End of year reporting is about to get a whole lot busier thanks to a new regulation – The European Single Electronic Format (ESEF) – which will see annual reports ‘go digital’. Main-market listed businesses in the UK will need to comply with the regulation which requires them to create, tag and publish a glossy report online in addition to producing their usual annual financial report.
What is ESEF?
ESEF requires the creation of a XHTML document which incorporates iXBRL tagging of primary statements ie Income Statement, Balance Sheet, Cashflow statement and Statement of Changes in Equity (SOCIE) and uses a taxonomy based upon the IFRS taxonomy which in the UK is the UKSEF taxonomy.
All figures in these statements – even footnotes – must be tagged and matched with the European Securities and Markets Authority (ESMA), and those that don’t will need to have extensions and anchors applied. Moreover, the document will need to ‘look and feel’ like the PDF counterparts, which businesses are still expected to produce.
Preparing the ESEF document could be problematic for many as year-end is already a very busy time, requiring large teams to work long hours to meet deadlines and produce the annual report.
It’s also important to get the document right as it will be viewable online and can be analysed by investors and agencies alike, potentially exposing the business to further scrutiny and the risk of reputational damage. You can see an example of an ESEF compliant report here.
When does ESEF apply?
ESEF was finalised on 29 May 2019 and brought in on 18 June 2019 but the FCA decided to delay its enforcement by a year due to the pandemic and Brexit. It applies to Annual Financial Reports for periods starting on or after 1 January 2021, after which market-listed companies are expected to comply.
This effectively means we can expect to see the first ESEF reports pop up on the web in Q1 2022 for 31 December 2021 year-ends. However, it’s thought that awareness of ESEF is not high, prompting the Financial Reporting Council to launch a survey to “understand the levels of preparedness” of those companies caught by the regulation.
Accountability
On 1 June 2020, the UK government also published its policy paper, setting out its position on ESEF and how this will affect directors’ sign-off processes for accounts. It effectively made clear that directors will not be held responsible for the accuracy of iXBRL tagging and can sign-off the accounts prior to or after tagging has occurred.
The statement emphasises that the tagging has been put in place to ensure the report becomes “machine readable”, suggesting it will be used to perform a deep dive into the report and analysis by financial authorities. As the director is attesting to the accuracy of the accounts in a human readable version, it was subsequently decided not to make those signing them off accountable for iXBRL tags.
The implications of this are that responsibility for tagging is likely to come under the remit of the finance team, with the CFO held accountable.
What’s the latest?
ESMA updated the ESEF reporting manual in July 2020 and published the latest ESEF XBRL taxonomy files, and ESEF Conformance Suite for developers, in December 2020. The UK government then issued guidance which stated there will be no mandatory audit or reporting requirement. However, companies can voluntarily decide to obtain a report from their auditors prepared in accordance with the Financial Reporting Council ISAE 3000 standard that covers the tagging.
UK businesses will need to adhere to the UKSEF taxonomy which allows the filing of ESEF accounts to both the FCA’s national storage mechanism and onwards to Companies House and HMRC. The initial requirements will see iXBRL tagging applied to the basic financial information but from 1 January 2022 notes to the accounts must also be tagged.
While ESEF is mandatory for years on or after 1 January 2021, an amendment passed in June 2021 allows companies to adopt the reporting standard for 2020 reports on a voluntary basis to get ahead of the curve.
What do I need consider?
ESEF is now in force and you will need to comply. How you choose to do so is up to you, with the government statement saying companies can choose to produce the ESEF report as “a single filing, a parallel tagged document or a tagged document once the annual report has been completed in paper format”.
That said, taking on the task of preparing the document in-house will undoubtedly see workloads increase at a time when resources are stretched. Plus, as it is a public-facing document, it’s crucial that the business mitigates any risk to protect the brand and its reputation. This digital version of the annual report will be pored over by more people once it is online.
There’s also likely to be a tight turnaround required so the process needs to allow sufficient time for both internal and external reviews. As stated above, auditors do not currently need to review the document – this is optional – but this may well change in the future so it’s worth considering how auditable your ESEF process will be.
How we can help
We believe ESEF doesn’t need to adversely impact your finance team and end of year process.
Our ESEF tagging service builds upon the success of our market leading iXBRL offering, which has been used to tag tens of thousands of sets of accounts since 2011, including almost half of FTSE 100 companies. It’s easy to use, cost-effective and secure – all we need from you is your prior annual report to draft, tag and prepare the document thereby reducing requirements at this crucial point.
For more information on our ESEF service, please contact a member of our new business team at 01784 777 700 or via enquiries@taxsystems.com.
