Have you ever heard of the ESEF? I'll try to jog your memory:
- It's a standard.
- Commissioned back in 2013...
- ...by the European Securities and Markets Authority (ESMA).
- It regards published financial reports.
- The "F" is for Format...
Anything? If not, then you're not alone: most people seem to have been so focused on IFRS 9, 15, and 16, plus new CSR requirements and other new directives, that they have let the ESEF slip by.
But slip by it shouldn't. The European Single Electronic Format (ahhh) or ESEF defines the format of published financial reports in light of the "transparency directive" (Directive 2004/109/EC), which requires all listed companies in the European Union to prepare IFRS financial reports.
Towards the end of last year, ESMA presented Regulatory Technical Standards (RTS), compliance with which is enforceable from 1 January 2022 (originally it was 2020 but a 2-year extension is already in the books). The new RTS explain what, specifically, this ESEF looks like and how companies can use it.
Structure your data
At present, most annual reports are PDFs with fancy custom designs—and no uniform structure. After companies start adhering to the RTS, however, these reports will be perfectly uniform. They will be machine-readable and thus easily processed, which is hugely advantageous for regulators and pretty much everyone in an increasingly big-data world.
Specifically, the RTS define the exact Extensible Hypertext Markup Language (XHTML) that companies must use to create their financial reports.
For consolidated financial statements, the issuer must "tag" the report with additional markups in Extensible Business Reporting Language (XBRL). Using XBRL requires a taxonomy system whereby unstructured data can be converted into machine-readable information, and this taxonomy is provided by the IFRS Foundation in this report, which is prepared annually to incorporate requirements from new IFRS standards.
Brace for impact
When the systems are revved up and operational, the reporting will be smooth and efficient for all parties involved. But that's in the future. In the present, the implementation process promises some hiccups: field test participants needed around two days to prepare the first electronic balance sheets and mapping exercises.
As with every implementation, the process must begin with strategic decisions at management level. Some questions to answer will be:
- Is it worth it to keep publishing a PDF version alongside the ESEF version?
- Are there any planned changes in our reporting structure that the IFRS taxonomy would potentially interfere with?
- Which department should head up the new requirements?
- Are the data points currently used in our financial reports all covered in the new IFRS taxonomy and, if not, how can they be added? (Or need they be added?)
Reminder: the IFRS taxonomy will change continuously, following new IFRS amendments and standards—so keep a close eye on it.
People are divided over the ESEF. Supporters point out how it will enable investors to rapidly analyse IFRS financial reports across industries, even across languages. Naysayers, however, doubt how much investors and analysts actually crave this standardised reporting—and issuers aren't crazy about the costs of preparing for it.
However, the debate is moot, for the ESEF is signed and sealed and firmly en route. As is typically the case, acting early will likely mean being better prepared.
The good news: the go-live is still four years away, so don't let this article ruin your weekend. But do keep the ESEF in mind!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.