How ESEF reporting changed the game

Whether you are a financial regulator, investor, financial expert or Investor Relations (IRs) officer, ESEF data has changed the way financial data is collected and used. For investors especially, ESEF data is a potential goldmine (and an incredible time-saver), as it allows for the analysis of large amounts of complex information in a quicker fashion than with traditional data-crunching methods.

The automation of financial data retrieval has thus provided investors with more leeway to conduct in-depth analyses to support their investment decisions. In a few clicks' time, they can compare company data across market segments or entire sectors… But only on the condition that the published data is comparable.

Issuers should be aware that the ESEF data they choose to publish is not a mere compliance issue. Understanding the key features of ESEF goes a long way to achieve a greater visibility to investors. We will however gladly acknowledge that this is easier said than done.

As companies still navigate through the complexities of this format, errors are inevitable. ESEF reporting is a fairly technical process, requiring to "map" the statements by tagging each reporting item with the right ESEF tag. Choosing the right tag to correctly represent the company's situation has especially been a conundrum for companies. But understanding the ESEF nomenclature is also about avoiding very basic errors regarding the reported amounts themselves… which remain very frequent to this day.

Beware of "simple" errors: choosing the wrong sign

The most common ESEF pitfall is the input of values with the wrong sign - a negative number instead of a positive one, or vice-versa. This can lead to serious consequences, since individual values are used to compute other items… A wrong sign can therefore trigger a chain reaction of errors, and invalidate an entire section of the report.

This can be solved easily if the error is big enough: a turnover appearing as a negative amount will catch the eye of any reader and appear as an obvious mistake. While that is not a great outcome for the image of the company, at least there is little chance the amount will mislead users into creating an inaccurate valuation of the company.

Some other sign errors are not so easy to detect. Profit or loss, for instance, can either be positive or negative. Taxes can either be paid or reimbursed. For such metrics, readers have no immediate way of knowing whether that they are using bad information.

And unfortunately, such sign errors on metrics that can take both signs are quite frequent. In the first week of March alone, we noticed more than 90 such mistakes across the 120 European ESEF reports Corporatings collected.

In the example above, in an IFRS consolidated statement published in early March, the earnings from non-controlling interests were reported… as a negative 13.5 million, while the actual contribution of non-controlling interests is positive. As the presentation of the financial statements themselves are peculiar, such an error can easily escape attention, even after careful proof reading. The company similarly declared wrong amounts for its taxes paid and interest received.

And this is just one example out of many. Across those 120 reports, 15.3% of companies (and 28.6% of banks!) reported taxes paid using the wrong sign…

A few tips to avoid sign errors

Choosing the right sign requires paying attention to the ESEF definition of the concept that is being reported. Traditionally, reports would present values with a positive or negative sign depending on their contribution to the reported profit. For instance, a tax expense would be presented as a negative value, since it affects the profits negatively. But ESEF taxonomy defines the concept of "Tax Expense" as a positive value - meaning that a negative "tax expense" would be interpreted as tax income.

Most ESEF metrics, that always contribute with the same sign to their subtotal, are in the same way expected to be always positive. Some others include the possibility of both positive and negative values, such as "Profit (Loss)", which interprets positive values as profits, and negative values as losses. The label itself gives the hint.

But even knowing the ESEF taxonomy, the sign choice can be difficult since meaning is never contextual, but display changes with context. Depending on where the figure is located within the report, the same metric can be displayed with different signs.

For instance, if the figure is presented within the cashflow section, then a cash outflow of 10M€ would usually be displayed with a negative sign ( -10M€). If the company commented the figure in a footnote, it could however write "the company paid a total of 10M€ in taxes in 2022". Although the displayed sign is different, the amount is the same, and the underlying electronic data should therefore be the same. Display is generally not of any help when trying to find the right signage for your data.

In this light, companies should be aware of the conventions associated with each concept, and thankfully, also they may not match the immediate intuition, these conventions are actually simple enough that they can be automatically checked with the right tools.

Signs obviously affect the way investors and readers at large will understand your reports. Companies should remember that investors will only include them in their market analysis if the company data is comparable to its peers. A single error can go a long way…

Avoiding errors is just the first step

In the best case scenario, these errors are corrected in time; but usually, this involves a time-consuming back and forth between the ESEF editors and its auditors. But efficiency is not the only thing that is lost in this "compliant" approach of ESEF reporting.

Companies should not forget that financial reporting is also about showing the best image of the company to investors and stakeholders… And an error-free report does not equal a strategically smart disclosure.

To fully regain control of their publications, issuers should not just seek to avoid errors, but rather determine how they can use this regulatory format as a competitive advantage. In other words, they should harness ESEF reporting as an opportunity to 1) improve the reliability of their data 2) gain a competitive edge by becoming more visible to investors.

Again, a smart disclosure strategy implies making sure the data can be compared with other issuers' statements. Improving data comparability requires knowing the best practices across the market at large… which can only easily be done with the right benchmarking tools.

Contact us to know more about ESEF reporting errors and data benchmarking, in order to make the best of your company disclosures!