Don’t sweat on the ESEF

As we approach the end of another year, finance teams across the UK will prepare for what may be their busiest and most difficult time: producing their companies’ Annual Financial Reports (AFRs). .

This year also sees the Single European Electronic Format (ESEF) become a mandatory requirement for major listed companies with a financial year starting on or after January 1, 2021 – meaning the first wave of compliant reporting ‘ESEF will arrive by the end of April 2022 at the latest.

Despite fears that the ESEF could potentially cause additional hardship during an already hectic time, at Tax Systems we don’t think there is too much cause for concern.

Evolution not revolution

It’s important to remember that ESEF is a technical format – you don’t have to produce or report new financial information – just make existing information available in XHTML format so that it can be read at both by man and machine.

When the AFR contains consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS), these should be labeled with eXtensible Business Reporting Language (XBRL) tags and then integrated into the XHTML document using XBRL online (iXBRL).

“The ESEF mandate was introduced to facilitate access, analysis and comparison of annual financial reports. Intended to benefit investors and other stakeholders through greater transparency, it marks an important milestone in bringing financial reporting into the digital age, ”according to a recent statement from ICAEW.

There are rumors that the ESEF could be a catalyst for a broader digital transformation agenda, but we don’t think it’s particularly likely. While this represents another step in digitizing reports, it does not require a process change in the way the AFR itself is produced. That’s not to say that it wouldn’t be wise to schedule extra time as part of the review process – we strongly recommend that you do so.

Do more than the minimum

The ESEF is also more than a ticking exercise – it’s great to be able to analyze and compare data, but it’s only useful if that information is of high quality. The Financial Reporting Council (FRC) reviewed 50 ESEFs (voluntary deposits or from EU countries where the requirements were already in place) in the UK and Europe. The FRC found that over 70% of them had tagging errors and over 50% of the problems limited their use.

Interestingly, the FRC also noted that over 25% of the reports reviewed also had design issues, so we can’t lose sight of the fact that documents will still need to maintain the tidy appearance of traditional PDF. annual report based. As a public document, it is essential that the company mitigates any risk to protect the brand and its reputation. This new digital version of the annual report will be viewed by more people when online.

“Companies should be aware that the problems identified are clearly visible to users and, therefore, can negatively affect a company’s reputation and the willingness of stakeholders to use digital information,” the FRC said in The report.

The advice is that companies should devote the same level of care and attention to their ESEF compliant report, as it is the one that will become the official version of the AFR under jurisdictional transparency rules.

The Financial Conduct Authority (FCA) and FRC jointly announced that they will assess both the quality and usability of ESEF compliant reports, noting that they may take further action if the quality does not meet their expectations.

Although the UK government has decided not to introduce a mandatory audit to check whether reports meet ESEF markup requirements, digitization creates an audit trail almost by default, so we believe that is subject to change. Again, the FRC suggests that boards should consider obtaining assurance (internal or external) to demonstrate that they have assumed the appropriate responsibility. Coupled with the FRC’s adoption of the International Standard on Assurance Engagements (ISAE) 3000, we expect this to be as soon as possible.

Careful consideration is still needed

The main choice you will probably have to make is to produce the newly formatted report in-house or outsource it to a third party.

Preparing AFRs can be time consuming and expensive, so taking on the task of preparing the document in-house will undoubtedly lead to increased workload at a time when resources are stretched.

If you are considering outsourcing ESEF markup, you might want to consider where the service will be performed and who does it – this is very sensitive information about your business, so you need to make sure it is between. in good hands, and you can also make it clear that he’s not leaving the UK.

It is also likely that a tight turnaround time will be required, so the process should allow sufficient time for internal and external reviews. The FRC recommends using the annual report from a previous year to test your chosen process, before applying it to the current year.

In summary

We know that ESEF is new (for the most part) this year and that change still has the potential to cause upheaval. However, there are plenty of comprehensive tips and tricks on what you can do to make sure you get a high-quality report that not only looks great, but is fully compliant as well.

For more information on ESEF and digital reporting, subscribe to our online seminar on December 2, 2021 from 10:00 a.m. to 11:00 a.m., where we’ll talk more about why we think ESEF shouldn’t be so stressful. You can also ask all your questions about the ESEF and discover our ESEF marking service.

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