A consistent and common failing of online annual reporting is that technical considerations and digital innovations have led to formats that fail to meet the needs of audiences. An obscure report from the European Securities and Markets Association (ESMA) risks repeating this mistake.

The ESMA feedback statement on its consultation on the European Single Electronic Format, weighs in at 245 pages. Published at the end of 2016, it wasn’t the sort of document you would put aside for holiday reading. If you did, or if you’ve since studied it, you would have been surprised to read the response to a question that asked whether a taxonomy should be developed for other parts of the annual financial report, mainly the management or strategic report, what it should be, and why. 

In simple terms, ESMA had originally decided to investigate whether a common approach should be adopted to classify financial information, which effectively will harmonise a variety of accounting standards used across the EU. Once companies have filed their accounts electronically, using ESMA’s preferred inline XBRL (iXBRL) format, readers and machines will be able to compare financial data across all EU companies.

So far, so good. But then ESMA changed the terms of its investigation. Having initially decided at the consultation stage that the management report would not lend itself to being reported as structured data, it performed a complete U-turn and decided it would be. Critically, the scope and wording of the consultation paper didn’t provide an opportunity to fully explore the implications of this. As a result, 25 of the 55 respondents to ESMA’s consultation are effectively setting corporate reporting legislation affecting around 5,500 listed companies. These respondents included 13 service providers, four accounting bodies and auditors and three statistical bodies.

Based on the responses from this vocal minority, ESMA has accepted claims that a textual file, for example a PDF, for the management report and a structured file using iXBRL for the financial information could lead to inconsistencies and be burdensome for preparers. This is despite the fact that 26 respondents agreed there was a need for a separate textual file, an opinion especially widespread among reporters that argued that PDFs are currently the most widely desired and used medium for investors reviewing financial information. 

Based on the current direction of travel, from January 2020 companies will initially need to file an XHTML document for the entire annual report and XBRL tagging of the primary financial statements as the new requirements are phased in. UK listed groups do not currently have any XBRL or iXBRL filing requirements except for their tax returns. 

The legislation is being driven by Europe, but Britain’s decision to leave the EU will not prevent it. The new requirement will be implemented as an aspect of the updated Transparency Directive, which has already been transposed into UK law. So, reporters with a December year-end have two more reporting cycles before they stop filing a PDF and start filing an electronic report.

Regardless of whether this initiative offers any benefits or will undermine the UK’s reputation for reporting, it raises a number of practical issues. Some companies may choose to produce a full PDF and extract the copy to file electronically. At the opposite end of the scale, others may decide to produce an electronic report and embrace a ‘digital first’ stance, which will involve overhauling their entire reporting process. Whichever approach they adopt, there is also the small matter of finding enough coding capacity to deal with such a huge change.

While we await further news from ESMA following recent field experiments and workshops, our advice is to start thinking about how this will affect your business.