What is remarkable is that while technology has impacted so many parts of our world, annual reports of listed companies in 2017 are not fundamentally different in format than they were in 1917. At its core, an Annual Report remains a paper document. However, changes are afoot.
A piece of legislation called the European Single Electronic Format (ESEF) is expected to be finalised early next year and will be in operation by 2020. It will drive a change in the digitisation of the production and consumption of thousands of European listed companies’ annual reports.
So what will change? Well, rather than a paper or PDF annual report it will require companies to combine a full XHTML annual report (a technology similar to web pages) with iXBRL tagged IFRS consolidated primary financial statements (using the IFRS-based ESMA taxonomy). This will be a significant change for those preparing, auditing and using listed company annual reports.
To help think through some of these changes the Financial Reporting Council’s (FRC’s) Financial Reporting Lab (the Lab) looked at XBRL as part of their Digital Future initiative.
Their report, released in December, considers the proposed regulatory changes, the abilities of XBRL and the qualities that preparers and users want from a digital reporting system. It identifies some crucial decision points for companies, regulators and others.
Overall the report suggests that XBRL is an important gateway technology for digital corporate reporting. It can offer many benefits to preparers and consumers of corporate reporting. However, these benefits are not guaranteed. The potential for XBRL to deliver for preparers and consumers of corporate reporting will need sustained focus, leadership and innovation from all those concerned, including regulators, companies, investors and technology providers. In particular, the Lab concludes that successful implementation will require actions from the following groups:
Regulators/ standard setters
Will need to work together both nationally and internationally if XBRL reporting is to fully optimise the reporting process for preparers while still working for users of corporate reporting.
Specifically, the Lab recommends the formation of a single committee in the UK with representatives from each of the regulators and government (such as FRC, HMRC, ONS, Companies House, 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 the adoption of ESEF (or UK alternative) is efficient and effective, and engage with the wider reporting community.
Will need to react to the fact 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 companies to support education in the business community and continue to innovate in the product space.
Will need to start thinking about ESEF and how they might implement XBRL. The Lab also calls on companies to take all opportunities to get involved with the development of the technology and supporting regulation.
Will 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.
Phil Fitz-Gerald, director of the Lab, comments, “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.”
Now that the Lab has finished their review of XBRL they are going to look at other important reporting technologies of the future; Blockchain, artificial intelligence and augmented or virtual reality. The end point for corporate reporting is not yet clear, but for listed companies it seems likely that the primacy of paper-based annual reports is coming to an end.
Phil Fitz-Gerald is director of the Financial Reporting Lab.