Recently, the UK Financial Reporting Council (FCA)’s Financial Reporting Lab studied the 2020 ESEF iXBRL filings of 50 companies in the UK and the EU. The observations were not very encouraging.
Most of the ESEF iXBRL reports that the FRC studied fell short of the quality desired of companies’ official annual reports. Over 70% of the ESEF iXBRL filings had tagging errors, more than a half had problems that limited their usability, and more than 25% had design issues. The FRC found that almost all these problems could have been avoided with the appropriate care and attention.
Based on its study, the Financial Reporting Lab has prepared a report, wherein it states that companies need to know that the issues identified are easily visible to users and may negatively impact a company’s reputation and the willingness of its stakeholders to use digital information. “A focus on quality by companies is crucial for a successful roll-out of structured reporting.”
In this context, the FRC, along with the Financial Conduct Authority (FCA) has written a letter to the CEOs and CFOs of companies within the scope of the ESEF iXBRL mandate, informing them of the need to ensure their companies’ ESEF annual reports conform to high standards of quality.
Further, based on the observations of its study, the FRC has divided its advice for the preparation of high-quality ESEF iXBRL reports into three heads: Process, Usability and Appearance, and Tagging. We will examine each of these in more detail.
Process
The corporate reporting process comes with tight deadlines and each company has its own set sequence of functions that lead to high-quality reporting and communication. Adopting a new format that replaces PDFs is bound to be disruptive, to say the least. The FRC suggests a few steps to simplify the process.
- Companies need to understand the impact of the new ESEF iXBRL filing requirements on their business. They need to involve the right personnel in the creation of their ESEF annual report. It is not just the company’s finance team that must be involved, but the company secretary and annual report teams too.
- Two broad ways to go about ESEF iXBRL reporting are in-house report creation and outsourcing. Companies need to choose an appropriate approach after considering the impact of ESEF reporting on their timetable, the level of involvement in-house teams need to have, and the level of design involved.
- Further, companies need to consider whether to go beyond the minimum ESEF tagging requirements to voluntarily address Task Force on Climate-Related Financial Disclosures (TCFD) or other Environmental, Social, and Governance (ESG)-related tags in their ESEF filings.
- Companies need to test their ESEF packages before the actual filing with the FCA. The FRC study revealed that only 29% of ESEF filers in 2021 had done a test run. The right way to test is to use a prior-year annual report and run validation checks using ESEF filing software or the regulator’s testing facility.
- Although ESEF iXBRL report creation mostly happens after a sign-off on the paper-based annual report, the process requires board-level oversight. Of the companies, FRC studied, less than 20% had involved their board in the ESEF report creation process. Companies need to ensure that the board has a sufficient understanding of the structured reporting process.
- In the absence of an audit requirement in the UK, company boards need to consider whether to seek internal or external assurance on the ESEF iXBRL reports.
- It is also good practice for companies to disclose their approach to governance and disclose whether their ESEF reports have been audited.
Usability and Appearance
Since the annual report is a key piece in companies’ communication with shareholders, employees, and other stakeholders, they need to attach the same level of importance to the structured, ESEF iXBRL report as they do to their traditional annual reports. The structured report is the official annual report of a company under jurisdictional transparency rules. A few guidelines are below…
- Companies in the scope of ESEF reporting requirements need to prepare their annual financial reports in xHTML format, which should include audited financial statements, a management report, and responsibility statements. (Read about the condition for dual-listed entities in the FRC report).
- It defeats the purpose of timely disclosure when ESEF iXBRL reports are made available only a number of days or weeks after the PDF version is released. In a few cases that the FRC noticed, even the PDF was released some weeks after a company’s results announcement. It helps to reduce the time lag between the results announcement and the PDF and structured reports.
- The ESEF zip package needs to follow the correct naming and structure convention for it to be readable by software tools. Find a list of software tools that produce the correct ESEF packages on software.xbrl.org.
- Companies need to prominently display their structured annual reports alongside their traditional PDF reports. They could also provide users with an explanation of the different formats and how they can be used.
- Some problems arise from designing PDF reports without keeping in mind their xHTML conversion. These include using fonts and symbols, layered images, and heat maps and graphs that do not render well in xHTML. Companies either need to simplify their designs or ensure there is sufficient time to review and ensure that their structure reports render correctly across a variety of viewers.
- The FRC noticed that companies that did indeed provide a structured report on their websites did so as a downloadable zip file which they sent to their national storage mechanism. This is not helpful as there would be concerns around viruses or the file being too large to process correctly. Companies need to provide an Inline XBRL viewer along with their structured report. An iXBRL viewer helps users access both the human-readable layer of an annual report as well as the XBRL tags.
Tagging
Tagging is the most important function in ESEF iXBRL report creation that can make or break its quality. Companies need to attach a lot of care to the tagging process and watch out for common problems.
- Before starting to tag their financial information, companies need to choose between the ESEF and UKSEF taxonomies. The UKSEF taxonomy is an extension to the ESEF taxonomy that can be used with other tags in the FRC taxonomies suite, including the Streamlined Energy and Carbon Reporting (SECR) and Task Force on Climate-Related Financial Disclosures (TCFD) tags.
- The FRC says tagging is not meant to be a ‘label-matching’ exercise. Companies need to look for a suitable XBRL tag in the core taxonomy whose accounting meaning corresponds to the specific disclosure. Correct tagging requires a good understanding of both the reported information and the accounting meaning of the tags in the core taxonomy. Personnel working on tagging also need to ensure they use the correct sign (+/-) for a tag. Using an incorrect sign can result, for instance, in income being reported as an expense or vice versa.
- If no suitable tag is found in the core taxonomy for a given disclosure, a company can create a custom tag or ‘extension to represent the disclosure. Extension tags, which allow entity-specific disclosures, are more difficult for users to analyze and compare than the standard, core taxonomy tags. Hence, extension tags need to be created sparingly. Moreover, the extension tags need to be ‘anchored’ to elements from the core taxonomy with the closest accounting meaning.
- ESEF iXBRL filing software and even the UK National Storage Mechanism run automated checks on ESEF filings that are submitted. The checks will reveal:
- Errors that need to be resolved before a filing a submitted. For instance, an error is generated if a company does not provide its Legal Entity Identifier.
- Warnings that indicate issues within the file that need to be investigated. But all warnings need not be resolved for a filing to successfully go through.
- Calculation inconsistencies that indicate some of the numbers in the ESEF file do not add up. “Calculation inconsistencies do not make the report invalid but should be investigated.”
This brings us to the end of a brief overview of the FRC study. For a more detailed read, click here.
A few helpful articles on ESEF iXBRL compliance from Fin-X Solutions’ blog page
ESEF iXBRL filings 2020 — A Fin-X Solutions study
ESEF mandate preparation in the UK: Findings of an FRC survey
A 5-point checklist for choosing the right ESEF software
ESEF reporting: Lessons to learn from early filing experiences