ESMA’s ESEF mandate for European listed entities made it mandatory to file Annual Financial Reports (AFRs) in ESEF iXBRL for the year ending 2020. The emergence of a global pandemic resulted in most European member states opting for a year-long postponement of the ESEF mandate. However, there have been quite a few issuers who have decided to buck the trend and go ahead with their electronic filing regardless.
We present some first-hand ESEF insights from early adopters, on their journey towards ESEF compliance. We hope these experiences facilitate smoother ESEF compliance for those who have chosen to hold back until the financial year ending 2021.
Where do we begin?
Whether you’re an early adopter who has already filed their first ESEF report, or a non-participant who has decided to wait and watch, there’s a very good chance you’ve already directed this question to your finance team at some point. Deciding how to proceed with ESEF compliance ultimately boils down to a choice between two things – an in-house or outsourced solution.
Choosing the former requires personnel who are equipped with deep accounting knowledge as well as expertise in XBRL. You would also require a tool for the subsequent xHTML conversion of your annual report.
Taking this process in-house is usually only seen in organizations looking to develop in-house XBRL competency in the long run. This will entail an outlay upfront, both in terms of time needed to be devoted to training with the technology as well as money invested in training resources.
Having worked with the XBRL standard for over 15 years, and in over 40 countries with different mandates, we have seen that while companies initially prefer to outsource their XBRL/iXBRL creation to an XBRL software/service provider, they begin to move these processes in-house when they start gaining familiarity with them.
Choosing the right ESEF reporting solution
There is a glut of tools out there that assist with all aspects of ESEF reporting. So what do you need to keep in mind when deciding on the best tool for you?
A product that is able to accurately tag numbers in your financial statements, as well as convert your stylized annual report into xHTML seamlessly and without loss in detail, is an absolute must. Do not compromise when it comes to this.
If your chosen product can also accommodate narrative reporting, i.e. tagging notes, then that’s just the icing on the cake. This will ensure that you’re ready to comply with most if not all of the forthcoming mandates related to broader phase 2 ESEF reporting.
Other factors that may weigh in on your final decision with regards to the choice of product or service might include – budget considerations, report complexity, corporate culture, and testimonies of reference customers.
Understanding taxonomy and tagging requirements
Taxonomies can be extremely complex and challenging for first-time filers. Where a concept doesn’t exist for a fact in your report, a custom tag or extension needs to be created. These extensions should be kept to a minimum as they affect ESEF reporting by decreasing the comparability of your report against others.
Apart from choosing the right tools, it helps to have the right experts by your side to guide you with regard to tagging, extensions, and anchoring. This is because these tools are not 100% automated and will need human intervention from time to time.
xHTML creation is a bigger deal than XBRL tagging
There has been an unprecedented focus on getting XBRL tagging right. However, the time and effort involved in creating an xHTML file that mirrors a company’s stylized PDF annual report has been underrepresented.
After analyzing some of the early ESEF filings, we found that one of the biggest challenges issuers are facing is to have their xHTML file look exactly like its highly stylized PDF counterpart. It has, therefore, proven crucial to choose a service provider and software that can facilitate this satisfactorily. Carrying out a test run with an ESEF vendor will help you evaluate the results for yourself. Ask the vendor you are evaluating to convert a short section of your stylized report into xHTML as a starting point.
Passing three levels of validations
There are three levels of validations that need passing to complete a successful ESEF filing. These are tool validations at the level of the ESEF service provider, the auditor, and finally the local regulator or OAM.
Issuers may pass one level but not the other. Therefore, it is critical to do a dry run with an older annual report, (perhaps from the year prior) ahead of the live ESEF mandate. It is wise to make sure your ESEF iXBRL package passes all 3 levels of validation. Of note is the fact that some OAMs have the facility to do a test filing, so it’s wise to check with your respective national OAM if that is possible.
The audit process and tackling last minute changes
In some countries, there are official guidelines for the audit of annual reports published in the ESEF iXBRL format. This means that every version of the annual report that is sent to an auditor needs to be audited for ESEF as well. Therefore, it is imperative to make sure your annual report publication schedule is well aligned with that of your auditor, leaving some buffer for contingencies.
Last-minute changes brought about by auditors and the Board result in increased back and forth leading to increased pressure to file on time. Not only does the design agency need to track and incorporate these last-minute changes, the ESEF vendor also needs to deliver an updated ESEF package on time, which in turn will be signed off by the auditor.
Creating a calendar where all stakeholders, both in the organization and outside of it (design agency, auditor, ESEF vendor) are in sync, is crucial to the success of your ESEF filing. Once again, dry runs and testimonies from your vendor’s reference customers are your best friend in order to tackle the aforementioned issues.
The key to a successful ESEF filing lies as much in diligence as it does in time management. Though submissions may seem complicated at first, with the right set of tools and personal guidance, your ESEF filing can be completed with minimal effort.