Decisions

If you look at the presentation formats, digitalisation has advanced greatly in corporate reporting. Even today, annual reports and sustainability reports are presented consistently as PDFs and often as online reports (HTML). But the technological developments go far beyond that. They are changing the way in which annual reports are created, distributed and analysed. The focus is no longer solely on the digital representation of the content, but also on the processing processes and the machine reading of the data material. Automated processing of structured data for users not only saves time and money, but also enables high comparability and better data analysis. This is precisely what the European legislator is demanding, stressing the benefits of a harmonised electronic format for issuers, investors and authorities.

Making this operational requires a standard, and this is where ESEF comes into play. ESEF is an open, platform-independent international standard for the electronic storage, processing and communication of financial and increasingly also non-financial reports. ESEF is an XHTML document with embedded XBRL. The language is also known as iXBRL. The EU regulation accords great importance to ESEF, which will become a reporting standard alongside the familiar PDF and HTML formats.

What does the regulatory requirement mean for companies publishing their reports and where should they start to ensure successful implementation? As is often the case, the challenge is to make fundamental decisions before the operational implementation is started in isolation. It is necessary to:

1. Identify the main target groups of the annual report and clarify their needs, then
2. Define the company-specific reporting strategy.

Annual reports are aimed at many stakeholders who have very different information needs. While customers, employees, suppliers and the general public are primarily interested in the company, its products and the management team, in which case it is the appealing presentation of the content that counts, capital market-oriented stakeholders such as investors and analysts come with more in-depth requirements for the annual report. In addition to easy, time-independent and location-independent access to the annual report, they consider it important to ensure that the data is processed as easily as possible while ensuring integrity. Defining the most important recipients of the annual report thus has a decisive influence on how it is prepared. Once the priority for the different target groups has been established, the next step is to define the reporting strategy. What channels does the company plan to use – print and/or online? Which is the ‘leading’ channel? Is attractive design the most important factor and should this be conveyed by a professionally designed PDF or an elaborate, channel-appropriate online report, or both? In short: should the annual report function as a ‘business card’ for European companies, with high standards for layout, graphics and images, or is it a mandatory requirement for the regulator? Clarifying these points is key, as they guide the way ESEF/XBRL is implemented.

Assuming that European companies will continue to use their annual reports as a strategically relevant corporate communication tool for a broad audience, they are faced with the challenge of implementing an additional reporting format because ESEF clearly has technical limits in terms of presentation. This brings additional complexity to a project that is already subject to intense time pressure. Companies have to make further fundamental decisions with regard to the ESEF/XBRL implementation:

1. Should the company rely on a minimum solution to meet the requirements defined by ESMA as of 01/01/2020, or a comprehensive solution that is flexible enough to cover future requirements?
2. Should the company choose a solution downstream of the creation of the PDF/HTML report for XBRL processing, which is usually outsourced to a service provider (bolt-on approach), or should it favour an internal, integrated solution (built-in approach)?

The bolt-on approach offers the typical advantages of outsourcing (expert assistance, time reduction), but has clear interface disadvantages. The lack of an integrated approach and the downstream work processes make rapid change management challenging, requiring checks which are associated with annual service costs. The built-in approach has the advantage of a single data source (‘single source of truth’) and simultaneous, automated processing, which requires a tool that is capable of this.

It is expected that the basic taxonomy (IFRS and ESMA) will change annually, which will require companies to analyse their taxonomy extensions every year and revise the content and structure of their reports. Consequently, most companies are looking for a standardised, integrated approach to reporting with disclosure management tools that allow for highly effective management. From the regulatory side, we know that from as early as 2020, the consolidated notes and the management report must also be submitted in XHTML format – in addition to the tagged primary tables and, starting 2022, the tagged notes. The increased pressure from stakeholders is expected to result in semi-annual reports and quarterly reports prepared in the same way, and issued without delay. For companies publishing financial reports, this means that system-based and automated processes become mission-critical. For all these reasons, the built-in approach appears to be the better solution.