What you need to know now about the new reporting obligation
Background: regulation of European financial markets
The European Union is continuing to implement the Transparency Directive / EU Directive 2013-50-EU of 22 October 2013 on the regulation of European financial markets.
On 18 December 2017, the European Securities and Markets Authority (ESMA) published the final draft for the development of technical regulatory standards (RTS), laying the foundation for a new reporting format that is uniform across the EU: the European Single Electronic Format (ESEF).
The aim is to
- increase transparency in EU and EEA regulated markets,
- make financial reports comparable regardless of language, structure and format,
- to enable investors, public authorities and issuers to carry out automated analysis of financial information.
On 20 September 2019, the Federal Ministry of Justice and Consumer Protection, together with the Federal Ministry of Finance, prepared a draft bill (RefE) to implement the amendments to the EU Directive 2013/50/EU with regard to ESEF and sent it to the participating associations for information and comments. The main content of the RefE is amendments to the commercial law requirements for reporting by capital market-oriented companies. In addition, the draft of the bill contains proposals for regulations to also make electronic documents the subject of disclosure, auditing and balance sheet control.
ESEF, XBRL, ESMA: Clarification of terms
European Single Electronic Format – the name of the new electronic reporting format that is uniform in the EU.
European Securities and Market Authority to improve investor protection and ensure stable and orderly financial markets. It monitors, inter alia and the implementation of the ESEF Regulation.
Extensible Business Reporting Language – an XML-based language that enables the standardisation of data. Previously, financial reporting was done in XBRL.
Inline eXtensible Business Reporting Language is the further development of XBRL. XBRL documents are inserted into a HTML document in such a way, that it can be displayed in web browsers with HTML-typical formatting.
Regulatory Technical Standard. The European Securities and Markets Authority (ESMA) was commissioned to develop the technical regulatory standard (RTS) for the EU standard digital reporting format ESEF.
Extensible HyperText Markup Language is a text-based markup language that is based on HTML 4.01. The language used for the markup is HTML 4.01. XHTML enables the structuring and semantic marking of content such as text, images and hyperlinks in documents.
A classification system to identify and structure information. For ESEF, the standard elements of the ESEF/IFRS taxonomy are used.
Across Europe, this affects approx. 7,500 companies. Approximately 5,300 of these have to tag their IFRS consolidated financial statements as part of the annual financial report.
Further financial reports (e.g. annual financial statements according to HGB) can be labelled with XBRL tags if a corresponding taxonomy is provided in the respective member state. For Germany, XBRL Deutschland e.V. provides an e-balance sheet taxonomy that can be used for this purpose.
Yes, if the components are already disclosed (Section 114 (2) Securities Trading Act) in accordance with commercial law, there is no obligation to publish an annual financial report.
All annual financial reports for financial years beginning on or after 1 January 2020 must be published in Extensible Hypertext Markup Language (xhtml) format. Both annual financial statements and consolidated financial statements are affected.
No. However, for financial years beginning on or after 1 January 2020, only the “main financial statements” such as balance sheet, income statement, cash flow and statement of changes in equity need to be labelled. In addition, 10 disclosures from the notes must be labelled. These include key information on the company such as name, registered office, legal form, etc. According to Art. 4 No. 3 of the ESMA draft, the use of additional tags is optional.
For fiscal years beginning on or after January 1, 2022, the scope of the disclosure requirement is extended to include notes to the consolidated financial statements (234 additional information to be tagged).
As of January 1, 2020, companies will be required to report in an XML language and the inline eXtensible Business Reporting Language (iXBRL). All figures and information in the financial statements will be provided with a standardised label (tag). These tags follow a clearly defined IFRS taxonomy, presented in the iXBRL language. It enables IT systems to read out annual financial statements/consolidated financial statements semi-automatically and process information further. A comprehensive ESEF taxonomy is provided for this purpose. In addition, this format can be opened and displayed in any standard browser just like a website. Thus, an XHTML financial report can be designed and graphically prepared like a print PDF file according to the issuers’ wishes.
Companies that are included in the IFRS consolidated financial statements of a capital market-oriented company should check at an early stage whether and to what extent financial statements or accounting systems are provided with XBRL tags. In this context, extensions of the taxonomy by the parent company are of interest.
The ESEF taxonomy is based on the IFRS taxonomy of the IFRS foundation. However, it is based on the legal status approved by the European Commission. In view of the experience with the IFRS taxonomy, frequent changes and additions to the ESEF taxonomy are to be expected. Issuers are therefore well advised to implement processes that ensure that taxonomy and technical standards are always up to date and that innovations at all levels are incorporated into the accounting system. When linking with other systems (e.g. e-balance sheet), attention should also be paid to interdependencies. In this context, higher running costs are to be expected.
A direct transmission of the financial statements to ESMA is not planned. The national business registers will remain in place. There will also be a central European register with reference to the national registers (European Electronic Access Point).
According to the wording of Art. 4 para. 1, the object of the Transparency Directive is the publication of annual financial reports. The preparation of the report and the preparation of the individual components are not addressed. However, the audited (consolidated) financial statements and (consolidated) management report are declared components. The ESEF-RefE resolves this ambiguity by moving the requirements of the ESEF obligation forward to the statement. Thus, the mere transfer of audited financial information into electronic form, but also the control of content by a third party, is ruled out. The legislator follows the assumption that the EU Commission is obliged to audit financial statements. However, this is not to be found in the ESEF Regulation itself, but only in the accompanying Q&As. Since digital reporting will in future be tied to the preparation of the financial statements, the auditors and the supervisory board must assess the accuracy of the tagging.
The ESEF Regulation involves considerable expense for issuers. The costs for the conversion should therefore not be underestimated. The cost depends very much on whether issuers implement the tagging etc, themselves or commission a service provider to do so.
The in-house solution is associated with high initial costs for the purchase of the corresponding software, but also for the expansion of personnel in accounting/investor relations. With the external solution, the initial costs are significantly lower, but there are fees for the transfer to the ESEF format for each transaction.
With the decision to implement the ESEF obligation in-house, companies are pushing ahead with digitization in-house. This initially requires a high initial investment in appropriate software and system adaptations. In addition, running costs will rise due to the increase in personnel in accounting/investor relations. However, once everything has been implemented, ESEF’s requirements can be implemented semi-automatically, significantly reducing manual effort and error sources. It is also important to make this decision in the context of the group!
To commission a service provider means to initially keep the effort in your own company low. Experience with the IFRS taxonomy shows that frequent changes and additions to the ESEF taxonomy are to be expected. Issuers must ensure that the taxonomy and technical standards are always up to date and that innovations at all levels are incorporated into the accounting system. This effort is considerable and probably not affordable without additional manpower in accounting/investor relations. By commissioning a service provider, this risk is outsourced. In addition, the initial investments and additional burdens for accounting, IT and investor relations are significantly lower. However, the issuer has less control over the creation process. Here, too, the decision must be coordinated with that of the parent/subsidiary if the issuer belongs to a group.
The step towards greater transparency and comparability is generally met with approval. Nevertheless, there is plenty of criticism of the implementation:
Representatives of small and medium-sized issuers fear that they will reach their limits with their limited financial and human resources. This raises the question as to whether the information gain for the addressees actually justifies the additional effort.
The German Accounting Standards Committee e.V. (DRSC) criticizes the susceptibility to errors in the implementation of XBRL tags in XHTML files with regard to the machine-readability of information. If no automated checking mechanisms were implemented to eliminate decimal and sign errors, the benefits of the new reporting format would be questioned.
The criticism of the Institut der Wirtschaftsprüfer (IDW) is directed above all, against the planned adaptation of the German right and here above all of the HGB to the ESEF obligation. The implementation of the draft would interfere with fundamental obligations under commercial and company law and would give rise to a large number of open questions both for the companies concerned and their executive bodies themselves and for the respective auditors. The IDW considers a positioning of the format specifications from ESEF within the HGB regulations for the preparation of the components of the annual and consolidated financial statements to be systematically inappropriate. In its statement of 15 October 2019, it justified this by stating that this was a matter of capital market law. The requirements should therefore be anchored in securities trading law. There, the auditor should also be obliged to give a separate opinion on the regularity of the ESEF formatting as part of the process of publishing the annual financial report following the preparation, adoption and approval of the financial statements.
In the IDW’s view, defining the formatting as part of the preparation and not the disclosure process of the annual financial reports also raises many questions. Proven processes for the preparation, audit, adoption and approval of financial statements would have to be changed. This could impair the reliability and timeliness of capital market communication.