We are now in the third year of the ESEF iXBRL mandate’s implementation. The European Securities and Markets Authority’s objectives for the digital reporting mandate include transparent financial reporting and high-quality data production. By all accounts, those objectives are being met. But companies must constantly assess their compliance with requirements that ESMA periodically publishes in the form of an ESEF Reporting Manual.
The most recent ESEF reporting manual was published in August 2022. Some of the requirements it stipulates are as follows:
- Company annual reports in the ESEF format will be considered the ‘official ESEF version’ containing ‘regulated information’.
- Company annual reports prepared in formats other than ESEF, such as PDFs, will NOT be considered the ‘official ESEF version’.
- If companies are legally bound to present annual reports in two or more languages, then the reports must be prepared in ESEF format using the same taxonomy elements and extensions.
- If there is NO legal requirement to present annual reports in multiple languages, then companies can prepare a single ESEF document. Additional language versions can be in other formats (such as PDFs).
- Companies must use elements in Annex II to markup disclosures if the corresponding information is present in the notes to financial statements.
The Case for High-Quality ESEF iXBRL Reporting
While the ESEF reporting manual is to be considered as a guide to complying with the ESMA’s requirements, it does not specifically mention the need to ensure that machine-readable data is of high quality. Inline XBRL or iXBRL is a standardized, machine-readable format, which makes it easier for investors and regulators to access and analyze information. High-quality ESEF iXBRL reporting is critical because it helps increase transparency and accountability for companies. Increased transparency can help to build trust and confidence in the company, which can ultimately lead to better financial performance. High-quality reporting also helps to improve the efficiency of financial reporting through an automated reporting process, which reduces the time and resources required for reporting. Additionally, the iXBRL format makes it easier for companies to share financial information with stakeholders, reducing the time and effort required to answer questions and provide additional information. Further, high-quality reporting helps ensure compliance with the ESMA’s regulations. Companies that use high-quality iXBRL reporting tools and processes can ensure that they are meeting all ESEF requirements.
Importance of Data Quality for Financial Reporting
High-quality digital financial reporting brings benefits in the form of improved engagement and association with various business stakeholders such as national regulators, investors, analysts, and lenders. We describe the benefits below.
Enhanced Regulatory Compliance
Data quality plays a critical role in ensuring compliance with regulations such as ESEF, which requires companies to prepare machine-readable financial reports. Poor data quality can lead to compliance failures, whereas ensuring data quality helps companies avoid the consequences of non-compliance.
Greater Reporting Transparency
Financial statements are the primary source of information for investors and other stakeholders. Poor iXBRL quality can lead to low-quality data that will have to be cleaned up before further use. By ensuring data quality, companies can provide more accurate, transparent, and useful financial statements.
Better Investor Communication
Data quality is also important for better investor communication. Investors favor companies that make it easier for them to understand their financials. However, poor data quality can lead to inaccurate financial statements, which do not provide investors with the answers they need.
Enhanced Company Reputation
Data quality is also vital for a company’s reputation. Low-quality financial statements can damage a company’s reputation and cause investors to lose trust. This, in turn, can have a negative impact on future financial performance. By ensuring data quality, companies can maintain a positive reputation.
Enjoy a Lower Cost of Capital
Data quality also plays a critical role in a company’s cost of capital. Banks tend to trust companies whose financials are transparent and above board. Consider the case of Dutch SMEs receiving discounts on loan and credit applications on providing XBRL versions of financial statements.
Common Data Quality Issues in iXBRL Reporting
Several data quality issues are commonly noticed in ESEF reports. These issues fall into two categories: Errors and Warnings. Errors are critical, as they can prevent ESEF files from being approved by the regulator. It’s crucial to address them promptly to avoid jeopardizing the entire ESEF filing process. On the other hand, warnings, while not as severe, still need to be addressed to ensure the ESEF filing meets high-quality standards.
In a recent Quality Analysis of ESEF reports filed in 2021, we found the following common errors and warnings:
Common ESEF Errors
- Extension Taxonomy Guideline Error – Occurs when schema errors introduce invalid characters in an iXBRL document and wrong units get assigned to numeric facts.
- Technical Errors – These include hidden fact values which are not displayed, and reporting language not being defined in the iXBRL file.
- Label Guideline Errors – These occur when duplicate labels are defined in an extension taxonomy.
- Taxonomy Package Errors – These occur when companies do not comply with the latest taxonomy package specification.
Common ESEF Warnings
- Calculation Inconsistencies – These occur when the numbers in the financial statements do not add up.
- Label Guideline Warnings – They occur when standard labels do not correspond to the language in the financial report.
- Extensions Taxonomy Guideline Warnings – They occur when extension taxonomy elements do not follow the LC3 convention or when the extension taxonomy defines abstract concepts.
- Taxonomy Package Warnings – They occur due to non-conformance with XBRL Taxonomy Packages 1.0 specification.
Ensure Accuracy and Consistency in Your Reporting
Here are a few tips and strategies for complying with the ESMA ESEF iXBRL mandate.
Understand the ESEF Taxonomy
Understanding the ESEF taxonomy is important for companies as it is the technical standard for the preparation, filing, and publishing of financial statements. Understanding the ESEF taxonomy enables companies to ensure that their financial statements are prepared and filed in compliance with EU regulations. Companies must also keep track of changes to the ESEF taxonomy and ensure they use the latest version.
Chalk Out a Compliance Schedule
ESEF iXBRL compliance requires a well-planned schedule to ensure a smooth and successful reporting process. Chalking out a schedule helps to factor in the time required for auditing and financial report design, and to avoid any last-minute rush. This enables the timely submission of financial reports, reducing the risk of penalties and reputational damage.
Work with a High-quality Software
High-quality ESEF reporting software can help automate processes, reducing the risk of errors and ensuring that the financial reports are compliant with ESEF regulations. Additionally, high-quality software enables companies to efficiently manage their financial data, including the conversion of financial data into the iXBRL format, and the tagging of data to meet the reporting standards. The software also provides real-time data validation, helping companies to identify and resolve any compliance issues before submitting financial reports.
Tools and Technologies for Improving Financial Reporting Quality
The ideal ESEF reporting software must provide companies with certain features and functionalities that enhance the compliance process. We enumerate a few functionalities below.
Software that Offers an In-built Validator: The ideal ESEF software must have an in-built validator to help spot and resolve errors and warnings before filing reports with the regulator.
Software with the Number-linking Feature: Software that helps link fact values across a document saves time for users by allowing changes to reflect immediately throughout the document.
Software that Facilitates Last-minute Review: ESEF software must allow companies to review and edit their documents until the very last minute before they file the documents with the regulator.
Software that Displays the ESEF Taxonomy: Some ESEF reporting solutions do not display the ESEF taxonomy alongside the annual report. Ideally, the iXBRL tagging process must be carried out using software that prominently displays the ESEF taxonomy.
Software that Maintains Reporting Quality: Companies must make sure to choose ESEF reporting software that ranks well in third-party XBRL quality assessments. Such software will help them with a smoother and error-free reporting process.