Don’t work up a sweat over ESEF

Don’t work up a sweat over ESEF

Despite fears that the European Single Electronic Format has the potential to cause additional difficulties during an already hectic period for finance teams, it need not cause concern, according to Tax Systems

Don’t work up a sweat over ESEF

As we approach the end of another year, finance teams all over the UK will be readying themselves for what can be their busiest and most challenging time – producing their companies’ Annual Financial Reports (AFRs).

This year also sees the European Single Electronic Format (ESEF) become a mandatory requirement for main market listed businesses whose financial year begins on, or after, January 1, 2021 – which means the first wave of ESEF compliant reports will arrive by the end of April 2022 at the latest.

Despite fears that ESEF has the potential to cause additional difficulties during an already hectic period, at Tax Systems, we don’t believe that there is too much cause for concern.

Evolution not revolution

It’s important to remember that ESEF is a technical format – you’re not required to produce or declare any new financial information – just make the existing information available in XHTML format so it can be read by both human and machine.

Where the AFR contains consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS), these must be labelled with XBRL (eXtensible Business Reporting Language) tags, then embedded into the XHTML document using inline XBRL (iXBRL).

“The ESEF mandate was introduced to facilitate access, analysis and comparison of annual financial reports. Aimed at benefitting investors and other stakeholders through greater transparency, it marks a significant milestone in bringing financial reporting into the digital age,” according to a recent statement by the ICAEW.

There are rumours that ESEF may be a catalyst to a wider digital transformation programme, but we don’t think that this is particularly likely. Whilst it represents another step in the digitisation of reporting, it doesn’t require a process change to how the AFR itself is produced. That’s not to say it wouldn’t be wise to build in additional time as part of the review process – we would highly recommend that you do.

Do more than the minimum

ESEF is also more than a box-ticking exercise – it’s all very well being able to analyse and compare data, but it’s only useful if that information is of high quality. The Financial Reporting Council (FRC) looked at 50 ESEF (voluntary filings or from EU countries where the requirements were already in force) across the UK and Europe. The FRC found that more than 70 percent had tagging errors, and more than 50 percent had issues that limited their usability.

Interestingly, the FRC also noted that more than 25 percent of the reports examined also had design issues, so we can’t lose sight of the fact that the documents will still need to maintain the polished “look and feel” of the traditional PDF-based annual report. As a public-facing document, it’s crucial that the business mitigates any risk to protect the brand and its reputation. This new digital version of the annual report will be pored over by more people once it is online.

“Companies should be aware that the issues identified are clearly visible to users and, therefore, may negatively affect a company’s reputation and the willingness of stakeholders to use digital information,” the FRC said in the report.

The advice is that companies should devote the same level of care and attention to their ESEF compliant report because that is the one that will become the official version of the AFR under jurisdictional transparency rules.

The Financial Conduct Authority (FCA) and the FRC have jointly announced that they will be assessing both the quality and the usability of the ESEF compliant reports, noting that they may take further action if the quality falls short of their expectations.

Although the UK Government has decided not to introduce mandatory auditing to check if reports are compliant with ESEF tagging requirements, digitisation creates an audit trail almost by default, so we think that this is likely to change. Again, the FRC suggest that boards should consider getting assurance (either internal or external), to demonstrate that they have taken appropriate responsibility. Coupled with the FRC’s adoption of the International Standard on Assurance Engagements (ISAE) 3000 we predict it will be sooner rather than later.

Careful consideration is still required

The main choice you will likely have to make is whether you produce the newly formatted report in-house or outsource it to a third party.

The preparation of AFRs can be time-consuming and costly, so taking on the task of preparing the document in-house will undoubtedly see workloads increase at a time when resources are stretched.

If you are thinking of outsourcing the ESEF tagging, you may want to think about where the service will be performed, and who is doing it – this is highly sensitive information about your company, so you want to make sure it’s in safe hands, and you also might want to stipulate that it doesn’t leave the UK.

There’s also likely to be a tight turnaround required so the process needs to allow sufficient time for both internal and external reviews. The FRC recommend using a previous year’s annual report to test your chosen process, before applying it to the current year.

In summary

We know ESEF is new (to most) this year and change always has the potential to cause upset. However, there’s a lot of comprehensive guidance and tips available on what you can do to make sure you end up with a high-quality report that not only looks good but is also fully compliant.

For more information on ESEF and digital reporting, sign up for our webinar on December 2, 2021 from 10:00 -11:00 where we’ll be talking more about why we don’t think ESEF should be that stressful. You’ll also be able to ask any questions you may have about ESEF, as well as find out about our ESEF tagging service.

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