elements exist for certain disclosures.
In our analysis, we found that the insurance industry accounted for the greatest number of extension elements (30%), followed by financial companies (22%), HR and support services (19%), logistics and transportation (19%), and gambling (18%).
Extensions by industry
Lessons for Companies from the 2021 ESEF Filings Analysis
- Annual report in PDF format should be searchable without any images.
- No external links or references must be embedded in the annual report
- Size of the xHTML file should not exceed 100 MB
- Formatting, text overlapping, and font issues must not appear while auditing the ESEF reports
- The naming convention used for consolidated and standalone HTML/xHTML documents should be as per ESEF Guidelines
- Ensure software vendor supports latest validation rules defined in the ESEF Reporting Manual and Conformance Suite
- Ensure all validation errors are corrected and there are no errors in the document
- Auditors should provide the audit report to the client well in advance so any changes may be integrated in the final iXBRL/xHTML document
- Make sure a test filing with the national regulator is done at least a week ahead of publication
The Final Word
As we have mentioned before, the ESEF format has increased annual reporting quality in the EU region. However, companies need to work harder to ensure their reports do not have mistakes of the kind our analysis mentions. ESEF reports need to be of high quality if companies and their stakeholders have to reap the benefits of the iXBRL format. The company would do well to tie up with ESEF software and service providers with deep expertise in the iXBRL format so that they may file high-quality ESEF reports.