The European Commission has issued new rules concerning the digitalisation of financial reports by listed entities. A new European Single Electronic Format (ESEF) was introduced by way of Commission Delegated Regulation (the Delegated Regulation) as part of the Transparency Directive. ESEF is intended to enhance the comparability and usability of financial information across the EU by making financial records more readable and accessible.
When does it apply?
For financial years beginning on or after 1 January 2020, listed entities are required to report their financial statements in ESEF. This means that most relevant companies' financial reports will be published in ESEF for the first time in 2021.
To whom does it apply?
All natural and legal persons with securities (shares and bonds) listed on an EU regulated market will have to comply with the Delegated Regulation, regardless of whether their registered office is in the EU or in a third country. Companies listed on AIM will not be affected.
What does it entail?
ESEF requires that financial reports be produced in a single file, which will contain the financial statements, management report and responsibility statements for the company. The file will have to be formatted using XHTML, an advanced computer code, but it will also be human-readable using standard web browsers.
Where the annual report contains IFRS consolidated financial statements, companies will have to mark these up using iXBRL (a global standard commonly used for embedding information in financial statements). XBRL is like a language, offering companies a structured way to report business facts and data within financial documents.
For the first two years, XBRL tagging is only required for the primary financial statements. After this, the notes will also need to be tagged. The requirement to format using XHTML applies to the entire financial statement from 2020.
Is the reporting format new?
In Ireland, all companies (whether listed or not) which are required to prepare financial statements under the Companies Act are already submitting their financial statements in iXBRL format as part of the CT1 tax return to the Revenue Commissioners. However, the specific formatting required by ESEF may differ from that used for reporting to Revenue, so it is not currently envisaged that the ESEF file could be used for this additional purpose.
There are also a number of global stock exchanges that require XBRL-based reporting, including Japan, Canada, China and the EDGAR system in the US.
What do listed entities need to do?
The burden of implementing the new reporting format will depend on whether a company prepares its annual financial reports internally or outsources the task. In-house teams will have to develop their own software solutions, or purchase off-the-shelf products.
ESMA has prepared an ESEF Reporting Manual to provide guidance on common issues encountered when generating iXBRL documents. This manual is aimed at relevant issuers, but also contains highly technical sections best understood by those with a working knowledge of XBRL, such as software developers.
ESMA has also published taxonomy files to guide the tagging of IFRS consolidated financial statements. These will be updated regularly to comply with IFRS standards.
At present, there is no mechanism to audit implementation of ESEF. The Commission has asked the Committee of European Auditing Oversight Bodies to explore how this could be carried out in practice and report its findings.
Cultural change
As well as the practical change of moving to a digital structure of reporting, the introduction of ESEF marks a significant culture shift in how certain companies' financial data is presented and analysed.
For example, the Companies Act currently requires directors to lay "copies" of various financial documents before the company at the AGM. This is just one small instance of where legislation and practices may need to change.
We will continue to monitor developments insofar as they impact upon the Companies Act and market practices.
