This article was first published in the March issue of the digital magazine for financial professionals; ThinkTWENTY20. You can find the pdf version of the magazine here.
In 2013, the transparency directive was amended by the European Securities and Markets Authority (ESMA). The objective of that directive was to give a more transparent view of financial reporting among issuers. Furthermore, the goal was to make financial reports easier to produce, compare, facilitate and distribute for the issuers.
Quite early in the process it was “obvious” that the best suitable format for the transparency directive was XBRL (eXtensive Business Reporting Language). But the question about whether it should be XBRL or iXBRL (inline XBRL) was yet to be answered. In 2016, after consulting the market and making various analyses and field tests, ESMA finally announced that the format chosen was iXBRL.
The European Single Electronic Format (ESEF) will come into force as of January 1st, 2020. This means that companies delivering annual reports with balance sheet dates after this will have to deliver their annual report in the iXBRL format. So, the real effect will be from 2021 on, when all the annual reports following the calendar year will be delivered.
And just to get some facts straight right away behind the transparency directive:
The advantage of using iXBRL is, that it gives you the best of both worlds: the “human” visual design part and the “machine” readable digital part of the annual report.
The “visual part” is for the human eye reading the report, maintaining the touch and feel, by showing the pictures, graphs, tables, formatted texts, references etc. The purpose is the same as today: to make it easy and digestible for the reader to understand the annual report and how the company has presented it. This is how we know the annual reports of today, we are accustomed to having it served in the PDF format. All the properties you have today in PDF will also be available in the iXBRL format from 2020 on.
The “machine readable” part is where the beauty of XBRL comes into play. You can compare it to the movie “the Matrix.” The human eye sees and reads a regular table of numbers in the consolidated financial statement in the iXBRL file, but a machine will see and read a lot of the metadata that is hidden and embedded within the numbers. The machine can extract specific values and the details behind the numbers (Is it a value in millions? Which period is it for? Which currency is it? How much percentage increase or decrease is it compared to last year? etc.). This can be done instantly and by doing this the data extracted can also be exported to other systems, analyzed automatically, translated into other languages, etc.
A practical example:
In Denmark, XBRL is a common standard reporting language today. When a company delivers its annual report to the Danish Chamber of Commerce, it also sends along an XBRL file. The minute the Danish authorities receive the reports online from the company, the XBRL file is published publicly online at the Chamber of Commerce website, and in a publicly accessible Datawarehouse. This enables analytic agencies, banks, system-builders, and other companies to import the files and thereby have the opportunity to analyze the company’s latest financial data. There are also language dimensions to the Danish XBRL files (as is the case for ESEF), meaning that a Danish bakery can deliver its XBRL file on a Monday evening and, on Tuesday morning, a Chinese investor can read the financial statement in Chinese, while another system can analyze or calculate statistics in the data, look at performance and compare the bakery to other similar bakeries or industries in real- time, based on the data that is published.
This means that the listed companies need to convert their annual report production processes so they can produce them in an iXBRL file. In effect, they will have to decide on how they want to produce their annual reports moving forward by choosing systems, vendors, consultants, processes etc.
Issuers will find that the biggest impact – and workload – comes the first time they need to prepare their annual report in iXBRL. In this preparation phase, all the individual accounting entries needs to be mapped against the XBRL dictionary, also known as “the taxonomy.” Once this is done, most of the mappings can be reused in the following years and, if the issuer invests in the right solution, it will most likely not need to map more than a couple of entries every year.
There are two important decisions that need to be taken when an issuer is ready to produce the iXBRL files:
It is a common misunderstanding that issuers have to invest in new accounting and reporting applications. However, many of the large applications already have support for iXBRL and there are also plenty of add-on solutions that can support the current applications.
Large applications vendors like Workiva, SAP etc. has already stated that they will implement and support iXBRL for ESEF as a part, or an addon to their systems, although we still haven’t seen any fully tagged ESEF iXBRL files yet from them.
There is also other vendors who has a long history in producing XBRL solutions, like ParsePort, Invoke etc. who is building other kind of iXBRL supportive solutions, where companies either can integrate them into their current workflow or use them as bolt-on solutions.
My point is, that there is a solution no mater which direction the Public Listed Companies want to go when they report ESEF.
In the US, most of the Securities and Exchange Commission (SEC) filers chose to outsource the mapping of their XBRL files the first several years. (ref: XBRL Int.) After this, we saw filers taking the mapping in-house again, after they had gained the necessary competence from their outsourcing partners.
Denmark is the only country in the EU where it has been mandatory for listed companies to file their financial statements and reports in XBRL since 2014. The experiences also show that there is a need for an XBRL specialist in the mapping phase during the the first years. In Denmark, most companies have outsourced that task to their auditors, meaning that the auditors hook the “XBRL specialist role,” which is contrary to the US SEC experiences.
The conclusion from the SEC and DKIFRS filings is that the mapping needs to be done by professionals, who are experienced in working with XBRL, mapping and taxonomies. This is a complex task for inexperienced users, and having an expert to review and map the annual report in Year 1 and Year 2 is a good investment. This, in turn, will make the users working on these issuers feel safer and more confident.
We always recommend that our customers, partners and clients do the following when they are getting ready to switch to ESEF:
This is still a bit undefined, but we do know for sure that the auditors will have to sign the xHTML(iXBRL) file that the issuer delivers. The latest we know is the Comitee of European Auditing Oversight Bodies (CEAOB) guidelines on the auditors involvemene in the financial statements, where they recommend that the auditor should report specifically on the work performed on ESEF. In other words – the auditor needs to have some kind of statement and conclusion on the mapping, as this is a part of the ESEF. So, clearly, the auditors will have a quite signifigant responsibility for the iXBRL/xHTML file.
The customary PDF file will be replaced by the xHTML file that is published. So, the glossy beautiful PDF file that usually is published will be replaced by an identical xHTML file. There is no need to worry about the quality of the new reporting format – the xHTML file actually has more to offer, and any browser can open it whereas a PDF file demands a software application that can read the file.
It is true that ESEF will give listed companies extra work and expense in the beginning. But, in my experience, listed companies are agile and very good at adopting new technologies and processes. ESEF will make the companies more attractive, because the reports will be digitalized and distributed instantly, optimizing the market reactions and giving companies a greater appetite for foreign and local investors. It is also my opinion that we will see some of the companies align their account entries with the XBRL taxonomy, streamlining, rectifying and unifying the annual reports, which will make them easier to compare and analysze. All in all, ESEF is a great solution and definitely is in the best interest of both investors and the markets.