ESMA Mandate Compliance: 5 Things To Watch Out For In 2022

January 6, 2022by Team IRIS CARBON

As companies across the European Union prepare to comply with the ESEF mandate, filing annual financial reports in the xHTML and Inline XBRL format, what are five developments they must watch out for in 2022?

Here’s an overview.

ESEF compliance is mandatory starting January 1, 2022

Compliance with ESEF is mandatory for listed companies across the EU and EEA starting January 1, 2022. Mandatory compliance was to kick in from 2021 but was pushed back to relieve companies of an additional burden at a time when they were facing the adverse effects of the pandemic. One of the first steps towards ESEF compliance that companies must take is to select a software solution that facilitates high-quality xHTML or iXBRL report creation. A collaborative SaaS solution such as IRIS CARBON® is well-suited for the purpose.

The newly-released 2021 ESEF Taxonomy can be used after March

ESMA in December 2021 published the ESEF 2021 Taxonomy and an update to the ESEF conformance suite based on the 2021 IFRS Taxonomy. However, companies may use the updated taxonomy for their annual disclosures only after March 2022, by which time the 2021 update to the ESEF regulation comes into force. The draft update to the ESEF regulation is currently under the scrutiny of the European Parliament and Council.

ESEF Audit is not mandatory in most EU countries but is essential

The ESEF mandate comes with an audit requirement that EU member countries need to formulate independently. While some countries such as Germany and Austria have a mandatory ESEF audit requirement, the majority of EU countries do not. It would, however, be helpful if companies across the EU factored in the audit requirement as a necessary part of high-quality compliance, because investors and other stakeholders would find it easier to trust information that has been conveyed through an auditor’s desk. It is also expected that several other EU countries would mandate an ESEF audit in the ensuing months.

The Italian experiment with extensibility is worth emulating elsewhere

The XBRL data standard has extensibility built-in. And an experiment with extensibility begins in Italy in 2022. A collaborative process led by XBRL Italy has helped the country to introduce a list of preferred extensions that banks and insurance companies should use in their iXBRL annual reports. The move would give a fillip to the comparability and analysis of those annual reports as the extensions used therein might be used uniformly across the sector.

Since the unnecessary use of extensions has often been mentioned as one of the issues affecting XBRL report quality, it remains to be seen if creating extension taxonomies for industries and sectors at the country or regulator level would be a remedy. Other EU countries would do well to notice how the Italian extensibility experiment works out and emulate it

For the uninitiated, extensions are custom XBRL tags that can be created for making company-specific disclosures. Under ESEF, such extensions or custom tags need to be ‘anchored’ to elements in the core ESEF taxonomy.

Adoption of sustainability reporting standards for use under ESEF regulation

Companies in the EU will need to make sustainability disclosures in accordance with the ESEF regulation only in 2024. However, the European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) are currently collaborating on the development of EU sustainability reporting standards. They are well on their way to releasing by mid-2022 the first set of sustainability standards, which the European Commission intends to adopt by October 31, 2022. It would help companies to examine the sustainability standards closely and prepare themselves in some manner to make disclosures using the same.

We hope this checklist of five ESEF developments to watch out for in 2022 helps you examine how the rollout of ESEF aids the production of high-quality financial as well as non-financial disclosures.

Follow the IRIS CARBON® blog and LinkedIn page for constant updates on the ESEF mandate and all things related to regulatory compliance.

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