Regulations can be a bit of a dirty word in the financial industry — or, at least, the word comes with significant negative undertones that suggest added complexity, time, cost and other burdens. In the case of the ESEF mandate, it is certainly true that the regulations will add new check-boxes to your financial reporting processes. But ESEF is the rare case where new regulations will directly benefit both issuers and investors in measurable and intangible ways. Below is a quick discussion of the relative burdens and benefits of the ESEF mandate.
THE TIME BURDENS OF ESEF
While the shift to XBRL is a necessary and beneficial step forward in promoting accuracy, access and analysis of financial data, there’s no doubt that the first year of XBRL tagging will be a very different process to what your company has done before. Here are a few things that will change:
- Your financial statements will need to be mapped against the ESEF Taxonomy — XBRL tags will need to be applied. It’s important to note that this is a one-off process that can be performed on your current year financials to save time in your reporting calendar.
- Even if you are having a service provider propose XBRL tags, someone inside your organization will need to gain basic understanding of XBRL rules, taxonomy and structure in order to be able to effectively review the XBRL tags proposed by your service provider.
- You will need to make time/dedicate resources for a thorough review of the XBRL tags proposed/applied to ensure the taxonomy elements and structure reflect your company specific financial presentation.
- Finally, you will need to have your inline XBRL (“iXBRL”) document prepared for submission to the appropriate authority.
Although there is work involved in this initial setup, the added time is not as significant as you may think — in particular, if you ensure you have access to knowledge (either internally or with the help of external consultants). And importantly, this time burden is mainly a year-one issue. As you move forward with XBRL-tagging beyond 2021, you will be able to build on your previous XBRL-tagged statements.
THE IMPORTANCE OF GETTING XBRL RIGHT
In addition to the year-one time burdens, the shift to ESEF and the overall move toward greater data accessibility presents some unique risks for filers:
- The data lives in perpetuity.
In our modern data-driven world, data lives forever and is never completely erased or forgotten. How exactly is this a risk? Many XBRL filers unknowingly take shortcuts and expose their company to errors in XBRL filings. Given the complexity of XBRL, an error may not be caught prior to or directly after your filing, but machine-readable XBRL data will be continually examined by analytics engines for years to come and these errors will inevitably make themselves evident. Moreover, inconsistencies and other mistakes like choosing the wrong XBRL tag can be amplified over time, leading small errors to blow up into embarrassing ones.
- Your financial story will now be told without the human analysis layer.
Related to the errors-live-forever issue, XBRL data is designed to be directly consumed by machines, giving investors more direct and instantly useable access to your financial information. While today most investors are dependent on data aggregators and analysts to pull all relevant data together and put it in context, the very near future will eliminate this human layer of data analysis and provide “ready to use” financial information. This information will be instantly available for investors to conduct their analysis. Since the computer cannot engage in subjective interpretation — it just reads the data you provide — you should take steps to ensure that your financial data prepared in XBRL and human readable formats tells the same story.
The most important thing to remember is that there is a reason that companies will have to manage the added challenges of year-one filing with ESEF. The ESEF mandate signals a major shift toward greater accessibility and usability of financial data — and opening up your financial data to wider audiences delivers direct benefits to all issuers:
The ability to tell your own story.
As we detailed in a previous blog, traditionally, your financial statements go through one or more filters or intermediaries before they reach your investors. The current lack of machine-readability or a universal format means that aggregators and analysts must convert your financial information into a single standard for comparison — all with a high degree of human involvement and potential mis-interpretation of your disclosures. The ESEF mandate eliminates this initial subjective human intervention and replaces it with structured data available for users to instantly slice, dice and process. Once the financial statements are filed, investors will have direct access to your financial statements — without the input of a third-party. Moreover, you will have more direct control over how your financial information is presented over time, as well as how you are viewed in comparisons to the market. In short, the ESEF mandate gives you greater comfort that the story you want investors to hear is coming directly from you, and not being interpreted by third party aggregators.
Easier for investors to consume your financial data.
Machine-readability makes it easier for anyone to access and conduct robust analyses of your financial information. This will improve investor decision-making — and more importantly, improve investors’ confidence in their decision-making. Opening up access and enabling easy data analysis will also expose your company to new and broader audiences, giving you an organic opportunity to expand your investor community. As more XBRL-tagged financial data is reported, the utility of analyzing that data grows exponentially — meaning that these benefits will continue to grow over the next 5-10 years.
More robust analyses and data visualizations.
The shift to XBRL will not eliminate the role of third-party analysts in the industry. Rather, it will allow these experts to spend less time collecting the data and more time actually analyzing the data. With XBRL, almost all of the data collection and processing is done almost instantly and automatically, unlike today’s data aggregators’ processes. Any analyst or investor can simply download the data filed to the regulatory body and immediately begin mining the data with analytics tools, creating visualizations like graphs and charts, and extracting key insights. Some of the most innovative data aggregators — companies like Idaciti and Calcbench — are using sophisticated analytics engines to produce incredibly intuitive and engaging data visualizations that make it easy for any audience to see relevant trends and insights.
Here is an example of SEC IFRS filer data pulled directly from the regulator (in this case the U.S. SEC) plotting Revenues against Earnings Per Share (EPS) across a peer group in a scatter plot diagram. In this case, Deutsche Bank is the primary company being viewed against their peers based on 2019 results.
These kinds of intuitive and compelling data tools will help investors — in near real-time — to easily find information they are looking for and identify trends, patterns and anomalies necessary for them to make more confident investment decisions. However, it is once again critical to recognize that as your financial data is being instantly consumed by a wider variety of high-profile data consumers, you should not let easy-to-make mistakes — like applying an improper XBRL tag or wrong signage — misrepresent your disclosures and embarrass your company.
XBRL increases accuracy of your financial data.
XBRL provides a simple structure for issuers to ensure that their filings are accurate. For example, XBRL brings connectivity to sections of your financial statements that allows for validation that content and tabular data are in-sync and telling a consistent, accurate story. XBRL also makes it easier to use automated tools to rapidly conduct quality checks — both throughout a single financial statement and across reporting periods. This gives companies the ability to go beyond mandated quality checks, while actually reducing the time and cost of these processes. Overall, this paints the “data lives in perpetuity” point described above in a different light. Yes, an error in XBRL will live forever — but if done right, XBRL dramatically reduces the likelihood of ever making that error.
Efficiency gains in preparing financial statements.
There is a lot of concern that the ESEF mandate will add time and cost to preparing and reviewing financial statements. However, this burden is likely limited to the first year or two. Long-term, the shift to XBRL-tagged financial statements will allow issuers the opportunity to re-evaluate their processes for assembling their consolidated financial statements — and to apply efficient, sophisticated statistical analyses and validation to ensure accuracy. In other words, companies already dedicate time and resources to validating the accuracy and quality of their financial statements. Today, this is largely a manual process. But XBRL allows much of this review and validation to become automated. Companies that have already made the shift to XBRL-tagged financial statements, such as those governed by the U.S. SEC, have seen small changes in their workflows add up to cutting multiple days from their previous schedule for preparing and reviewing financial statements. Considering the inevitable pain and time crunch of peak end-of-year season, getting any time back is a major benefit.
THE CRITICAL STEP: ALIGNING WITH XBRL EXPERTISE
Whether you are talking about managing the added burdens or unlocking the many benefits of the ESEF mandate, the underlying reality is that most companies are new to XBRL and thus lack in-house XBRL expertise. Most know that they will need to add experienced help — or the time burdens and risk of common errors will increase significantly. But given the lack of experienced IFRS XBRL experts in the market — and consequently the high costs of hiring in-house expertise — it’s most likely that companies will seek a third party to support their needs. Considering the large potential benefits, the significant potential risks and the overall high visibility of your XBRL-tagged financial statements, aligning your business with high-quality XBRL expertise is a critical step in balancing the burdens and benefits of the ESEF mandate. Make sure you seek out people who understand the complexities of regulatory disclosure, IFRS Standards and the art and science of XBRL tagging.
This 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. There is no one more qualified to help our clients understand, successfully implement, produce and confidently move forward with XBRL.