A quick introduction to our ESEF expert: This new blog series features Bartek Czajka, Director of XBRL Consulting Services at Toppan Merrill. Bartek is one of the foremost experts on XBRL, having created the majority of updates and additions to the IFRS Taxonomy between the years of 2010-2017 during his tenure as Senior Technical Manager at the IASB, the organisation that issues the IFRS Standards. When ESMA was tasked with developing the European Single Electronic Format (ESEF), Bartek directly helped ESMA define the shape and form of the XBRL taxonomy to be used. He also participated in the field test organised by ESMA with 25 European issuers to assess the cost and benefit of using XBRL for ESEF. We can think of no one more qualified to help our clients understand, successfully implement, produce and confidently move forward with XBRL.
With the end of the year fast approaching, I’m getting more and more questions about the ESMA European Single Electronic Format (ESEF) mandate that goes effective January 1, 2020. At this point, many European companies are aware of the ESEF mandate — but plenty of questions, concerns and uncertainties remain around what it will require and what companies should be doing today to prepare. To provide clarity, I’ll be producing a quick blog series that gives you simple answers to the who, what, when, why and how of the ESMA ESEF mandate — as well as many related what-abouts and what-ifs. To get started, let me cover the basics:
The ESEF mandate essentially means that, beginning January 1, 2020, all issuers on regulated markets within the EU and European Economic Area must submit annual financial reports (AFR) in the European Single Electronic Format. To be more specific, you’ll need to prepare your AFR in xHTML (a type of digital formatting) and, in case of IFRS consolidated financial statements, include Inline XBRL (iXBRL) tags for the primary financial statements.
There is no phase-in by company size or sector. Starting with the financial statements for annual periods beginning on or after January 1, 2020, the mandate applies to all issuers within the EU.
Annual financial reports (AFRs) in xHTML format and iXBRL-tagged IFRS consolidated financial statements are due four months after year-end. In practice, this means you won’t be submitting your first ESEF filing until early 2021.
It should also be noted that, while the initial requirement applies only to primary financial statements, discussions are ongoing about expansion of the ESEF requirement to text-block tagging of the accounting policies and notes in Year 3 (filings in early 2023). Ultimately, ESMA will likely extend the requirement to detailed tagging of the notes (where numeric values within notes would also be tagged individually) within the next several years. This will be a significantly more complex task.
The ESEF mandate is the end result of a cascade of actions that started with the European parliament’s goal to create a “single digital market” by “moving from individual national markets to one single EU-wide rulebook.” This led to the 2013 EU Transparency Directive changes, which essentially gave ESMA the task of defining a single digital financial reporting format. ESMA followed the clear global trend (following similar mandates by the U.S. SEC and South African CIPS), adopting XBRL tagging and iXBRL format as the basis of the ESEF.
But that’s all more of a “how did we get here?” The real why — the promised benefits — of the move to xHTML/iXBRL are pretty simple:
More consumable financial reporting data. The overarching goal of the mandate is to make it easier for both people and machines to access, analyse, understand and use the information contained in AFRs and consolidated financial statements.
Expanded digital access. xHTML-formatted AFRs can be opened with any web browser, expanding digital access for people around the world.
Machine-readable reports. XBRL tags make financial documents machine-readable. The tags are like barcodes for financial data.
Empowered data analysis. Giving modern analytics engines easier access to XBRL-tagged financial data will make it easier for analysts to explore the data — and will drive faster, deeper and more relevant insights.
WHAT IS XBRL?
XBRL stands for eXtensible Business Reporting Language. It has been around since 1998, but has been widely adopted in financial reporting around the world over the last ten years. XBRL addresses the reality of a data-driven world: people don’t read financial statements cover to cover. They increasingly use technologies (such as data analytics, etc.) to distill what they want to pull out of the financials. XBRL helps provide accurate financial data directly to various users. Like I said earlier, XBRL tags function as barcodes for the numbers, so that computers and analytics tools can instantly ingest this data for immediate analysis and comparison.
WHAT IS xHTML?
Over the past few decades, European companies have moved toward increasingly stylised annual reports — often available via the web, using HTML (HyperText Markup Language, essentially the most common language of web pages). xHTML (eXtensible HyperText Markup Language) takes HTML and adds a layer of machine-readable metadata.
To illustrate, you can think about this web page: you’re reading basic text and seeing colours and images. At the same time, Google’s analytics tools are reading a layer that sits beneath the viewer-friendly layer you see, allowing Google to instantly scan the page, understand its content and rank the page.
In ESEF’s case, the use of xHTML allows the addition of Inline XBRL tags while preserving the “look” of the digital AFR.
WHAT IS INLINE XBRL?
When you combine XHTML with XBRL tags “in line” — that is, in the metadata layer that sits beneath the visible text — you get Inline XBRL (iXBRL). iXBRL lets you prepare a financial report that looks like a normal web page and is appealing to a human viewer, but also has a machine-readable layer of XBRL data embedded under the text.
WHAT DOES ALL THIS MEAN FOR MY COMPANY?
Acronyms are nothing new in the accounting world, but all the technical language sounds more like the business of a data scientist or software programmer. So, will these changes at all impact how consolidated financial statement are prepared and filed today? The harsh truth is that the ESEF mandate will completely disrupt the way most European companies file their financial statements today, which is most often via a PDF file.
There are two main steps in moving from PDF format to iXBRL:
The need to create the 2020 AFR in xHTML format (or convert the report from HTML or InDesign files into xHTML).
The need to add iXBRL tags where necessary.
WHAT DO I NEED IN ORDER TO MAKE THE TRANSITION TO iXBRL?
To tackle these steps, all companies will need to use some kind of disclosure management software to produce the iXBRL tags. Rather than trying to build their own proprietary software, I expect that most will turn to the existing software-as-a-service (SaaS) products available on the market today. Since this will be many companies’ first experience with XBRL tagging, many will also need to bring in expertise on how to properly tag and create an XBRL document. Some may choose to bring this expertise in-house, hiring an individual (or, more likely, a team of individuals) to handle XBRL tagging going forward. But again, most will look outside for help — leaning on a professional services partner with proven experience with XBRL and iXBRL — as this approach will be much quicker, less painful and ultimately less costly for most companies.
IS XBRL TAGGING REALLY THAT DIFFICULT?
Yes and no. It’s really just like learning a new language: it doesn’t happen quickly, and there are plenty of embarrassing errors along the way. Looking at the U.S. as an example, here are some of the most common XBRL tagging errors the U.S. SEC has seen over the last few years:
Incorrect sign: Tagging a value as positive when it should be negative, or vice versa.
Incorrect value: Tagging a value in millions instead of billions, for example.
Incorrect unit: Tagging a value in Euros, when it is in British Pounds, for example.
Incorrect element selection: There are more than 5,000 elements in the most recent IFRS Taxonomy, including more than 2,000 monetary tags. A typical company will only use 100-150 tags to mark-up the primary financial statements. Many tags look and sound similar, so it is easy to choose the wrong one.
Inconsistent tagging within a document: Using a different tag for the same information in different instances within the financial statements.
Here’s one of the more notable and embarrassing examples: in 2015, General Electric Co. in the U.S. made a big mistake in reporting the amount of money the company earned and kept overseas. The company mistakenly reported this figure as $104 million in its XBRL filing, while the accurate figure was $104 billion. Not surprisingly, once the mistake was discovered, GE received intense scrutiny and criticism from the media and U.S. politicians — both for keeping more than $100 billion outside the U.S. economy, as well as for seemingly trying to obfuscate that through the filing error.
WHAT HAPPENS IF I MAKE A MISTAKE?
There are a number of national regulatory bodies that will be validating and analysing data from these new iXBRL reports and monitoring them for inconsistencies and errors. So, of course, mistakes have a legal risk. I don’t expect regulators to be heavy-handed with fines and sanctions at first, but no company wants to attract undue attention from regulators.
Realistically, the biggest risks lie in all the other ways your iXBRL data will be used in the coming years. Analysts and data aggregators are eager to jump on the highly consumable iXBRL data. Your data will also be available to everyone via various commercial financial data platforms. If the data is incorrect, that incorrection is likely to be out there for years, negatively impacting not only the financial analysis, but also the view of your company in the public space.
The bottom line is that ensuring the quality of your iXBRL data ensures that your financial information isn’t misunderstood, that your company isn’t misrepresented and that you don’t lose control of the story you’re telling the world.
HOW DO I ENSURE XBRL QUALITY?
The first thing you should do is ensure your company is prepared to dedicate extra time and engage additional resources to prepare and review your 2020 financial statements. With that in mind, here are some tips:
Schedule time for detailed review: Make sure you’re scheduling additional time not just for the initial XBRL tagging, but also for a close review of XBRL data towards the end of the reporting process.
Know the common errors: Both your initial tagging and your later reviews should start with a solid understanding of the most common errors so that you can avoid them.
Use software — but be warned: As I mentioned earlier, there are several SaaS products that can help you with preparing your XHTML filing and adding your iXBRL tags. But while some claim to use artificial intelligence (AI) to automate the entire tagging process, it is important to remember that XBRL tagging is not science. In many cases it is a bit of an art and choosing the correct tag might not be straight-forward. Some tags sound and look as if they were right, but have certain characteristics (such as their definitions) that make them an incorrect choice. Leave it all up to AI and you may never even realize the complex ways in which your company’s data is being misrepresented in your own XBRL.
Engage an expert: Since iXBRL is bridging the gap between humans and machines, you need a human expert who understands both languages. Whether that’s in-house or an outside partner, you should have a human expert who can ensure you’re applying the right tags and formatting your reports in the right way to effectively and accurately convey the critical financial data. This minimizes the risk of embarrassing errors and lost-in-translation issues, so you can be confident that your financial reports tell the right story, directly to investors and regulatory bodies.
Hopefully this has answered a few of your questions around the coming ESMA ESEF mandate. Stay tuned for my next blog, where I’ll dive into the promised benefits — for issuers, regulators, analysts and investors — of the shift to machine-readable iXBRL reports.