{"id":80383,"date":"2022-11-01T05:22:10","date_gmt":"2022-11-01T05:22:10","guid":{"rendered":"https:\/\/fin-xsolutions.com\/?p=80383"},"modified":"2022-11-01T07:21:28","modified_gmt":"2022-11-01T07:21:28","slug":"financial-reporting-council-frc-study-on-structured-digital-reporting-key-learnings","status":"publish","type":"post","link":"https:\/\/fin-xsolutions.com\/financial-reporting-council-frc-study-on-structured-digital-reporting-key-learnings\/","title":{"rendered":"Financial Reporting Council (FRC) Study on Structured Digital Reporting – Key Learnings"},"content":{"rendered":"

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Introduction<\/h3>\n

Companies allowed to trade on regulated markets in the UK are mandated to produce their annual financial reports (AFRs) using a structured digital format known as Inline XBRL (iXBRL). This report is submitted to the Financial Conduct Authority (FCA) for filing in the National Storage Mechanism (NSM).<\/p>\n

Building upon a previous early implementation study of voluntary practice conducted in 2021, the Financial Reporting Council (FRC) Lab has published a new report where it identifies key learnings from the first year of mandatory structured digital reporting under ESEF.<\/p>\n

To gather feedback and identify areas of improvement by reviewing a sample of these filings by UK companies, the Lab held outreach events with companies and other stakeholders such as design agencies, XBRL tagging service, and software providers, as well as assurance providers.<\/p>\n

In the following sections, we will take a brief look at the basis and focus of the study, who it is for, what the three key areas of the survey were, what companies can learn from the findings, and lots more.<\/p>\n

High-quality Digital Reporting \u2013 The Need of the Hour<\/h3>\n

The HMRC was among the first regulatory and tax authorities in 2011 to require UK entities to report to them in a digital format. The UK\u2019s Companies House is the official registrar of companies in the country and also allows voluntary digital reporting to it. While tax reporting in iXBRL has been around for over a decade, this study conducted by the FRC solely focuses on digital reporting under the Disclosure Guidance and Transparency Rules (DTR) requirements.<\/p>\n

Under the DTR, companies in its scope must produce their AFRs in the electronic reporting format prescribed in the TD ESEF regulation, the UK\u2019s version of the ESEF Regulatory Technical Standard (RTS). Adoption of ESEF became effective for AFRs published on or after 1 January 2021 and ushers UK corporate reporting into the digital era.<\/p>\n

The introduction of structured digital reporting in a usable and comparable format helps companies be more transparent with their shareholders and promotes the effective functioning of the capital markets. However, this is possible only if the resulting reports are high-quality and usable in practice.<\/p>\n

With that in mind, let\u2019s take a closer look at the focus areas of the Lab\u2019s study that hold the key to high-quality digital reports complying with the ESEF mandate.<\/p>\n

FRC Lab\u2019s ESEF Reporting Study \u2013 Key Areas<\/h3>\n

Building off of their early implementation study conducted last year, there are 3 focus areas of the FRC Lab\u2019s review of structured digital reporting in the UK under ESEF. These are:<\/p>\n

    \n
  1. Tagging<\/strong><\/li>\n
  2. Process<\/strong><\/li>\n
  3. Usability and Design<\/strong><\/li>\n<\/ol>\n

    Analyzing a sample of the filings from the first year of mandatory structured reporting in the UK, the FRC used public data along with data made available by the FCA for this study. While it found measurable progress since its last implementation study, the results of this analysis leave much to be desired in the terms of data quality and usability of the reports, unbecoming of companies in a leading capital market.<\/p>\n

    Among its many observations in these 3 areas, it found various opportunities for companies to improve their processes when it came to structured digital reporting by outlining two kinds of workflows. The Lab\u2019s study also investigated tagging in-depth and suggested ways for companies to mitigate errors. Finally, it identified issues with the design and formatting in the human-readable layer of the XHTML document and the loading time of these documents among other things. In the coming sections, we will touch upon these issues in more detail.<\/p>\n

    FRC Lab\u2019s ESEF Reporting Study \u2013 Who this Study Benefits and How<\/h3>\n

    Among the primary beneficiaries of this study are companies filing to the FCA<\/strong> who need to assess whether changes to the core taxonomy they use have any impact on their tagging, like transitioning from IFRS 2020 to IFRS 2021, for example. This report can also guide regulators, analysts, and investors<\/strong> in understanding ESEF reporting in the UK in greater detail and make value judgments accordingly. Regulators can lay down more specific guidance for filers and aid them in publishing ESEF reports that are more suited to the purpose of improving data transparency and comparability.<\/p>\n

    FRC Lab\u2019s ESEF Reporting Study \u2013 An Overview<\/h3>\n

    Since the requirement for iXBRL tagging only applies to companies using the EU IFRS accounting standard, not all of the 679 <\/strong>mandatory reports filed on the UK NSM at the end of July 2022 contain XBRL tags. A little over 65% of the companies had tagged AFRs that could be further studied for the purpose of this review.<\/p>\n

    The 443<\/strong> companies that had iXBRL-tagged AFRs provided over 150,000<\/strong> data points to inform the findings of this study. The FRC\u2019s Lab focused primarily on three areas of improvement:<\/p>\n

    Tagging<\/strong> \u2013 The FRC Lab found that most of its guidance from last year\u2019s implementation study remains applicable. This includes using the correct sign, avoiding concealed facts (an issue that appears to be largely resolved in filings this year), investigating warnings, and avoiding changes to standard labels of tags. It makes additional observations on anchoring<\/a>, choice of taxonomy, calculations, and further voluntary tagging that we will explore further in the next section.<\/p>\n

    Process \u2013<\/strong> The study identified opportunities for companies to make their processes more efficient in the long term despite companies preparing structured digital reports in line with prescribed requirements. Various contributory factors include the level of involvement, ownership, and governance by companies, the workflow adopted to produce these reports, the manner of submission to the NSM, external assurance, and filing in multiple jurisdictions.<\/p>\n

    Usability & Design \u2013<\/strong> Investigating the visual quality of reports, the Lab\u2019s report noted an improvement in formatting and readability across the board. It also made observations on the availability of iXBRL reports on corporate websites, submission timings, file size and loading times of reports, and embracing XHTML as a web-based format for reporting, changing the way they think about report layouts as opposed to the PDF\u2019s traditional A4 size.<\/p>\n

    In our last and final section, let\u2019s take a closer look at what the report unearthed across all three focus areas and what lies in the future for companies vis-a-vis digital structured reporting.<\/p>\n

    FRC Lab\u2019s ESEF Reporting Study \u2013 The Findings<\/h3>\n

    The FRC Lab\u2019s study highlights certain aspects of a sample of UK companies\u2019 digital corporate reports and focuses on innovation and best practices that should be followed to produce more useful information for all concerned stakeholders. Let\u2019s look at what the Lab found across the three focus areas.<\/p>\n

    1. Tagging<\/h3>\n

    The study continued to observe tagging errors in the reports submitted to the NSM, observing that it is crucial for companies to continue improving data quality if they want investors to be unreluctant in using structured reports in the future. It also noted that poor tagging quality can be construed as an indicator of weak underlying processes and this may influence their decisions in a big way.<\/p>\n

    Apart from the guidance, it provided as part of its implementation study last year, the Lab felt it important to reiterate and highlight five factors to guide filers in the right direction.<\/p>\n

      \n
    1. Extensions and Correct Tags<\/strong> \u2013 In a sample of 50<\/strong> reports submitted to the NSM till 31 July 2022, the study found 400 tags on average <\/strong>with 86% tags from the core taxonomy <\/strong>and the remaining 14% tags being extensions<\/strong> (custom tags). These rates vary by industry and statement type. The graphic below illustrates extension rates based on statement type.<\/li>\n<\/ol>\n

      \"DigitalSource: FRC Study<\/a><\/p>\n