With the breakneck speed at which the digitization of data is underway globally, the quality of this actionable information becomes the cornerstone of a well-oiled capital market. In a market like the UK that supports structured Annual Financial Reports (AFRs), analysis, accessibility, and comparability of financial and non-financial data is far more easily facilitated, provided the quality holds up to an appropriate review. Structured Reporting
The Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) have jointly addressed a letter to issuers with transferable securities trading on a UK-regulated market. In their communication, they reiterate the obligation issuers have towards producing usable AFRs while setting some expectations on their quality. They also talk about corrective action that they may take should issuers fall short of these expectations.
So, let’s start with the obligations. What are they?
Obligations of Issuers
The FCA has employed certain rules under the European Single Electronic Format (ESEF) mandate that requires UK issuers to publish their AFRs in a structured web browser format known as XHTML. They must be filed with the FCA’s National Storage Mechanism (NSM).
An issuer preparing consolidated financial statements using the International Financial Reporting Standards (IFRS) is further required to tag the financial data within their AFR using a digital classification, also called a taxonomy.
In view of the pandemic that affected everyone in early 2020, the FCA delayed the effective date of these requirements to November of 2020. However, it made changes to its systems, allowing issuers to file voluntarily with the NSM in the new format before they came into force mandatorily.
While the whole exercise was deferred by a year, we have finally arrived at the point where mandatory filing will come into force. From the 1st of January 2022, issuers will need to file their AFRs with the NSM for financial years starting on or after the 1st of January 2021.
To ensure that they are submitting the AFRs in the required format and with the appropriate level of quality, issuers will need to devote operational and managerial resources on an ongoing basis for this activity annually.
To check whether and to what extent these requirements apply, issuers will need to review the Disclosure Guidance and Transparency Rules (DTR 4.1) that can be found here.
The FCA specifies the ESEF taxonomy that came into force on the 31st of December 2020 for issuers that produce consolidated financial statements in the UK. In a quarterly consultation paper, the FCA has deliberated on which taxonomy and corresponding version should be made available to issuers to comply with their rules. They are aware that issuers may be using more recent versions of the ESEF taxonomy as used in the EU or even its UK-specific derivative, the UKSEF.
Now that we have a firm grip on the obligations of UK issuers as set out by the FCA and the FRC, let’s look at what their expectations are on quality.
AFR quality expectations
While change is an ongoing part of the world we live in, a transformation in the way corporate reporting is processed can create some very detrimental challenges for issuers who need to comply with them. These hurdles are mainly technological, due in part to the introduction of a new format that is now mandatory for AFR submission. That said, it’s still important for issuers to produce an output that is usable and of satisfactory quality.
While voluntary filings in the past year have proven to be a great learning for a large number of issuers that decided to take the plunge early, issuers that will be filing for the very first time next year will need to be wary of a few things. The FRC’s Lab conducted a study reviewing a bunch of tagged filings not just in the UK but in the EU as well where ESEF has already been mandated. Their research discovered some areas where issuers may need to pay special attention in order to avoid issues with their final submissions.
Of special note is the fact that issuers are responsible for all the data drawn up and made publicly available under the DTRs. Both the FRC and the FCA, therefore, expect issuers to dedicate as much attention and care to their XHTML AFRs as they do to their PDF/printed ones.
They encourage issuers to file voluntarily while still possible to ensure they are familiar with the requirements and the submission process before mandatory obligations come into force.
If the quality and usability of the submitted AFRs are not up to the mark, the FRC and FCA may take certain corrective actions.
Remedial actions that may be undertaken
The quality and usability of the structured AFRs will be considered by the FCA and the FRC’s Lab in the first year of mandatory submission. A follow-up of the Lab’s review of best practices is set to be published some
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