Policy paper

The UK government’s position on the effect of the ESEF Regulation

Updated 9 December 2020

Overview

1. The European Commission published a Delegated Regulation on the use of the European Single Electronic Format (ESEF) on 29 May 2019^{[footnote 1]} (the ESEF Regulation).

2. This note sets out BEIS’s position on the directors’ sign-off of accounts of those companies that are subject to the requirements of the Financial Conduct Authority’s (FCA’s) Disclosure Guidance and Transparency Rules sourcebook^{[footnote 2]}) and the ESEF Regulation.

3. In particular, this note addresses the question of whether directors must consider the iXBRL tagging when confirming that the accounts meet the requirements of the Companies Act 2006 and give a true and fair view of the company’s financial position.

Update December 2020

4. This note was updated in December 2020 to take account of:

• the announcement by the FCA that the ESEF requirements for filing and publication of machine-readable accounts and mandatory tagging of basic financial information will be postponed so that they will apply to financial years beginning on or after 1 January 2021^{[footnote 3]}
• the government’s decision not to implement a mandatory auditor reporting requirement on the electronic formatting of accounts as part of the application of the Regulation
• the publication by the Financial Reporting Council (FRC) of the UKSEF taxonomy
• the end of the transition period that has applied as part of the UK’s exit from the European Union

5. The contents of this note should not be considered to be legal advice – if in doubt companies should seek their own legal advice.

Summary of position

6. Issuers with transferable securities admitted to trading on UK regulated markets are in scope of ESEF requirements which will apply at the end of the transition period as part of the UK’s exit from the European Union. All issuers in scope will now be required to file and publish machine-readable accounts for financial years beginning on or after 1 January 2021. Those that prepare consolidated accounts in line with International Financial Reporting Standards (or equivalent) are also required to tag, in iXBRL, basic financial information. These issuers will also be required to tag notes to the accounts for financial years starting on or after 1 January 2022.

7. The electronic formatting requirements in the ESEF Regulation can be applied after sign off of the annual accounts by the directors. In practical terms this means that the directors’ confirmation that the accounts meet the requirements of the Companies Act 2006, and give a true and fair view of the company’s financial position, does not extend to consideration of the iXBRL tagging. This is the case even if the company chooses to tag the accounts before submitting them to be signed off by the directors.

What new formatting requirements does the ESEF Regulation set out?

8. Technical detail relating to the requirements of the European Single Electronic Format (ESEF) can be found on the European Securities and Markets Authority (ESMA) website, and in the FCA Quarterly Consultation on transposing Article 4(7) of the Transparency Directive, published in September 2019, which includes a brief overview of the ESEF Regulation’s requirements.

9. In summary, the intention of the ESEF Regulation is to ensure that certain sections of the annual accounts of issuers with transferable securities admitted to trading on regulated markets in the UK are ‘machine readable’. This is achieved by requiring issuers who prepared consolidated accounts in line with EU adopted IFRS^{[footnote 4]} (or equivalent) to ‘tag’ specified disclosures in the accounts using structured data formatting processes. The annual accounts in ESEF will include the ‘normal’ visual copy of the accounts in an electronic format, as a file in XHTML format, with specified iXBRL tagging to ensure that sections of the accounts are ‘machine readable’.^{[footnote 5]}

What requirements will come into effect and when?

10. The ESEF Regulation came into force on 18 June 2019. Currently it applies to annual accounts for financial years beginning on or after 1 January 2020. However, on 5 November 2020 the FCA announced that at the end of the transition period that has followed the UK’s exit from the European Union, it will postpone the application of the ESEF requirements for a year so that they apply to annual accounts for financial years beginning on or after 1 January 2021. The timetable for mandatory tagging of notes to accounts has not been changed and will be for financial years beginning or after 1 January 2022. An announcement by the European Commission (3rd paragraph below ‘A new EU Recovery Prospectus’) indicates that the European Union will soon introduce a similar postponement.

11. When directors consider whether to approve company accounts as having been prepared in accordance with the Companies Act, there is no requirement for them to consider the tagging of the accounts in ESEF and in particular to consider this as part of whether the accounts are ‘true and fair’. Indeed, the tagging can be applied later, in a version prepared in XHTML format with iXBRL tagging.

12. As regards the contents of the audit report, there is currently no requirement in UK law for the auditor to report on whether the electronic formatting of the accounts complies with ESEF requirements. However, companies may wish to obtain a report from their auditors, or other assurance provider, that covers the tagging of the ESEF accounts, prepared in accordance with the FRC’s newly adopted ISAE 3000 standard. The European Commission argues that an auditor reporting requirement should apply. Having considered whether the UK should introduce such a requirement, the government has concluded this would not be appropriate at this stage.

What has BEIS taken into account in forming its view on the directors’ approval of accounts?

13. Under the Transparency Directive (2004/109/EC - Article 4(3)) in EU law, where consolidated accounts are required to be prepared in accordance with the Accounting Directive (2013/34/EU), they must be prepared in accordance with the International Accounting Standards (IAS) Regulation (1606/2002), where applicable^{[footnote 6]}.

14. The Accounting Directive and IAS Regulation apply to a wider category of companies than those in scope of ESEF, and they do not require the preparation of accounts in machine readable format as required by ESEF. BEIS therefore considers that the requirement for preparation of accounts that give a true and fair view under the Accounting Directive^{[footnote 7]} arises prior to the electronic tagging requirements under the ESEF Regulation in EU law.

15. Accordingly, any electronic tagging requirements can be applied after the directors have satisfied themselves that the accounts meet the requirements of the Companies Act and give a true and fair view of the company’s assets, liabilities, financial position and profit or loss as required by the Act. In terms of their process, companies may choose to create a single filing, a parallel tagged document, or the creation of a tagged document once the annual report has been completed in paper format. Notwithstanding the various approaches that companies may take, in all cases, the directors’ confirmation relates to the human-readable version of the annual report and therefore does not extend to consideration of the iXBRL tagged data.

16. To facilitate the digitisation of company accounts in the UK, the FRC has worked with Companies House and HMRC to create a UKSEF taxonomy which allows the filing of ESEF tagged accounts to both the FCA’s national storage mechanism and onwards to Companies House and (where relevant) HMRC.

Will the government introduce mandatory reporting by the auditor on ESEF tagging?

17. A requirement under the Audit Directive in EU law^{[footnote 8]} is for the audit report to contain an opinion, where appropriate, on whether the accounts have been prepared in accordance with statutory requirements. The European Commission^{[footnote 9]} is of the view that compliance with the ESEF Regulation should be considered a statutory requirement for the purpose of this provision.

18. The government has considered whether, during the transition period, the combined effect of the ESEF Regulation and the Audit Directive has been to require that the electronic tagging of the accounts must be the subject of reporting by the auditor. The government believes that the auditor reporting requirement in the Companies Act 2006 does not need to be amended and that it should not introduce an auditor reporting requirement at this stage. As stated above, the FCA has also announced that application of the ESEF requirements will be postponed for a year so that the mandatory application will be for accounts for financial years beginning on or after 1 January 2021.

19. The Financial Reporting Council (FRC) has now adopted standards to facilitate additional assurance in a separate report by the auditor if desirable for companies on a voluntary basis. The ISAE 3000 standard could be applied in an assurance report by the auditor, or by another assurance provider, specifically to cover the tagging of the ESEF accounts. In an ISAE 3000 engagement the objectives for the auditor would be to:

• obtain reasonable assurance about whether the issuer’s consolidated accounts have been tagged in all material respects in compliance with the ESEF Regulation
• express an opinion regarding the outcome of the evaluation of the electronic tagging of consolidated accounts through a written report (included after the main auditor’s report)

20. Issuers with securities admitted to trading on both UK and EEA regulated markets will need to consider what steps are also appropriate for compliance with the framework of each relevant EEA State.

21. In the longer term, mandatory auditor reporting on electronic formatting of accounts will be considered in the context of the recommendations on audit made by Sir Donald Brydon.

1. Commission Delegated Regulation on a European Single Electronic Format (ESEF) (2019/815, which was amended by Delegated Regulation 2019/2100) (‘the ESEF Regulation’). Delegated Regulation 2019/815. Delegated Regulation 2019/2100. ↩

2. The relevant rules (DTR 4.1.14) can be found here: Disclosure Guidance and Transparency Rules sourcebook, FCA ↩

3. Further information available: Delay to the implementation of the European Single Electronic Format (ESEF) ↩

4. For UK issuers with financial years beginning after the end of the Transition Period, this must be in UK-adopted international accounting standards. ↩

5. An explanation of iXBRL is provided on GOV.UK at: XBRL guide for businesses ↩

6. The Directive also provides that, in cases where the issuer is not required to prepare consolidated accounts, the accounts must be prepared in accordance with the national law of the member state in which the issuer is incorporated. In addition, if the issuer is incorporated in a third country, the issuer may be permitted to prepare their accounts in accordance with the same IFRS standards as for consolidated accounts in the EU or in accordance with equivalent standards, which would include International Financial Reporting Standards as issued by the IASB. ↩

7. This requirement is set out in UK law in section 393 of the Companies Act 2006. ↩

8. Article 28(2)(c)(ii)); section 495(3)(c) of the Companies Act 2006. ↩

9. See the Commission’s statements on interpretation of the EU law. The Commission‘s guidance does not express a view on whether ESEF should be considered by the auditor when reaching a view on ‘true and fair’. ↩