New European legislation on digital reporting will force a radical rethink of the production and consumption of the annual report

In the near future, there may exist a curious hybrid. This strange object is readable both by humans and machines; a fusion of formats, blurring the lines between the standard public limited company annual report and a web page.

This is not an X-Files episode, but an article about another X which originated in the 1990s: XBRL (eXtensible Business Reporting Language) and how it is going to change the way that companies report.

Mulder and Scully's weekly exploits on the X-Files originally aired in 1993, a time before tablets and smartphones, when the internet was still called the Information Superhighway. What is remarkable is that while technology has impacted so many parts of our lives, the annual reports of listed companies in 2018 are not fundamentally different in format than those from 1993 – or even 1883.

At its core, an annual report remains a paper document (even if delivered as a PDF). However, changes are afoot.

Standard-driven change

Regulation drives annual reporting and a critical piece of new legislation called the European Single Electronic Format (ESEF) is expected to be finalised soon and in operation by 2020.

This legislation – officially a regulatory technical standard – will drive a step change in the digitisation of the production and consumption of the annual reports of thousands of European listed companies.

Rather than the paper or PDF annual report, it will require companies to combine a full XHTML annual report (a format similar to web pages) with iXBRL tagged IFRS consolidated primary statements (using the IFRS-based ESMA taxonomy).

If you want some data to be understandable by machine you need to provide some structure that allows the machine to identify and classify the data. A database would be a common example of this, but annual reports are unstructured. XBRL provides a way to map a structure onto these unstructured documents.

"This legislation will drive a step change in the digitisation of the production and consumption of thousands of annual reports"

XBRL is like a language; it offers companies a structured way to report business facts and data and relational and presentational information.

When combined with taxonomies, XBRL can be used to express accounting and reporting information. Companies can use these taxonomies to 'tag' their annual reports, creating a machine-readable layer underneath the visible report.

Given that full HTML annual reports are currently only produced by a handful of UK listed companies, this requirement will be a significant change for those preparing, auditing and using annual reports.

To help think through some of these changes the Financial Reporting Council's Financial Reporting Lab looked at the proposed regulation and the underlying XBRL tagging technology as part of our 'Digital Future' initiative.

Gateway to better reporting

The resulting report considered the proposed changes of the ESEF, the abilities of XBRL and the qualities that preparers and users want from a digital reporting system.

In the report, we evaluated the role of XBRL and other supporting initiatives using our framework of future digital reporting. The framework was developed through extensive engagement with companies, investors and other relevant stakeholders and consists of 12 characteristics that were commonly held to be critical for successful digital reporting.

Overall our analysis suggested that XBRL and ESEF could be important gateway initiatives for better digital corporate reporting. Better digital reporting that offers benefits to preparers and consumers of corporate reporting should be welcomed.

However, the technology and the proposed regulation in isolation do not guarantee these benefits. The potential for XBRL to deliver for preparers and consumers of corporate reporting requires sustained focus from all those concerned.

What it means for you

We identified some crucial decision points for companies, regulators and others, concluding that successful implementation will require the following actions:

Regulators and standard setters

Industry leaders and regulators will need to work together nationally and internationally if XBRL reporting is to optimise the reporting process for preparers and still work for corporate reporting users.

Specifically, we recommend the formation of a single committee in the UK with representatives from each of the regulators and government, such as the FRC, HMRC, the ONS, Companies House, the FCA and BEIS.

The committee would have the mandate to explore the potential benefits of driving digital reporting in the UK, facilitate cross regulator working to ensure that adoption of ESEF (or the UK alternative) is efficient and effective, and engage with the wider reporting community.

Technology community

The technology sector needs to recognise that XBRL is reaching a critical juncture as widespread regulatory adoption will significantly increase the numbers preparing and using XBRL-enabled company data.

To facilitate this transition the Lab calls for technology firms to support education of businesses and to continue to innovate in the product space.


Those involved in producing a firm's annual report need to start thinking about ESEF and how they might implement XBRL. The Lab is calling on companies to get involved with the development of the technology and supporting regulation.

Investment community

Investors need to get more vocal. Many of the regulatory changes are being undertaken with a goal to increase access to company data in a usable format. Investors and analysts, as a key audience, should engage with regulators as they are shaping the implementation of the regulations.

Action required

We are at a turning point for the use of technology in corporate reporting. The paper-based way of reporting is likely to change with the European requirement to prepare digital financial information by 2020.

The changing demands of users, supported by upcoming regulatory changes mean that boards can no longer ignore digitisation of listed company reporting.

"The technology sector needs to recognise XBRL is reaching a critical juncture"

We recommend that you start to think about helping the board to understand the ESEF process and the areas of judgment to provide appropriate levels of governance.

It is also important to begin to get an understanding of the costs and benefits of the different choices around implementation and discuss the timeline of ESEF with design, audit and other service providers, thinking about the implications that this might have on your process.

More coming from the Lab

Our 'Digital Future' initiative is not just focused on XBRL. We are interested in how technology will impact corporate reporting more widely.

Now that we have finished the review of XBRL, we are reviewing other important technologies including blockchain, artificial intelligence and augmented and virtual reality. As well as releasing individual technology-focused reports, we hope to feed all our insights into a broader project on the future of corporate reporting.

The endpoint for corporate reporting is not yet clear, but for listed companies, it seems likely that the primacy of annual 'paper' reports is coming to an end.

Q&A with the Lab

The Lab heard many viewpoints during its project and questions and concerns from a wide range of preparers and others. Here are some of the key questions that were asked.

What is the European Single Electronic Format?

Article 4(7) of the Transparency Directive assigned ESMA the responsibility to draft a technical standard specifying a European Single Electronic Format (ESEF) under which all annual financial reports of issuers with securities listed on regulated markets are prepared.

What format was selected?

All annual financial reports will need to be prepared in XHTML. Where the annual financial report contains IFRS consolidated financial statements, these should be labelled with XBRL tags, which should be embedded in the XHTML document using the Inline XBRL technology.

Who is covered?

The requirement covers all annual financial reports of issuers with securities listed on regulated markets (for example, FTSE All-Share but not AIM), across all countries currently within the EU. Overall, around 7,000 companies are affected.

When would it be in place?

The regulation will apply to annual reports containing financial statements for financial years beginning on or after 1 January 2020. For the first two years XBRL tagging is only required for the primary financial statements.

After this, the notes will also need to be tagged (as a block). XHTML format is required for the whole annual financial report from the start.

Does Brexit mean that this will not apply?

The impact of Brexit on ESEF in the UK is not yet clear. Once EU parliament endorses the regulation it does not need any additional legal mechanism – it simply gives form to a piece of the Transparency Directive in place since 2013.

Current expectations are that UK requirements would be in line with the Transparency Directive. Ultimately the extent to which these regulations can be repealed or amended will depend on the arrangements eventually made with the EU.

Will this stop me producing a PDF or paper annual report?

No, it will not prohibit either of these and the Companies Act still requires paper copies if requested by shareholders. However, it does change the focus of the reporting process and the PDF will likely become the voluntary element.

Is this XBRL stuff the same as we use for HMRC?

No. Although most entities must file an iXBRL set of accounts with their tax return, this is done on an entity, not on a group basis.

Furthermore, the ESEF requires the use of an ESMA taxonomy based on IFRS which is not the same as those used either in the UK or US. It is not currently envisaged that this file could be used to file to Companies House or SEC (for those with a dual listing).

Does the file need to be audited?

This remains an open question.

Thomas Toomse-Smith is project director at the FRC's Financial Reporting Lab

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