The ‘hidden’ requirement of the ESEF mandate: Creating and Filing your Company Taxonomy

Since the ESEF mandate came into effect this year, one can hear/ read a lot about annual reports being required to be submitted in xHTML/iXBRL. What you may not have read much about is that the annual report in iXBRL is not the only thing you are required to file. This is an oft overlooked piece of the ESEF mandate-  issuers are required to submit not just an iXBRL tagged annual report, but also their company taxonomy. Read more about Taxonomy and Tagging concepts in our earlier article.

For each issuer, its ‘Company Taxonomy’ will include only those elements from the ESMA taxonomy that are applicable for its own disclosures, as well as custom elements that it has created (also called extensions). Extension elements are created to tag those items that don’t have an exact match in the ESMA taxonomy. Such extension elements, once created, are to be included in the company taxonomy, and also are required to be anchored to the standard ESMA element that closest matches it in meaning.

To create a taxonomy, four ‘linkbases’ are required to be created:

Presentation linkbase: Defines how XBRL concepts should be presented & displayed. This replicates the line items as one would see them in the financial report.

Calculation linkbase: Defines the arithmetical relationship between the concepts used in the company taxonomy. This ensures that all tagged data is accurate and ‘adds up correctly’.

Definition linkbase:  Defines other additional relationship between elements. For example: a relationship can be defined between elements of general nature and elements of specific nature, or a relationship can be defined between elements which can be categorized based on parameters (total sales and sales by geography, for instance).

Label linkbase:  : Defines the labels of the elements as reported in the annual report. This ensures that users of XBRL read the company specific labels along with the XBRL tags (company may report Sales, while the ESEF taxonomy has element ifrs-full_Revenues, with a standard label ‘Revenues’. The company can define a Company specific label named ‘Sales’).

Users/Filers often feel it is very difficult to prepare and structure their Company taxonomy.  That is why, perhaps, many users prefer that they not get involved with the company taxonomy. And just let the software create it in the backend.

Should the company taxonomy be hidden?

Even if some software create company taxonomies automatically/in the backend, it is advisable that the created company taxonomy be visible to users. Here’s why:

To solve validation errors/warnings: Issuers while preparing the iXBRL document need to solve various types of validation errors or warnings in order to submit an error free iXBRL document to the regulator. Without seeing the taxonomy, it is harder to resolve validation errors.

We illustrate this with an example.

Below is the extract from the income statement of a Company:

The ‘hidden’ requirement of the ESEF mandate: Creating and Filing your Company Taxonomy

Here, the entity has presented the value of ‘Cost of goods sold’ in brackets/Parenthesis to represent that this is a negative value. Many entities present their expenses this way. This could lead to a problem in XBRL. In the taxonomy, each concept that is used has a ‘weight’ (depending on whether it is debit or credit), and that weight is used to determine whether the value tagged against that concept is added or subtracted, while setting up the arithmetical calculations in the calculation linkbase of the taxonomy. Some of these arithmetic calculations are already defined in the ESEF taxonomy.

In this example, in the ESEF taxonomy: Revenue (credit) has a weight of +1 and Cost of goods sold (debit) has a weight of -1, and Gross Profit has a weight of +1.

Line Items

Value reported for year 2018/19 Element to be used Balance Type Weight in Company Taxonomy

Revenue

9433.9

ifrs-full_Revenue

Credit

+1

Cost of goods sold

-6962.7

ifrs-full_CostOfSales

Debit

-1

Gross profit

2471.2

ifrs-full_GrossProfit

Credit

+1

Representation in the taxonomy:

The ‘hidden’ requirement of the ESEF mandate: Creating and Filing your Company Taxonomy

Therefore, as per the ‘Calculation linkbase’ rules defined in the taxonomy, whatever value is tagged in Cost of Goods Sold will automatically be deducted from the value tagged in Revenues, to get the derived value of Gross Profit.

If the value of ‘Cost of goods sold’ is tagged as -6962.7 in XBRL (following the style of the original company report), then XBRL validations will throw a calculation inconsistency. That is because the ‘negative number tagged’ and the ‘negative weight already assigned in the XBRL taxonomy’ will cancel each other out. As a result, Cost of Goods Sold will get added to Revenues, rather than subtracted. The amount of Gross profit will become 16396.6 mn Euro in XBRL, as opposed to the actual/ reported figure of 2471.2 mn Euro.

The ‘hidden’ requirement of the ESEF mandate: Creating and Filing your Company Taxonomy

To resolve this calculation inconsistency, the value of ‘Cost of goods sold’ need to be tagged as positive in XBRL. This will ensure that the calculation works correctly in the calculation linkbase.This is one small example, there are many validation rules which will need you to access your company taxonomy to errors that may arise as you prepare, review and finalize your iXBRL report.

Assigning of the correct (company document defined) preferred label:

Another reason to have access to the company taxonomy is about faithfully representing the items in XBRL the way they are represented in the original annual report.

In creating a taxonomy, for each element (whether picked from the ESMA taxonomy, or custom created by companies), there is a place where companies can define their ‘preferred label’. Using the same labels in XBRL as the labels in the original company report makes it easy to match up the XBRL tags with the document. This is useful for review by regulators and auditors, and also helps companies present their XBRL data in the same way to a wider audience, with the same labels as in their original report.

The ‘hidden’ requirement of the ESEF mandate: Creating and Filing your Company Taxonomy

Remember that the pains you are taking to ensure a perfect annual report should also reflect in a perfect iXBRL document, which is only possible with a perfectly made taxonomy. And while all good software automate parts of the company taxonomy creation, the best software also allow you to see and edit what is created, so that you can ensure the taxonomy your stakeholders view, and what you submit to the regulator is perfect too.

IRIS CARBON® is your one-stop solution for all your ESEF iXBRL compliance reporting requirements. Our world-class solution backed by our expert XBRL team ensures that your documents are of the highest quality while making the entire process completely hassle-free.

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The ‘hidden’ requirement of the ESEF mandate: Creating and Filing your Company Taxonomy

The ‘hidden’ requirement of the ESEF mandate: Creating and Filing your Company Taxonomy