The 'B' Word: Brexit, Corporate Reporting and the ESEF
The United Kingdom (UK) formally started the process to leave the European Union (EU) on 31 Jan, bringing a number of possible consequences for business, many still not finalised. But, what consequences will Brexit bring to the corporate reporting team?
The Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) have been busy making sure that UK companies have information on where regulation and reporting goes next:
- The FCA website has a section looking at financial regulation after Brexit, electronic payments, the impact on trade repositories and many other topics
- The FRC, who published a number of recommendations with the Department for Business, Energy and Industrial Strategy (BEIS) related to audit, recommended that large companies include information on risks and uncertainties related to Brexit in their annual report
- Plus, the ICAEW also have a very helpful checklist
What about the ESEF?
The impact of EU regulations introduced during the negotiation period has depended on the shifting formal date of British exit from the EU and the effective dates of those regulations.
The status of one regulation, the European Single Electronic Format (ESEF), until recently, had been uncertain.
Applying to issuers on EU regulated markets, the ESEF was mandated by the European Securities and Markets Authority (ESMA) and scheduled to become effective for annual reporting periods beginning on or after 1 Jan 2020. A number of processes needed to be completed before that date, and some after that date, for the ESEF to become active in UK law.
A few of those are worth taking a closer look at.
One such process was the transposition of the ESEF requirements into UK law by the FCA, including amending the Disclosure and Transparency Rules sourcebook (DTR). The FCA published these updates as part of their quarterly consultation back in September 2019.
Chapter five covers the amendments related to the ESEF and states, 'This caters for a scenario where the UK remains subject to EU law on 1 Jan 2020. … However, if the UK leaves the EU before 1 Jan 2020 without a withdrawal agreement and implementation period having been ratified, the ESEF requirements will not be operative in the UK and the changes we are proposing to the DTRs will not come into force.'
Additionally, in a later consultation publication, the FCA clarifies that, "In its explanatory memorandum on the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019, the Treasury proposed that the UK's transparency framework should continue to operate as intended in the UK once the UK has left the EU. To ensure consistency with that approach, all issuers with securities admitted to trading on a UK regulated market will be required to comply with the transparency requirements from exit day. If DTR 4.1.14R is made, they will also be required to comply with the UK version of the ESEF RTS.
'So, under our proposals, all issuers with securities admitted to trading on a UK regulated market will be subject to the same requirements as under the EU ESEF RTS to prepare their annual financial reports in the specified single electronic format and, where applicable, to mark up their annual financial reports.'
In addition to the work by the FCA, the FRC Financial Reporting Lab published a very informative blog discussing the results of a digital reporting field trial they ran that looked at the potential impact of the ESEF. The blog also examined their own work on electronic reporting for the Streamlined Energy and Carbon Reporting (SECR).
In the blog, the FRC suggested that companies should not wait to see if the ESEF became effective in the UK because (among other comments), “Digitisation is a fact across multiple jurisdictions and across multiple types of reports (UK, EU, Japan, USA, South Africa)… ESEF is not the only driver.”
The withdrawal act
Another relevant legal process was the European Union (Withdrawal) Act. The act repeals the European Communities Act 1972, but also serves to preserve existing UK and EU law at the point of exit.
The act was published and received royal assent in June 2018, but came fully into force when the UK formally left the EU as of 23:00 (GMT) on 31 Jan, which is now after the ESEF technical requirements took effect.
So, the ESEF is now a UK requirement
All this uncertainty has left the preparation of some UK companies a little behind their European peers. However, the good news is that there’s still plenty of time for organisations to take a good look at their current annual reporting process, think about what they hope to achieve with the report and implement a solution that is robust, rather than rushed.
With Her Majesty's Revenue and Customs (HMRC) already requiring iXBRL® for tax filing, Companies House exploring how iXBRL is shaping our digital future and the FRC introducing the taxonomy for voluntary XBRL® tagging of SECR disclosures, there is no doubt that the ESEF is not a one-off requirement that can be solved with a bolt-on process. It's clear that companies in the UK need a modern, digitally enabled connected reporting platform.
For more details on how connected reporting and compliance is changing the way organisations gather, manage and apply their data, read this guide.
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