The European Single Electronic Format (ESEF) is now a reality. Any company listed on a regulated UK or European exchange will be required to file its annual report in XHTML with the additional requirement to tag the primary financial statements in accordance with the IFRS taxonomy using iXBRL tags. ESEF will become mandatory for all companies with a financial year starting 1 January 2020 and will affect most businesses for the first time in 2021.
Seven thousand companies will be forced to rethink how they produce and distribute their annual reports with implications for:
- How the annual report is designed.
- The reporting time table.
- How the production process is governed.
ESEF aims to improve the transparency and accessibility of financial information by allowing the annual report to be both machine and human readable. The requirement to file in iXBRL is not new; in the UK it is the common standard used by companies to file their tax returns with HMRC. The extension of its use to financial reporting will, however, disrupt a process that has remained the same for years.
Implications of ESEF
With the introduction of ESEF, it is the XHTML file and not the print/PDF version of the report that will need to be signed off by a company’s board, verified by the auditors, filed with the relevant authorities, and distributed to shareholders.
ESEF means that companies will be required to think XHTML first. To avoid having to audit two different versions of the report, the PDF will need to be generated from the XHTML file. Doing so without affecting the design integrity of the report will present a significant challenge. In the future we may see a far less “designed” annual report with the creative effort applied to alternative summaries of a company’s annual performance.
Rethinking the Reporting Timetable
The reporting timetable may also be affected. For the new legislation to make good on its promise of better transparency and comparability, the digital report will need to be made available more quickly than is usually the case today, and before the data becomes available on third-party financial portals. As such, a benefit for investors may be the shortening of the time between publishing the full-year results and the annual report, drawing together the numbers and the narrative in to a single release.
Companies will also need to think about the controls and governance that are in place for getting the annual report signed off. The board of directors will have the additional responsibility for the machine-readable elements of the report. Thought will need to be given to how the “hidden” data in the tags can be exposed to make this as easy as possible.
Prepare for ESEF Now
Based on discussions we have had so far on the subject, the majority of companies are not yet feeling pressure to adapt to an ESEF world. There has been no formal legislation requiring them to do so until now, and the timing of the legislation means that most will not be affected until 2021. ESEF, however is now mandatory and far-reaching. The time to prepare is now.
We would advise that companies start by looking at their current process and timeline for producing the annual report and ask how ESEF changes this. As this change will affect not just the reporting team but potentially affect the board’s calendar, some companies might opt for a low-risk dress rehearsal in 2020 without the potential to fail the technical elements of the acceptance standards.
As a market leader in the corporate communications space, Investis Digital is finalizing a solution to help our clients, designers, and auditors fulfill their new regulatory obligations. Contact us to discuss our new reporting platform and how best to prepare for ESEF.