ESEF : a delicate balance between customization and comparability

ESEF, or the European Single Electronic Format, is the new format in which all companies listed on EU exchanges are required to file their financial reports. The format has allowed the financial sector to make great progress in automated data collection, helping financial experts extract data directly as stated by companies more easily. But it also came with some practical difficulties for issuers… especially when it comes to reporting industry or entity-specific data.

ESEF is built on top of a predetermined taxonomy, or a standardized set of concepts that companies must use to label their data. Each monetary amount of each primary financial statement must be « mapped » using this taxonomy, allowing users of the data to understand the amount's meaning regardless of language or presentation choices.

However, not all financial data fits neatly into these concepts. The IFRS have few specific requirements of how exactly amounts are supposed to be aggregated and disclosed. In addition, issuers might need to report on significant industry or entity-specific metrics, most of which do not have an exact correspondance in ESEF taxonomy. For example, a company may wish to single out a specific type of instrument in its equity that is significant to properly analyse the company, while the ESEF taxonomy only has broad classes available. What happens then?

To address this problem, the XBRL technology extensibility comes into play, as it allows issuers to create their own custom metrics. If none of the standard ESEF concepts are close enough to the accounting meaning of the amount they must tag, they are required to create their own indicator and use it in their mapping.

However, this customization comes with several requirements and recommendations to ensure that readers are able to understand the information. These rules are followed by issuers with a wide range of conscientiousness.

The problem with custom indicators

Custom indicators provide issuers with more leeway to present their information in a way that accurately portrays their specific activities. But if not used properly, they can lead to serious issues and impair the overall quality of the report.

To make a proper use of custom indicators, issuers have to meet two conditions : they must provide additional information about the accounting meaning of their metric by linking it to ESEF concept with the closest wider accounting meaning; and they additional must provide information about the components of the custom metric if significant components correspond to standard metrics. This helps readers understand the nature of the provided information, and access it more easily through automatic data retrievals. Let's say company ABC does not disclose metric M directly; M is instead a component of an aggregated custom metric in ABC's statements. A user will be able to retrieve relevant information about the metric M if and only if company ABC properly applied the law and linked its metric to M.

The problem is that companies often omit the links needed to understand the components presented item. Most validation software does not detect missing "components" links, and with many issuers only comply with the parts of the law that are automatically checked. As for linking their custom metric to the standard metric with the closest accounting meaning, there again there are many cases where the work is very sloppy. Automated checks are often limited to checking that a link has been created but no check about the accounting meaning can be totally automated. Many companies therefore lazily link their custom metrics to the most generic standard metric available, for instance linking a specific custom current asset to the "Current assets" metric, providing exactly zero extra information to the user.

This issue remains far too frequent. As we stated in our previous article, there are many areas in which the quality of European financial statements has stagnated from 2022 to 2023. As a matter of fact, this is one where it has worsened. The proportion of ESEF statements containing incomparable indicators has slightly increased, from 72.4% in 2022 to 73.2% in 2023.

There are some rare cases where the base ESEF taxonomy is missing appropriate indicators and the concept with the "clostest accounting meaning" is indeed a rather generic subtotal. These represent about 0.6% of the uninformative links. All other cases (99.4%) are ones where the issuer failed to comply the law.

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Companies with the most obscure custom metrics in 2023 are the following:

• Iberdrola
• Santander Consumer Finance
• Sacyr
• Autostrade Per L'Italia
• Ip Group

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Companies with the most significant improvements on custom metrics in 2023 are the following:

• La Banque Postale
• Société Générale
• Banco Desio
• Safran
• Italian Exhibition Group

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To avoid this problem, companies must carefully consider the categories that their custom indicator fits into and choose the closest ESEF standard indicator. They must also provide additional information about the indicator to ensure that investors understand what it means and how it is calculated. But even then, there is a fair amount of cases where custom indicators are used in places that do not seem significant.

When customization comes at the cost of comparability

The absence of a one-size-fits-all template for financial statements is a good thing. In accordance with the spirit of IFRS disclosures, it allows issuers to give a faithful account of their specific position. But this margin for customization should not make us forget the end goal: investor accessibility and understandability. If your data is too different from your competitors’, investors won’t be able to compare your performance and you will most likely be left out of their market analyses.

While ESEF statements should be precise enough to give an accurate image of the issuers’ financial situation, the data must be « generic » enough to be included in investors’ market comparisons and analyses.

Balancing both imperatives involves making a very careful use of custom indicators. If used improperly, customization comes at the expense of both precision and comparability. Extremely specific or, worse, ill-defined concepts will likely make your data impossible to compare.

Even worse, with automated data retrievals becoming the preferred way to access data, chances are that a company's data will show up as incomplete. Indeed, if an investor is looking to compare issuers based on a specific indicator, he can pick the corresponding standard ESEF concept and easily retrieve the entire market’s data in one single click. If your information was linked to the right standard ESEF concept, it will not appear where it needs to.

Custom indicators should therefore be used sparingly, as the result of an in-depth reflection on how the information will be interpreted by investors. Benchmarking ESEF data can also be a good way to know about the current reporting trends and improve comparability with your competitors. Contact us !