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CPD technical article
The world’s financial markets are gradually crossing the digital divide, and taking listed company annual reports with them
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This article was first published in the July/August 2019 UK edition of Accounting and Business magazine.
Every day, advances in digital technologies are increasing the volume and variety of available data and the ease with which we can collect, extract, manipulate and use it to enhance decision-making in our personal and our professional lives. But so much more is possible – particularly with the financial data that listed companies make available in their annual reports and compliance filings.
Technology exists to allow investors, regulators and other stakeholders to automatically assemble and analyse comparable financial data from listed companies across the globe. The Securities and Exchange Commission (SEC) in the US has been experimenting with the possibilities for decades and was an early adopter (see ‘Born in the USA’ box); other regions and regulators have shown less pioneer spirit.
There have been voluntary and mandatory financial filing initiatives using eXtensible Business Reporting Language (XBRL) by regulators in Australia, Denmark, Japan, the UK and other countries, and more are coming. Suruhanjaya Syarikat Malaysia, the country’s business regulator, recently adopted XBRL for the annual and financial filings of over a million companies, and big changes are on the way in Europe too.
For annual periods beginning 1 January 2020, the EU requires listed companies to report annual financial statements in the European single electronic format (ESEF). ‘It will make financial statements more accessible and more easily comparable for investors, improving transparency and contributing to increased investor protection,’ says Steven Maijoor, chair of the European Securities and Markets Authority (ESMA).
‘The single electronic format allows the analysis of large amounts of financial information without extensive and burdensome manual processing, and will provide users with financial information that can be easily compared and transformed to other formats,’ he says. ESMA specified the use of ESEF – with its inline XBRL (iXBRL) in an XHTML file – as a result of the EU transparency directive.
Readers who need to know what these abbreviations mean, or understand the tags and taxonomies, can learn more from ACCA and ESMA (see the ‘More information’ box) and from specialists such as audit and accountancy firms and software suppliers. Most accountants simply need to know that XHTML with iXBRL embedded will allow filings to be read by humans (on screen or in a printout) and software alike.
Some aspects of ESEF are not yet finalised and are waiting on decisions in individual EU countries. Even so, annual report production processes in affected organisations will probably need to change. Currently most annual reports are custom-designed paper documents (and PDF representations of them), so moving to an e-document is not insignificant.
‘It’s quite a big shift in the way that companies prepare and produce their annual reports,’ says Thomas Toomse-Smith, who leads the digital corporate reporting project for the Financial Reporting Lab of UK regulator the Financial Reporting Council, which has published a helpfully non-techy report on XBRL, prompted by the prospect of ESEF.
Some preparers expect ESEF to add cost and complexity, if they create XHTML documents and retain PDFs, or are dual-listed in the EU and US. ‘Some bits of the process will need to be done once for each jurisdiction,’ says Andi Wood, senior director of data modelling for audit software supplier Workiva, but there may be efficiencies because SEC and EU requirements will be using iXBRL and IFRS Standards.
Learn from the pioneer
Widespread multijurisdictional adoption of XBRL (in its human and machine-readable iXBRL form) has the potential to make financial statements more accessible, more transparent and more easily comparable for investors and other stakeholders. But national regulators will need to avoid some of the problems the SEC encountered as a pioneer (and grapple with new challenges too). The SEC discovered the hard way, for example, that the flexibility of XBRL can result in too much customisation, which then reduces rather than increases comparability.
A world view on XBRL may be key to its success. The FRC Lab report on XBRL urges collaboration, innovation, leadership and support among regulators, standard-setters, the technology community, preparers and investors. ‘The potential for XBRL to truly deliver for preparers and consumers of corporate reporting will need a sustained focus from all those concerned,’ it states. The benefits are not guaranteed.
Lesley Meall, journalist
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