Reporting update: ESEF – the difficult story of technological advancement in annual reports

‘ESEF’ stands for the ‘European Single Electronic Format’. The ESEF requirements originated in EU legislation but following Brexit the Financial Conduct Authority (FCA) introduced the requirements for companies admitted to trading on UK regulated markets through the FCA’s Disclosure Guidance and Transparency Rules (DTR).  As such these requirements apply to companies on London Stock Exchange’s Main Market with certain limited exemptions (see DTR 4.4).

All annual financial reports of issuers within scope must be prepared in XHTML, a human-readable digital language, meaning that filing in PDF or scanned documents will no longer be permissible.  In addition, companies with consolidated IFRS financial statements are required to be labelled with XBRL ‘tags’, which make the labelled disclosures machine-readable.  For the first year, it is mandatory for only the primary financial statements to be marked up with XBRL tags, noting the second phase requiring mandatory block-tagging of notes to the consolidated financial statements will be required in the following year.

The ESEF requirement was originally scheduled to begin in January 2020, but mandatory adoption in the UK was postponed by a year (due to Covid-19) and is now applicable for financial years starting on or after 1 January 2021.  However, as a result of this delay, some companies who were ahead of the curve elected to voluntarily apply the ESEF requirement in their December 2020 annual report and the results of the early applicants don’t all bear positive news.

In October 2021, the FRC published its study on early implementation and its key findings include:

• The majority of reports across the sample fell short of the quality that is expected for companies’ official filings. More than 70% of the files contained tagging errors, more than half had issues limiting their usability and more than 25% had design issues; 
• Although many issues were identified during the review, almost all issues could be solved with appropriate care and attention. A focus on quality by companies is crucial for a successful roll-out of structured reporting; and
• Companies should be aware that the issues identified are clearly visible to users and, therefore, may negatively affect a company's reputation and the willingness of stakeholders to use digital information.

Some of the difficulties arise from the format of the information being available for review.  A viewer tool allows Inline XBRL reports to be viewed interactively in a web browser, displaying both the human-readable layer and the tags.  Errors may arise due to the tag not being the most suitable tag, or companies may inappropriately apply a custom tagging for an entity specific term where an IFRS taxonomy tag exists, incorrect linkage between numbers or the incorrect sign for the tag being used.  

The UK National Storage Mechanism does run some automated checks on the filings, however we understand that this is not a complete check, and it is performed at the time of submission. Errors identified at this stage would result in delays in rectification. 

Contrary to many other European nations, BEIS has taken the approach that the XHTML file and the tagging should not be within the scope of the audit albeit BEIS have also stated that “companies may wish to obtain a report from their auditors, or other assurance provider, that covers the tagging of the ESEF accounts, prepared in accordance with the FRC’s newly adopted ISAE 3000 standard.”

This results in decisions to be made at Board level in respect of the governance procedures that it wants to apply. Questions that should be addressed include whether the tagging should be performed in-house or externally outsourced, and who has oversight on the tags applied and when a custom tag is necessary and should there be any procedures written to address this, and should assurance over the tagging of ESEF accounts be sought.

There is also the question of timing - and this is quite a big decision.  In the UK the electronic formatting requirements in the ESEF Regulation can be applied after sign-off of the annual accounts by the directors.  Whilst delaying the tagging procedure can be a relief for finance teams in the run-up to the finalisation of the audit and the annual report, if the tagging process does identify an underlying error in the financial statements, by then it is too late if the annual report is signed.  The FRC highlighted that companies should minimise the time lag between their results announcement and the publication of the official (structured) electronic format report, to enhance the value of the report and its structured data to users.

Therefore there are some key decisions for finance teams and boards which need to be made in the finalisation of their 2021 annual report, emanating from the application of a technological advancement that has not yet proven to be as straightforward as it could or perhaps should have been.