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3 Principles for Implementing ESMA - People/Process/Technology

 

The introduction of ESEF reporting in line with the ESMA mandate will affect companies listed in the EEA.  The mandate will impact the way Finance teams create and submit annual financial reports. For a start, reports will now have to be produced in XHTML, whereas many teams today are used to producing them in PDF or another document format.

ESEF requirements create an electronic reporting format capable of being rendered in a standard web browser using XHTML. For companies that produce consolidated financial statements using International Financial Reporting Standards (IFRS), there is an additional component requiring them to tag the reports using Inline XBRL, a human-readable version of the XML based eXtensible Business Reporting Language.

For companies producing consolidated accounts under IFRS, the primary Financial Statements will also need to be tagged using the ESEF taxonomy and any custom extensions. Those tags will need to be validated, and the ESEF content audited. From 2022, the notes to the accounts will also need to be block tagged.

Lastly, the report may need to be submitted online to a new entity. Regulators across Europe are setting up Officially Appointed Mechanisms (OAMs); organisations who will collect and store the financial reports.

People:

The way the team handles year-end reporting will need to evolve to include new skills based on the new technology and will, in-turn require new collaboration across team members.

Process:

The process of creating the report will change, as the report will need to have iXBRL tags applied, and this would ideally happen during the reporting process, not once the report is completed. And the disclosure process will change too, as the report will need to be produced in XHTML and filed online, potentially to a new OAM.

Technology:

Producing reports in XHTML and tagging financial data with iXBRL will require new software designed to handle these outputs.

In-house or Outsource solution

Finance leaders have two broad options when it comes to tackling ESEF compliance:

  1. Outsource the report creation and tagging process to a third-party
  2. Invest in a software solution to handle the XHTML report creation and (if required) iXBRL tagging

Outsourcing is an option, but perhaps not the most desirable solution. Finance executives may not feel comfortable with sensitive financial information being shared with a third party; a process that may also involve sending the data offshore. The tags applied by the third party will also need to be reviewed to ensure they are correct since the Directors are responsible for the submission.

As often happens, what if data changes within the source systems and the files for tagging have already been sent to the 3rd party? Yet another delay is added into an already time-challenged process. There’s also the cost of the outsourced service to consider, as well as the additional pressure created at filing deadline time, with the draft report being sent back and forth for validation and approval. A fully outsourced model can introduce risk and may lead to a lack of control around the data and the reporting process.

As often happens, data changes within the source systems and the reports need to updated to reflect the new content. Therefore, the files for tagging may only be sent  to the 3rd party when the report is complete and signed off. Yet another delay is added into an already time-challenged process, and auditors will also need time to review the ESEF content. There’s also the cost of the outsourced service to consider, as well as the additional pressure created at filing deadline time as outlined above. A fully outsourced model can introduce risk and may lead to a lack of control around the data and the reporting process.

An interesting insight into outsourcing can be seen in the US. Around 10 years ago the U.S. Securities and Exchange Commission (SEC) introduced regulations similar to ESMA. Many companies opted for the outsourced option. Gradually the filing requirements became more complex, time-consuming and increasingly expensive to outsource. So much so, that many companies have now chosen to switch to third party purchased software solutions managed within the corporate IT platform.

Third-party purchased software solutions

With a purchased software solutions managed internally, you maintain control of the data and the process timescales are under your control.

However, not all in purchased software solutions are created equal, some are unable to integrate with the data source systems, or there are process breaks within the software which requires manual intervention, spreadsheet manipulation, and process delay.

Best of breed solutions will provide a fully integrated platform that will directly integrate with the financial data sources and then manage the data flow and workflow process from within the platform. Updates from the data source will flow through the system without the need for manual intervention. Providing the Finance team with a single source of information allows a platform approach to reporting preparation that ensures that the same audited data is used to produce multiple outputs, including meeting the ESEF requirements. The result will be a faster and controlled process with the output always accurate, consistent and up to date – a huge benefit to time-pressured organisations.

For more insight into the ESMA solutions offered by Certent, take a look at our ESMA insight page.

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