ESEF - PAS Financial Advisory

CFGI is one of the most experienced providers of professional consulting services around the European Single Electronic Format (ESEF) – from the selection of the most suitable software solution, to the optimization of reporting structures, to the final tagging of the financial statements.

The electronic reporting format has come to stay

Legal framework

The Act of August 12, 2020 introduced the European Single Electronic Format (ESEF) for annual financial reports. Since then, issuers whose securities are admitted to trading on a regulated market must prepare their financial statements and management reports in the ESEF format.

For the 2020 financial year, initially only selected components of the IFRS consolidated financial statements and, since the 2022 financial year, the notes to the financial statements have also been subject to the obligation to be marked up in accordance with the so-called ESEF taxonomy.

The ESEF documents are to be audited by the auditor and acknowledged in a separate section of the auditor's report. In addition, the annual financial reports in ESEF format must be disclosed to the Bundesanzeiger (a German governmental publication platform).

Objective and future prospects

ESEF is intended in particular to increase the transparency of financial reports in the EU since ESEF makes it possible to compare financial reports regardless of language, structure and format.

The XHTML format also enables machine analysis of financial information. The more and the more detailed the information contained in the ESEF format, the more meaningful such evaluations become.

Furthermore, CSRD (Corporate Sustainability Reporting Directive) will make sustainability reporting a mandatory part of annual financial reports. Thus, ESEF will also extend to ESG (Environmental Social Governance) reporting.

Special challenges for first-time adopters

Anyone who will soon fall within the scope of the ESEF regulations, for example through an IPO, must be aware of some special challenges.

The ESEF format is an XHTML format. To ensure the specifications of a valid XHTML report, a software solution with the corresponding iXBRL technology is inevitable.

Every company is therefore dependent on using a corresponding software solution or on handing over the task of tagging to an external service provider with access to such a solution.

The initial assignment of the ESEF taxonomy to the individual financial statement information and components takes a lot of time.

In any case, we always recommend creating a test financial statement with the currently valid ESEF taxonomy and discussing it with the auditor. The annual closing phase is always tightly timed and the additional workload caused by ESEF has forced even experienced companies into supplementary audits. We are therefore observing the logical trend towards early closing (so-called Fast Close).

As already explained, the allocation of financial statement information and components is technically complex.

Even if it is a requirement of the publication of the annual financial reports, the project responsibility should be anchored in the finance department (CFO agenda) and not, for example, in Investor Relations. This is because the competence to correctly allocate the ESEF taxonomy to the annual financial reports lies in the finance department.

In addition to annual adjustments of the ESEF taxonomy, content adjustments to the annual financial reports may also cause a necessary update of the ESEF tags.

A corresponding review should be included in the annual ESEF process.

Special challenges of ESEF Phase 2

Many of the first-time adopter challenges are also found in ESEF Phase 2.

The tags are now even more extensive and the ESEF taxonomy also includes the notes to the annual financial reports. Currently, tagging in the appendix is done on text blocks (so-called text block tagging) and causes assignment chaos, especially in sections with diverse collections of information.

Some assignments are not trivial from a technical point of view and require timely coordination with the auditor. Our experience shows that different audit firms also use different interpretations as a basis here.

Test closings and early coordination of the ESEF documents with the auditor are again advisable here.

In order to relieve the peak phase of the preparation of the financial statements, the ESEF processes should be settled or be optimized again at the latest for phase 2.A fast close process or outsourcing of ESEF activities can relieve internal resources and support compliance with internal and external requirements.

Our conclusion

ESEF has come to stay and, once stakeholders make effective use of machine-readable data, will continue to grow in importance; not least by extending it to ESG reporting.

We are happy to support you in the preparation of ESEF readiness or optimization of ESEF processes

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