ESEF: the new electronic format and its effects

Since January 1st 2021, all listed companies in Europe must submit their annual financial reports in ESEF, or European Single Electronic Format, as defined by the “Regulatory Technical Standards” issued in May 2019.

Marc Houllier

Marc Houllier

June 9, 2023
6 min read
ESEF: the new electronic format and its effects

           By now, you probably know at least a little about this but here’s a quick recap before we jump into the impact that the electronic format will have on your business.

           In the past decade, European PDF financial reports have been used less and less. They are generally considered as less comparable and less transparent than in many other parts of the world. As a consequence, financial analysts have been assigning a significantly higher risk to investments in European companies. These companies then generally find themselves unable to rely on equity financing for their new projects. A new electronic format (called ESEF for "European Single Electronic Format") was therefore created, with a twofold objective:

- to improve the readability and comparability of corporate financial data, even when expressed in the many languages of the European Union

- to prepare a shift to a harmonised European mechanism to provide access to financial data and other information valuable to all stakeholders (issuers, investors, regulators,etc.).

ESEF is based on the "Inline XBRL" format that combines a visual format (XHTML) and a data format (XBRL) to help achieve the aforementioned objectives. However, using this format also makes the production and audit of annual accounts significantly more complex. Let us go over what the specifications require and over how the challenges posed by the format can be overcome.

ESEF reports: what's required?

           The European directive applies to companies that issue equity or debt securities that are traded on a regulated market in the European Union. These companies must now publish their annual financial reports in XHTML. The creation of further specifications on how to report data in such documents was delegated to the European Securities and Markets Authority (ESMA); these detailed specifications make up Commission Delegated Regulation (EU) 2018/815 of 17 December 2018, which is amended every year to reflect changes in the accounting standards or technical changes (latest amendment: Commission Delegated Regulation (EU) 2022/352).

ESMA also publishes a "Reporting Manual" with further clarifications about

The specifications also stipulate that companies whose consolidated financial statements are prepared in accordance with IFRS must add technical tags to mark up these financial statements. This is where things start to get complicated. Indeed, these tags must be embedded in the XHTML annual financial report using the Inline XBRL format. You can think of XBRL tags as "bar codes" used to identify figures and other disclosures.

So, the main point to remember is that the financial statements of listed companies must now be published in a combined format:

- An XHTML file that can be viewed with standard web browsers

XBRL tags readable by dedicated computer programs.

Given the technical complexity of these reports, many companies have opted to still start by creating a PDF report, then use PDF to XHTML conversion and finally outsource the tagging task; these practices introduce many additional actors in the report creation chain, which drastically slows down the process and creates difficulties both for companies and for auditors.

What is XBRL exactly?

XBRL has become the open international standard for digital business reporting. In essence, XBRL provides a language that both allows standard setters and regulators to define reporting items, and allows companies to report their values for these items. Said items are used to uniquely represent the contents of financial statements or other kinds of compliance, performance and business reports. XBRL enables quick and precise digital sharing of reporting data across organizations.

By linking unique identifiers to reported facts, XBRL allows, among other things:

- The publication of reports with data and information that can be consumed and analysed instantly and accurately - very useful for corporate accounting directors.

- The automated validation of reports against business and logical rules, to capture and avoid mistakes at their source - particularly helpful for auditors.

XBRL reports and block tagging: the advanced requirements

In order to make the ESEF report readable and understandable by humans as well as software, the information in the reports must be marked with specific tags.

These tags identify the accounting meaning of the marked figure or text area. They possess human-readable labels and documentation in all languages of the European Union that help end users understand the meaning regardless of the original language of the financial report. Reporting companies are required to also document additional information such as items specific to the company or such as the calculation relations between lines of their main financial statements.

Some additional requirements kick in from the beginning of 2023. The most significant addition to the ESEF requirements is the so-called text block tagging. In a block tag, the content of an entire section of a report is tagged as a single point of data. The section may contain text, numbers, tables, and other information. The term "block tag" is used to describe the fact that the entire disclosure is marked as a single block, while individual numbers or tables within the note do not need to be separately identified.

There are important instructions on how to construct text block tags in section 1.9 of the updated Reporting Manual (5 August 2022).

- Find out more in this article: Complying with rule 1.9.1 of the 2022 Reporting Manual

XBRL reports: working with a complex format

The aim of the obligation to use the new electronic format is to harmonise annual financial reports on a European scale. This is intended to overcome the language barrier and alleviate the problems of search volume. However, this requires that the actors in charge of creating and verifying these reports - companies and auditors - learn to manage a format that is much less not as easy to understand as a simple PDF.

With the introduction of this new format, auditors have an increasing number of new possible issues they need to check for within reports, that can be quite difficult to consistently detect with basic means. Companies are more dependent on various software providers (for PDF into XHTML conversion, for the selection of the right tags, for XBRL tagging). Even when the auditor does manage to detect an issue with the electronic report, it can often be complicated to identify which party was responsible for it. Overall, this tends to increase the number and complexity of exchanges between companies and their auditors.

XBRL: how can the compliance of ESEF reports be ensured in their new electronic format?

Faced with a lack of insight into the data they are responsible for, due to complex requirements, auditors and companies alike need to be equipped with tools that enable them to ensure the compliance of ESEF reports.

This is where we, Corporatings, come in. With the PRISM offer, we can help you solve these issues. Thanks to PRISM, auditors can verify that the audited report complies with all relevant specifications, that it is consistent with the accounting standards, and that the reported data is understandable. The time and effort required to confidently assess the compliance of a report can be divided by ten using PRISM.
PRISM also restores autonomous prepublication. Companies can regain autonomy in the production of their annual accounts, whilst simultaneously streamlining exchanges with their auditors.

Strengthen your competitive edge with our unique innovation. PRISM, our ESEF quality control solution, allows you to audit and compare ESEF reports via an independent and innovative solution.

- Focus on useful tasks by automating repetitive tasks

- Meet regulatory requirements on time

- Stand out from the competition

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Marc Houllier
Marc Houllier
Cofounder & CTO