Where do entities in the UK stand with respect to their compliance with the ESEF mandate? What is their level of preparation?
The UK’s Financial Reporting Council (FRC) sought to find answers to such questions in a recent survey involving 46 companies, more than half of which are listed on the FTSE 100 and FTSE 250. The survey threw up some interesting insights.
We discuss a few of the findings in the paragraphs below:
Awareness of the mandate and level of preparation
Awareness about the ESEF mandate has grown. Of the 46 respondent companies, over 70% said they were fully aware of the ESEF mandate. Contrast this with 50% of the companies showing limited or no awareness of the mandate in a similar survey in 2020.
However, the numbers showing firms’ preparedness for compliance were a little disappointing. Asked to rate their preparedness on a scale of 1 to 5, about 17% of the companies chose the number 3 and 8% chose 5. However, almost 15% of respondents chose 1, indicating very little preparation for their compliance.
Note: It may be recalled that the Financial Conduct Authority allowed companies in the UK a one-year delay in compliance with the ESEF mandate because of the financial burden brought on by the pandemic.
Actions and activities undertaken
The survey showed that most companies have started taking the right steps towards compliance with the ESEF mandate. About 43% of respondents have started analyzing ESEF mandate requirements, while around 36% have identified ESEF service providers. Almost 15% of respondents said they had already done a test run with a prior-year annual report and an equal number said they have begun training internal resources on compliance tasks. However, only 4% of respondents said they had carried out a voluntary ESEF filing of their 2020 annual reports.
Approach to compliance and willingness to share the file with shareholders
Most of the companies polled are treating the ESEF file as separate from their traditional PDF annual report. They believe that an ESEF xHTML file needs to be created in addition to the PDF. A limited number of companies believe, however, that the xHTML version is meant to replace PDFs.
The FRC said in a note: “…there remains confusion around the appropriate flow and process in relation to obligations under the Companies Act, the FCA rules and the Companies House guidelines. The Lab will cover these in our Early Implementation Review.”
Almost all companies believe ESEF mandate compliance will add to their costs — but it will be an intermediate cost increase in the interim. The FRC says this is consistent with the findings of an XBRL International survey, which found a significant number of products to facilitate ESEF compliance available at below €25k.
However, the FRC says that while ESEF software and services are key contributors to compliance costs, “preparers/issuers will need to dedicate significant internal and governance resources to ensure that the ESEF process results in high-quality reporting”.
Over 30% of the companies polled are awaiting guidance about the taxonomy to be used for ESEF mandate compliance. About 15% said they would use the UK Single Electronic Format (UKSEF) taxonomy. Around 13% said they would use the ESEF taxonomy.
The ESEF taxonomy, which is based on the IFRS taxonomy, is an exhaustive list of over 5,000 accounting concepts. The UKSEF taxonomy adds UK-specific concepts or tags to the ESEF taxonomy.
The UK’s Financial Reporting Council recently released an updated version of the UKSEF taxonomy as part of its 2022 taxonomies suite.
Other tagging areas
Companies participating in the FRC survey were also asked about other areas of digital corporate disclosure that they would comply with if a taxonomy was available.
Most companies chose Taskforce on Climate-related Financial Disclosure (TCFD) reporting and other
Environmental, Social, and Governance or ESG-related reporting as priority areas for digital disclosure.
The FRC said the latest UKSEF taxonomy can be used along with other taxonomies in the FRC suite such as the Streamlined Energy & Carbon Reporting (SECR) Taxonomy and TCFD.
Based on the findings of the survey, the FRC is making the following resources available to ESEF filers:
- A list of resources to help companies understand and implement the requirements
- An Early Implementation Review of ESEF across the UK and EU
- An event to get people prepared for year-end