European Single Electronic Format
Big changes come into effect for listed entities with effect from 1 January 2020 with a new EU requirement for accounts to be published in electronic format.
Change is coming fast to the method of publication and dissemination of the audited accounts of listed companies.
For financial years starting on or after 1 January 2020, the EU (European Union) will require those companies which have their securities traded on any financial markets in the EU, or within the wider EEA (European Economic Area) to publish their annual financial reports in the European Single Electronic Format (hereinafter referred to as the ESEF). (The EEA, also called the Internal Market, comprises all EU members with the addition of Iceland, Liechtenstein and Norway.)
It is a major step in the evolution of financial reporting and is intended to make it more easily accessible and able to be assimilated by users.
What is the enabling legislation?
This is the Commission Delegated Regulation (EU) 2019/815 which was finalised on 4 June 2019. It establishes technical standards for a common electronic reporting format in the EU for the publication by listed companies of their annual financial reports.
The Regulation will require all listed companies as defined above to publish their annual financial reports (AFRs) using a standard digitised reporting system which has two features:
(a) XHTML (eXtensible Hypertext Markup Language) This must be used for publishing all AFRs.
(b) iXBRL (in line eXtensible Business Reporting Language). In addition, this must be used where the AFRs also include IFRS (International Financial Reporting Standards) consolidated financial statements.
How is this to be done?
From 2020, the preparers of all IFRS-compliant consolidated annual financial statements must have them tagged with iXBRL standard tags or labels to enable them to be configured and machine-readable before publication.
These tags, which will then be embedded in an XHTML document using iXBRL technology, will make the items marked structured and machine-readable. The tags are an example of a taxonomy.
This is the term for a basis of a hierarchical classification of things or concepts so as to make sense and order out of a mass of data. In modern times, it originated with the ideas of the 18th-century Swedish naturalist Carolus Linnaeus (1707-1778), who is credited as being the founder of taxonomy. He devised what is now called the Linnaeus system of classification.
Accounts preparers will mark up the required disclosures (balance sheet and income statement headings) in the AFRs using the taxonomy entry (like in a dictionary) which most closely corresponds to the item to be marked up. If the closest taxonomy entry is unsuitable because it does not faithfully describe the disclosure, then the preparers shall crate an extension taxonomy element and anchor this extension to the basic taxonomy category which has the closest meaning to it.
As from 2020 all AFRs must now be produced in XHTML; this can be opened with a standard web browser and is capable of being read by a human being. The XHTL files will also contain embedded tags in iXBRL.
The European Securities and Markets Authority (ESMA) provides more detail on the requirements. The UK Financial Reporting Council (FRC) has also produced a helpful infographic on the subject.
What is iXBRL?
First produced in 1998, this is a freely-available international standard for digital business reporting and exchange of information. It was developed and managed by a non-profit making consortium founded in 1996 by the American Institute of Certified Public Accountants (AICPA).
iXBRL applies computer-readable tags (think of bar codes) to business data to enable this data to be processed automatically by software.
Adoption of iXBRL is claimed to significantly raise the quality and efficiency of the analysis of business information.
The advantages claimed for iXBRL are:
- Reporting terms can be rigorously defined and then used to uniquely represent the contents of financial statements, compliance reports to a regulator (e.g. Companies House in the UK or SEC filings in the US) or similar reports.
- Information can move more quickly and accurately between organisations.
- Greater transparency of information for users.
- Those who publish reports can confident that the data within them can be much more efficiently analysed and consumed more accurately than before.
- Those using the information being published can have greater confidence that it conforms to a set of previously established definitions.
The ESEF adoption of iXBRL enables human-readable disclosures in a set of AFRs to now be presented in a version that a computer can understand.
Accounts preparers will now be required to select tags for the items in the published accounts (e.g. fixed assets and their categories) from an approved taxonomy.
ESMA has been given the responsibility by the EU to produce Regulatory Technical Standards (RTS) to specify the reporting format. The ESEF taxonomy adopts the IFRS taxonomy of the IASB (International Accounting Standards Board) by adopting their tags for EU-endorsed IFRS standards and adding any additional tags now needed for ESEF filing.
The primary financial statements of a set of IFRS consolidated accounts (comprising the income statement, balance sheet, statement of cash flows and statement of changes in equity) must be tagged or marked up in detail as from 1 January 2020.
As from 2022, the notes to these financial statements must also be tagged but for these, the tagging is required to be done in the form of block tagging (which means the marking up is done by whole sections of the notes).