When accounting develops its own language

The ESEF format has changed the way companies disclose their annual statements. To convert their information into the XHTML webformat, issuers now need to master the technical language of eXtensible Business Reporting (XBRL). The idea is simple: by linking each element of the financial report to a corresponding XBRL element, issuers create a "map" of their company's information, translated into a language that can theoretically be universally understood by computers and lectors.

Mapping involves navigating the complex ESEF taxonomy and finding how each element of the financial statement can be tagged with an XBRL tag. This can prove very technical: there are over 4,500 standard tags to choose from! To avoid mistakes, it's therefore essential to check how each standard tag is precisely defined under the taxonomy.

The complexity doesn't end here, since issuers may need to create extensions to map company-specific information that can not be linked to a standard tag. But as we explained here in a format article, such extensions should be used with caution since too much customization will make the data difficult to compare and analyze for investors.

The very technical requirements can create quite a dilemma for accounting departments. They must choose between keeping control over the creation of the report and risking technical errors (that may be difficult to solve and may make all of the report unreadable), or handing over the creation of the report to external parties for more serenity... at the cost of a loss of control over the actual data published in the report. External parties may make undesirable choices or even errors, not from a technical perspective, but from the accounting perspective, due to their lack of expertise when compared to the consolidation analyst. Such issues would cause analysts to misunderstand your communication – consequently decreasing their confidence – or lead them to make investment choices based on misleading data.

In the end, with compliance as a focus, many companies have chosen to outsource this process entirely to external parties, who will be responsible for the technicality of the final report and for ensuring that it complies with the regulation.

Beyond compliance: controlling your company's narrative

ESEF filing quality is not just about regulatory compliance: it's also about conveying your equity story to investors, analysts and stakeholders. Your disclosures communicate the information they need to make investment and voting decisions.

Learning which XBRL tag "works" is only the first step to guarantee that your message comes across. Think of it like learning any other language: ESEF compliance is equivalent to complying with the language's rules. But just because you can articulate a grammatically correct sentence in Chinese, does not mean the sentence is meaningful to Chinese-speaking interlocutors.

When it comes to ESEF, many companies seem (when looking at the reports) to be ignoring so far the difference between a compliant sentence and a meaningful narrative. They worry about making meaningful ESEF sentences, but not enough about the actual meaning of these sentences.

That is a consequences of delegating everything to external parties. With no experience gained over publications and no tool acquired to inspect their data, companies have no way to check and challenge the contents they actually broadcast.

This loss of autonomy also leads to a huge loss of efficiency. The company's consolidation department is still the one responsible for discussion with auditors, but issues discussed are completely foreign to a consolidation analyst with no insights into what the report contains in its electronic layer. The consolidation department ends up being a middleperson between auditors, external parties and/or software providers in discussions that can waste weeks of their time and create delays at the worst possible moment.

There is much to gain by reassuming the control that should be yours over the information you provide to investors. Thankfully, companies like Corporatings have created tools like Prism (for detailed insight and benchmarks on your own data at production time) and Lens (for whole-market overview, screenings and benchmarks) that allow you to make the most of ESEF & XBRL to serve your financial communications strategy.

Leverage your publication by benchmarking disclosure trends

Financial experts make investment decisions by identifying the most financially promising issuers among a given market. With the rise of a digital format such as ESEF, it is becoming easier for investors to compare companies based on their financial disclosures. But they are not equally interested in all disclosures' indicators: some accounting items might be more relevant to assess a company's future profitability. Others might be relevant, but if they are too company-specific, they may be difficult to compare with the rest of the market.

To put it in ESEF language, it means that some XBRL tags are more relevant than others to attract the attention of investors. This means that choosing the right tag can have an impact on your firm's visibility. So how can you improve your ESEF disclosures to attract investors?

When firms want to improve their products or services, they usually start by analyzing the competition. They benchmark their competitors' market shares, pricing, marketing practices, etc. The same logic should be applied to financial communications: firms should understand their own strengths and weaknesses by benchmarking disclosure practices before drafting their reports.

Knowing what matters to investors, as well as what your peers are up to, is the best way to pinpoint what you can leverage and to get ahead of the trends!