A bit of context
The ESEF taxonomy (link) comprises over 5,000 accounting concepts and is primarily based on the IFRS taxonomy. Companies preparing their ESEF annual reports need to choose anything between 100-200 of those concepts that best describe their disclosures. And they need to map their disclosures to relevant ESEF taxonomy concepts in a process known as ‘tagging’.
In case of disclosures where none of the ESEF taxonomy concepts are an appropriate fit, companies may create extension elements or custom tags.
ESEF Reporting
How to identify an extension element?
Here’s the main difference between taxonomy elements and extension elements.
Where tags from the ESEF taxonomy have the prefix ‘ifrs-full’, extension elements have a company code or symbol as their prefix.
For instance, the ‘xyz’ portion in this example of a custom tag — ‘xyz_ElectricityAndNaturalGasRevenue — represents the company code or symbol.
Extension elements: How they help
If used correctly, extension elements can help companies present a better picture of their financial position to investors. They also allow companies to impart information that lies beyond the scope of the ESEF taxonomy concepts. However, companies need to take care not to use custom tags in instances where the right ESEF taxonomy fit is available. Such a practice not only raises questions about the quality of reporting but is also frowned upon by regulators.
Anchoring — Vital for easy comparability
‘Anchoring’ is a requirement that is unique to the ESEF mandate. Companies are required to ‘anchor’ their extension elements or custom tags to ESEF taxonomy elements with the nearest accounting meaning. Apart from helping companies to make unique disclosures, anchoring performs the crucial function of making such disclosures across a group of companies comparable.
Let’s take the above-mentioned example of a custom tag: ‘xyz_ElectricityAndNaturalGasRevenue’
Here, the custom tag can be anchored to the ESEF taxonomy tag that represents revenue: ‘ifrs-full_Revenue’.
The anchoring of a custom tag may involve an ESEF taxonomy concept with a ‘broader’ or ‘narrower’ scope. A taxonomy concept with a broader scope is one that covers the meaning of the custom tag in its entirety, while a concept with a narrow scope is one that relates to the custom tag to a limited extent only. The task of choosing the right taxonomy concepts to anchor custom tags with requires utmost care so that these company-specific disclosures lend themselves to comparability when third-party tools analyze many XBRL documents together.
To conclude, it is useful to create extensions to describe disclosures that do not have an appropriate fit in the ESEF taxonomy. However, to maintain the quality of financial reports and facilitate comparability across companies (for investors), it is necessary to use extensions wisely and anchor them to an appropriate (narrow or broad) taxonomy concept.