XBRL and ESEF reporting

The case for change

In today’s world of ever-increasing regulatory oversight, regulators in particular are struggling to make sense of gigabytes of data submitted by operators - in particular, in the Financial Services sector, which cuts across all industries and service providers.

Regulators find themselves creating ad hoc submission spreadsheet templates and receiving data in various forms and sizes from excel to word and pdf. This not only creates a major load on regulators to manually extract, tag, classify, rekey and integrate all the data from all submitting entities, but in the process renders it next to impossible to truly leverage the wealth of information collected for better insight, oversight and enforcement.

These challenges have highlighted the need for a new way of governance for electronic data gathering, analysis and retrieval; a way that allows for frequent interchange of compliance metrics with a higher degree of accuracy and with little impact on existing resources. Such a mechanism would not only have to define the structure of the submission, but also every metric, measure, formula and data type. It would need to accommodate changes to the business environment by easily adapting to new business reporting needs. Furthermore such a reporting structure has to standardise and tag ‘narrative information’. In the area of tax and financial submissions, narrative disclosures are critical for understanding and enhanced transparency. Such a framework should be easily adaptable to different regulatory regimes where each would just need to define rules in line with the same common framework.

XBRL

A solution is found in eXtensible Business Reporting Language (XBRL). This has been around for over 20 years ever since U.S. accountant Charles Hoffman came up with the idea of mapping and tagging financial information using eXtensible Markup Language (XML) - which had itself started coming into its own during the .com boom of the late nineties: XML provided web developers with a structured and standardised mark-up language for storing and transporting web pages and documents between very different platforms. XBRL was conceived to build on this format and, by 1999, Deloitte & Touche LLP, together with other members of the big four and corporations such as Microsoft, were actively involved in the steering committee (Roohani, 2008)⁶ driving for its adoption in the financial space.

Regulatory authorities around the world have adopted rules requiring companies to submit financial information in such interactive and machine-readable formats (Mohini Singh, 2017)⁵. The automation of business information processing and regulatory filings is expected to reduce regulatory, preparer as well as potential investor costs.

The United States Securities and Exchange Commission (SEC) started phasing in mandatory use of XBRL by U.S registrants in 2009 for financial statements and statement schedules (Deloitte US, 2009)². Starting 2011, the SEC required mutual funds to provide risk/return summary information in XBRL and June 2019 was the deadline for Large Accelerated Filers under US GAAP to submit in iXBRL (inline XBRL) format, with this requirement being extended to Accelerated Filers by June 2020. All regulatory filings will be eventually mandated via XBRL.

Japan (JFSA) started mandating use of XBRL for electronic filings of financial statements from June 2008 followed by Canada, Korea, UK, and Australia, China and India and many countries in Europe. Greater adoption will make data more consumable and available. Whilst this will push companies towards greater transparency in order to stay competitive in the global marketplace, at the same time, this structural approach will assist them to manage their businesses more effectively.

ESEF

With the publication of the Commission Delegated Regulation (EU) 2018/815 of 17 December 2018 supplementing Directive 2004/109/EC of the European Parliament and of the Council of Ministers, local companies will be faced with a similar regulatory mandate starting from January 2020. In March 2019, the European Securities and Markets Authority (ESMA) published the XBRL taxonomy and related documentation to support the European Single Electronic Format (ESEF); the Regulatory Technical Standards (RTS) being then published on 29 May in the Official Journal of the European Union. ESEF taxonomy is an extension on the IFRS taxonomy and will be updated on a yearly basis, or as necessary, to reflect any changes in these Financial Reporting Standards.

As per (MFSA, 2019)⁴, the new regulations require that all issuers¹ on EU regulated markets shall prepare their Annual Financial Reports (AFR) in a single harmonised structure based on the published taxonomy in XBRL format. This will come into force for financial years beginning on or after 1 January 2020, whereas the mandatory marking up of notes to financial statements will apply for financial years beginning on or after 1 January 2022.

How will business benefit?

Although there is no doubt that many companies will see this as yet another compliance burden, it is in reality an opportunity to get one’s information chain in order. The benefits go beyond the reduction in regulatory filings effort. Structured data improves the generation and frequency of automated reports, streamlining what can be a very labour-intensive process and reduces data errors as a result of reduced manual intervention with the ultimate beneficiary being the business itself.

The manual production of XBRL instance documents is practically impossible. Therefore a software approach is mandatory.

A professional consultancy can bring technology and industry knowledge and experience in this area to assist businesses in selecting the right solution for their needs. Experts can assist you in navigating through the many approaches and packages on the market from software that purely addresses the immediate requirements of compliance and Enterprise Performance Management (EPM) solutions that go well beyond what is needed today. EPM software is to finance what ERPs are to operations. Targeted for companies of a certain size and complexity and going beyond the needs of regulatory filings, these facilitate continuous automated financial reporting, financial planning, forecasting and budgeting whilst simultaneously providing automatic filing capabilities in line with potentially multiple taxonomies.

More specific XBRL reporting tools can be integrated with existing software platforms to handle the production, validation, transfer and analysis of financial and XBRL data. According to (Veeraraghavan, Ravi, 2011)⁹, "such processes are more than just an ‘import data’ and ‘save as XBRL function. In order to serve the users well, software needs to be able to provide a host of functionalities".

Definition of terms

iXBRL – Inline XBRL extends XBRL by defining how XBRL metadata is embedded within an HTML document making it possible for an XBRL instance to be easily consumed through a normal browser. For large and complex financial statements, the iXBRL specification allows for a set of iXBRL documents to be treated as a single iXBRL document set. (Various, 2019)⁸.

XML – XML stands for Extensible Markup Language. This defines an open standards set of rules for encoding documents (or data-sets) in a format that is both human-readable and machine-readable. (Wikipedia)¹⁰.

Mark-up Language – A mark-up language is a computer language that uses tags to define elements within a document. It is human-readable, meaning mark-up files contain standard words, rather than typical programming syntax (TechTerms)⁷.

Taxonomy – A taxonomy is essentially a dictionary of elements, or tags, that represent the reporting fields/concepts required for specific statement filings. Taxonomies provides the hierarchical structure used to classify financial information and is essential for structured electronic reporting using XBRL. Each metric, formula, definition or note is assigned a standardised identified tag specific to the particular taxonomy. The taxonomy to be used for ESEF is an extension of the IFRS taxonomy. (ESMA, 2019)³.

References

1. [1] Listed issuers are entities having issued stocks, bonds or any financial instrument that is traded on one or more EU stock market.
2. Deloitte US. (2009). eXtensible Business Reporting Language. Deloitte Development LLC.
3. ESMA. (2019). European Single Electronic Format. Retrieved from European Securities and Markets Authority: https://www.esma.europa.eu/policy-activities/corporate-disclosure/european-single-electronic-format
4. MFSA. (2019). MFSA. Retrieved from Commission Delegated Regulation: https://www.mfsa.mt/wp-content/uploads/2019/05/20181217_CommissionRegulation.pdf
5. Mohini Singh. (2017). The cost of Structured Data: Myth vs. Reality. CFA Institute.
6. Roohani, S. (2008). XBRL education. Retrieved from http://www.xbrleducation.com/edu/history.htm.
7. TechTerms. (2011). Markup Language Definition. Retrieved from TechTerms: https://techterms.com/definition/markup_language
   
8. Various, W. (2019). iXBRL. Retrieved from Wikipedia: https://en.wikipedia.org/wiki/XBRL#iXBRL
9. Veeraraghavan, Ravi. (2011). Essential Features of XBRL Reporting Software. Deloitte Touche Tohmatsu India Private Limited.
10. Wikipedia. (2019). XML. Retrieved from Wikipedia: https://en.wikipedia.org/wiki/XML