INSIGHTS: WHY YOUR BUSINESS MUST TREAT ESEF AS TODAY’S PROBLEM
This year's Evolution of the Annual Report conference takes place in London on 13 September. Investis Digital is leading the session on changes to corporate reporting
If your company is listed on a regulated UK or European exchange, you are probably overlooking a major change to how you’ll produce and publish your annual report: the European Single Electronic Format (ESEF).
ESEF is intended to improve the transparency and accessibility of financial information by enabling annual reports to be both machine and human readable. The ESEF regulations require any company listed on a regulated UK or European exchange to file its annual report in XHTML. Additionally, the primary financial statements must be tagged using iXBRL tags in accordance with the IFRS taxonomy. These new requirements became a reality in May (subject to Brexit in the UK of course).
Make no mistake, ESEF has far-reaching implications. But too many companies affected by ESEF are not giving it the attention it deserves. There are a few reasons for the lack of urgency.
First is that ESEF still seems like a faraway problem. ESEF only becomes mandatory for companies with their financial year beginning after 1 January 2020, and therefore the first reports published under the new regulations won’t appear until early 2021.
Second, most of the noise around ESEF has focussed on iXBRL and the tagging process which does little to capture the imagination of senior-level decision makers responsible for overseeing the publication of their financial reports.
But businesses that are not planning ahead are in for a rude awakening. ESEF will force thousands of businesses to completely overhaul their annual reporting –from how their reports are designed to the timetable for creating them.
For example, ESEF will force businesses to rethink their report planning and sign-off processes as they move from print to a digital first focus. That’s because with the introduction of ESEF, it’s the XHTML – not the print or PDF version of the report – that needs to be signed off by the company’s board, verified by the auditors, filed with the relevant authorities, and distributed to shareholders. However, few businesses have any experience of digital first reporting or what’s required to create entire reports in XHTML.
In addition, ESEF is likely to change the timetable for reporting. For the new legislation to make good on its promise of better transparency and comparability, businesses will need to publish their digital report more quickly than is usually the case today. Businesses will need to adapt to a collapsing of the time between publishing the full-year results and their annual report.
ESEF will also impact governance processes. The board of directors will have the additional responsibility for signing off the machine-readable elements of the report that are typically hidden from human readers. Businesses will need to carefully ensure that they adapt their sign-off processes accordingly.
ESEF has now been passed into European law (and is expected to be adopted by the UK post-Brexit). As such, businesses that don’t prepare for ESEF risk incurring reporting delays, financial penalties and damage to their reputations.
We suggest companies prepare now. Take a hard look at your process, timeline, and governance for creating your annual report – what would be the impact of moving from print to digital-first reporting? Why not consider doing a dress rehearsal in 2020 to test that your processes and technology are robust. Prepare when you can for change, not when you have to.
Simon Gittings is the creative director at Investis Digital