Below are the recommendations of points worth considering based on lessons learnt from ARKK’s first experience with ESEF.
With ESEF, ESMA aims to improve analysis and comparability of financial statements and to make information more accessible for businesses and auditors alike. The newly introduced iXBRL format is an electronically tagged xHTML file that is different from the current PDF 'glossy' format and requires a specific iXBRL tagging or conversion technology.
For all main market listed companies Ireland and the UK, ESEF will apply to accounting periods starting ‘on or after 1st January 2021’, meaning 31st December 2021 year ends are the first in scope. Although this will be a different format to the existing PDF, we do not see the ESEF report replacing the need for the PDF. What we have experienced with our clients who have fallen in scope of the ESEF mandate across Europe this year, and with those who have completed a voluntary submission, is that the PDF will continue to be published in addition, as the xHTML ESEF compliant report does not print as well and is not as user friendly to view on mobile devices.
Below are the recommendations of points worth considering based on lessons learnt from ARKK’s first experience with ESEF.
Whether you are choosing to tag the ESEF report yourself in-house, or outsource to a third party iXBRL specialist, it is important for a company to have a good understanding of the ESEF rules and guidance provided by ESMA to ensure your ESEF report is fully compliant. Not only this, but it is also important that you have a good understanding of the tags applied to the report as it will be public domain for all to analyse.
Of course, a good start to ensure you are compliant is to have reliable software which can validate your file and that follows the ESEF specifications and reporting manual. At ARKK, we are partnered with AMANA, using their XBRL Tagger which is XBRL Certified Software. This software includes a validator which assures us and our clients that our process is thorough and technically correct.
As an issuer you should keep up to date with the ESEF rules and guidance and continuous updates (even if you are outsourcing), as tags, sign logic, calculations etc. will still need reviewed in-house. XBRL International have a great series called ESEF Errors and Common Pitfalls that is worth a read for everyone reviewing an ESEF report. https://www.xbrl.org/tag/esef-errors/Start your ESEF process as soon as possible because time management is the key to a successful filing.
Tagging the previous year’s annual report is the best way to prepare for your mandated filing, as it will provide the groundwork. A dry run will help a company detect any possible issues early in the process and can therefore give them time to fix any problems. It will also allow the finance team or those stakeholders reviewing the report, sufficient time to review the tagging, reducing the time required for the review on the final report for the mandated submission.
An audit review is also something that may be required, depending on where you are filing, and to allow auditors time to review the tagged output, it is of upmost importance that you start your preparations as early as possible. Those listed in an EU country will have an audit review requirement for the ESEF report but the level of review may differ between jurisdictions and for this reason, it is important to contact them sooner rather than later to create a timeline with them for your ESEF filing.
In short, ESEF involves 2 parts. A main market listed company
Most ESEF solutions create a company’s XHTML by converting it from PDF, which will occur before any tags are then embedded. Whilst we often talk of the iXBRL tagging and the rules behind it being the cause of issues; companies should understand that challenges can also stem from the PDF to XHTML conversion. Converting a file to xHTML is not always straight forward.
Early preparation and discussions with the creators of your annual report (whether it be in-house or through design agencies) will help minimise these issues. Annual report designers may need to work to simplify PDF creation and follow certain PDF recommendations, to help with perfect xHTML conversions.
In some cases, issues have stemmed from poor rendering of fonts and choices of colour settings leading to incorrect colour conversion being displayed, but in ARKK’s experience, the most common pitfall is hidden text. When converting to xHTML, hidden text is also converted and is visible in the xHTML. This can lead to the xHTML having overlapping text and text where it should not be. By working with your report creators and introducing them to these possible issues can help ensure they do not happen when it comes to the final document.
When looking at an in-house solution, there are many factors to be considered. Do you have the expertise in-house to accurately tag and convert an ESEF compliant report? Do you have the capacity to add this into your annual report production timetable? We know that ESEF tagging is not straightforward, even for those with experience in tagging for Revenue/HMRC. The rules and guidance are different, and they can change on a regular basis. We have the addition of extension tags for ESEF; it requires calculations to be added and the use of members.
Many in-house solutions or software providers have the capability to tag the report as it is being produced. This is certainty a benefit as it means the work can be completed without the time pressure of your publication date looming. But you will have to consider how the tagged output from the software will merge with your InDesign annual report for publication.
A feature seen as a pro for in-house tagging is the idea of auto-tagging, the argument being that it can make the ESEF process easier and will help to alleviate the need to learn the taxonomy and guidance. Auto-tagging can provide a partial solution to ESEF but there are some specific nuances that will still require human input.
As previously mentioned, the requirement of extension and anchoring tags, means that human input for these is a must. There is more to these than just creating a label for a tag, the relationship with the anchor(s) tags must accurately reflect the line item in the report. Something else to consider is that in addition to data in the primary financial statements, ESEF also requires numbers in related footnotes to be tagged. That is likely to be another issue for auto-tagging as a) it will need to find the numbers in the text and then b) it’ll need to find out what they relate to. In the situation where those numbers would be extended/anchored, that will be practically impossible.
Even in a world where auto-tagging works perfectly, the tagging in an ESEF document needs to be 100% accurate. Therefore, companies would still need a human (an experienced one, who has an extensive knowledge of the ESEF taxonomy and the ESMA rules and guidance) to review the output before they put it on their website for the world to see.
Then we look at the service providers. When choosing the right service provider, you will have to take into account how they will fit into your annual report process. The ESEF publication is time restricted, and you must find the provider that will meet your needs without adding unwarranted additional work to your publication timeline.
Another thing to consider is what their experience is in the world of iXBRL? With many companies having completed an ESEF test run or voluntary submission this year, has this service provider had any experience with this and what would be their advice to those companies going through the ESEF process for the first time?
When relying on a third party to complete the tagging of your report you will need support when it comes to the reviewing of the tagging. The ESEF taxonomy has over 7,000 tags to choose from so you will need a team that can take your through your options, particularly when it comes to the use of the extension tags. You will need a partner that knows the taxonomy in a high level of detail, what the 7,000+ tags in the taxonomy are and when they should be used.
Something else to question is what support you will receive outside of the tagging? Will the team be on hand to assist with submission hiccups? Are they in your time zone? You need to ensure you are covered when you need assistance.
In conclusion, my best piece of advice for anyone preparing for their ESEF filing for the first time, is to not underestimate the knowledge and preparation required in advance to ensure you have a hassle-free live filing. Whether you are implementing a solution in-house or are looking to partner with an expert third party service provide, now is the time to get that in place. Check out our website for more information on what the ESEF mandate is and how our process can help simplify your filing.