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ESMA, ESEF and iXBRL. What this means for Australian companies.

Sep. 17 2020 by Rohan Persaud, Country Manager, ANZ - CCH Tagetik Asia Pacific

Performance Management Reporting & Compliance

Effective January1, 2021, the European Securities Market Authority (ESMA) has mandated that all publicly listed companies on EU/EEA related markets must report their Annual Financial Statements (AFS) using the new European Single Electronic Format (ESEF).

At first glance this may not seem to impact us here in Australia, but be careful, if you conduct business operations and activities overseas you might find yourself with not enough time to meet your new regulatory requirements. ESMA is not going to offer an extension and failure to comply could lead to fines or sanctions. Remember this is for full year reporting periods commencing on or after Jan 1, 2020, so you will not have another year to get ready.

Why are they doing this? It really speaks to good governance. Regardless of language or format, this will bring transparency and compatibility to all filings allowing for much better reporting and analysis which is a good thing today.

As with all change it might sound a bit daunting. The conversations have now shifted to tagging and new technical concepts such as mark-up languages that might be unfamiliar to Finance. However, when you break it down it is not too difficult.

ESEF uses iXBRL, or inline XBRL. In the old days you might have experienced using HTML to create a webpage. Those sorts of tags caused data to be displayed in a certain way giving you a rendered visualization. iXBRL acts similarly, however in this case it allows tagged data can be stored or transported. That is a bit over simplified but what makes iXBRL easy to use is that is both machine readable and human readable.

Fortunately for us, ESMA is going to phase in the new reporting requirements with only the primary financial statements required next year (Balance Sheet, Income Statement, Net Equity Variances, Cash Flow and some Master Data such as the company’s registered name and address). Notes to accounts will be required with the second submission effective January 1, 2022, when the entire annual financial statement will need to be tagged.

Can you do this yourself? Every organization generates their Annual Financial Reports their own way, but it is extremely important to understand that creating these statements is an entirely separate process from completing the iXBRL tagging. For the tagging, you will need technology and this in turn this will require investment.

Your investment does not need to be expensive however, and the skills required to complete the appropriate activities should be easily transferable in house. After completing one reporting cycle your team should be create statements, tag them, review them internally for completeness, submit to your auditors for assurance, export the iXBRL file and then send them off to ESMA.

Is it that easy? For most organizations, the hard work will always be around completing the Annual Financial Statements. A good disclosure management solution will help create error free, auditable reports in a relatively short period. The next piece of software required is for the tagging, which must use the ESEF taxonomy. A perfect solution will combine the two.

Moreover, your solution should be smart enough to complete most of the work through auto tagging. What remains untagged are the exceptions. These can be handled as extensions to the system, or classifications unique to your organizations, and represent anywhere up to 20%-30% of the effort, so plan accordingly. The good news is that a solution exists that autotags using machine learning and will remember the new additions and carry them forward to the following year.

CCH Tagetik iXBRL, powered by CoreFiling, is a solution used by many large organizations globally. Not only is it bundled together with a world class Disclosure Management solution to create your annual financial reports, but it also employs financial intelligence within its unified platform to intricately understand the ESEF taxonomy. From AFS creation to tagging to exception handling, this solution can easily address all of your filing concerns.

We often get asked if iXBRL will become a requirement for Australian filings? The short answer is uncertain. ESMA is a driving force as far as regulatory change is concerned globally and once this becomes a widely implemented practice in Europe, it is only a matter of time before it will be reviewed once again locally.

ASIC does however accept iXBRL submissions today, so your investment can be leveraged staying ahead of the curve. What is also of interest is that there are new regulations coming out regularly like DAC 6, looking at cross border tax arrangements that very well maybe subject to iXBRL tagging in the future.

It is an interesting space and no doubt there will many changes, but iXBRL is here to stay as the new standard for ESEF reporting.

Please keep in mind you should explore your reporting obligations with your auditors or the IASB website and seek an in-depth understanding of how the ESMA, ESEF and iXBRL wave impacts your organization.

We know it can be difficult evaluating software. Please download our comprehensive checklist "The Ultimate iXBRL Software Checklist" so you will know what features to look for when selecting a good iXBRL solution to meet your reporting requirements.

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