The electronic reporting format has come to stay
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.
- The initial assignment of the ESEF taxonomy to the individual financial statement information and components takes a lot of time.
- As already explained, the allocation of financial statement information and components is technically complex.
- 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.
Special challenges of 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.
- Test closings and early coordination of the ESEF documents with the auditor are again advisable here.