ESEF: a step forward in business data digitization

Traditionally, as long as they complied with IFRS standards, European firms were free to present their financial reports in various ways, with company-specific data. For analysts, this meant a lot of data crunching to find the right information and to level the playing field in order to compare what can be compared.

Business data digitization was thus welcomed as a new opportunity to make the benchmarking process more efficient… provided that data be readily accessible,reliable, granular and consistent from one issuer to another. In this regard, it became apparent that issuers' reporting standards were in critical need of harmonization.

That's where ESEF changed the game. ESEF relies on the eXtensible Business Reporting (XBRL) format to structure the reports according to a standardized taxonomy, which creates a clear hierarchical structure for all IFRS consolidated financial statements.

Statements must now link each IFRS item to a XBRL tag – a markup which makes reports far easier to navigate. Since 2022, this requirement also applies to financial statements' notes, which must be marked with macro-tags (also known as"block tags").

All in all, ESEF reporting makes the company data easier to extract, read and analyze than traditional reporting formats. More importantly, it ensures more consistency across companies' statements, which means they become more comparable. But this process is not automatic: it requires a good understanding of the strategic dimension of ESEF reporting.

XBRL markup: the art of choosing the right tag

Even though ESEF taxonomy can be considered as an extension of IFRS standards, its day-to-day implementation can be quite tricky if you don't "speak" the XBRL language. Understandably, issuers are concerned about potential mistakes, for instance choosing an incorrect tag, or mixing up values and units.

As a result, financial experts often discuss ESEF compliance as a mostly technical issue. But this emphasis on technicity should not make us lose sight of the true stakes of ESEF reporting. Learning the language is not the end goal: smart ESEF reporting should be geared toward data readability and comparability.

Knowing the market's best practices

The XBRL taxonomy is so vast that it can be difficult to choose the right tag to associate with each component of the financial report. In this process, issuers might be tempted to choose the first tag that works – as long as it complies with the regulation.

But there is a gap between regulatory compliance and actual data exploitability. Just because a tag "works" from a regulatory perspective, doesn't mean it is relevant for financial experts to conduct analyses and comparisons. Therefore, choosing the right tag should be done with one strategic goal: ensuring that business information can be easily extracted and used in reports, softwares and databases – without downgrading the data's integrity.

For instance, for an issuer with inventories in its current assets section and no inventories elsewhere, two tags are conformant: “Current inventories” and “Inventories”. While the latter is conformant, it is unnecessarily vague and is used by much fewer companies (92% use “Current inventories” in this situation).

This tag may well be acceptable from a compliance stand point. But if other issuers don't use it too, users cannot compare your information with the rest of the market. That's why it is so important to be aware of the most commonly used aggregates and extensions across the European market.

Knowledge is power. Understanding the market's best practices is the first step to make sure your company's data can be compared. This is why an important step of reporting strategy should be to carry out benchmarks aimed at finding the most strategic tags to make your company visible.

User-oriented benchmarks

However, the market's best practices should not be the sole factor to consider. What if a large percentage of issuers use a specific tag which is, in itself, difficult to analyze for users? Indeed, the market's "best" tag-related practices might actually be far from relevant from an analyst's perspective.

For instance, companies that summarize all their current receivables on a single line of their financial statements have been found to use the “Current Trade Receivables” in 59% of instances, while “Trade and other current receivables” was used in 40% of instances. But if an analyst was to browse the list of commonly used tags looking for the one representing the sum of all current receivables, “Trade and other current receivables” would definitely seem more favorable.

Finding the right balance between reliability and comparability

To ensure readability, it is essential to use tags that are relevant to your own company's disclosures. But what happens if a company-specific item does not exist in the ESEF taxonomy? In that case, companies can use customized tags, otherwise known as extensions.

Yet companies should be careful. Since customized extensions are perfectly admissible from a regulatory standpoint, issuers might be tempted to overuse them, in order to convey the most faithful representation of the company's specificities. But this would be a mistake, and here is why.

Due to their high degree of customization, extensions are usually difficult to analyze and compare from a user's perspective. Again, smart ESEF reporting options should be done with one specific criteria in mind: to optimize user readability. Extensions should therefore be used sparingly to make the reports as comparable as possible withother companies.

A solution comes with anchoring, an operation which links customized extensions with the standard ESEF tags which have the closest accounting meaning. It therefore creates a pathway for the user to access the extension as a normal tag, while keeping the company-specific information. In any case, a careful benchmark is needed to choose the most relevant tags for users.

These operations might sound fairly technical, but they are worth the effort. Benchmarking your ESEF data accordingto users' best practices brings added value to your financial communication. Rather than viewing it a regulatory burden, issuers should thus welcome it a step forward in the process of business data digitization. Contact us.