Overview of issues with respect to the application of the European Single Electronic Format
06 January 2022
With the aim of further enhancing the transparency of financial market participants the European Commission issued the Commission Delegated Regulation (EU) 2018/815 of 17 December 2018 with regard to regulatory technical standards on the specification of a single electronic format (the "RTS") of which article 4(7) provides that for financial years beginning on or after 1 January 2020 all annual financial reports under the RTS must be prepared under the European Single Electronic Format (the "ESEF"). Pursuant to its article 8, the RTS was originally intended to apply to annual financial reports containing financial statements for financial years beginning on or after 1st January 2020.
However, given the outbreak of the COVID-19 crisis, the Luxembourg financial supervisory authority (the CSSF) announced by way of a press release published on 20 January 2021 that the requirement set out by article 4(7) of the RTS was postponed for one year for issuers for which Luxembourg is the home member state within the meaning of article 3 of the law of 11 January 2008 on transparency requirements (the "Transparency Law"). As a consequence of the foregoing, the ESEF requirements only apply to the annual financial reports containing financial statements for financial years beginning on or after 1st January 2021.
What is the ESEF?
The ESEF is a particular electronic reporting format, including the ability to "tag" individual disclosures in the annual financial report according to a published taxonomy. Compared to an unstructured format such as PDF, structured files allow the contents of an annual financial report to be readable using specialist software tools. It is to be noted that this requirement does not apply to half-yearly financial reports under the RTS.
Why the ESEF?
The ESEF aims to improve the accessibility, analysis and comparability of the annual financial reports of issuers subject to the RTS, which will help to bring ever greater transparency to regulated markets.
1. APPLICATION OF THE ESEF FOR ISSUERS FOR WHICH THE GRAND DUCHY OF LUXEMBOURG IS THE HOME MEMBER STATE
1.1 Scope of application and exemptions
The ESEF requirements now apply to all issuers for which Luxembourg is the home Member State, and that are required to publish their annual financial reports in accordance with article 3 of the Transparency Law.
Issuers are however exempted from the requirements to make public their annual financial report and their half-yearly financial reports, in particular, in the following cases:
- the debt securities admitted to trading on a regulated market have a denomination per unit of at least one hundred thousand Euro (EUR 100,000.-) or, in the case of debt securities denominated in a currency other than Euro, the value of such denomination per unit is, at the date of the issue, equivalent to at least one hundred thousand Euro (EUR 100,000.-); and
- the denomination per unit of which is at least fifty thousand Euro (EUR 50,000.-) or, in the case of debt securities denominated in a currency other than euro, the value of such denomination per unit is, at the date of the issue, equivalent to at least fifty thousand Euro (EUR 50,000.-), which have already been admitted to trading on a regulated market in a Member State before 31 December 2010, for as long as such debt securities are outstanding.
1.2 The use of XHTML format
Under the ESEF requirements all issuers which are not exempted from publishing an annual financial report must draw up their annual financial report specifically under the XHTML format, which is considered as a human readable standard that can be opened with any standard web browser.
1.3 Tagging requirements
Where annual financial reports include IFRS consolidated financial statements, issuers must additionally mark-up those consolidated financial statements using XBRL tags. ESEF also requires issuers to mark up all disclosures that correspond to the elements in Table 1 and Table 2 of Annex II of the RTS if those disclosures are present in the issuer’s financial statement.
A two-steps implementation phase has been put in place where only the tagging of the primary financial statements is required. As such, the primary financial statements need to be completely and in detail tagged using XBRL tags. The notes to the consolidated financial statements can be marked up on a voluntary basis but need at least to be “block” tagged. However, annual financial reports for financial years beginning on or after 1 January 2022 should be tagged in detail throughout the complete annual financial report, which includes the primary financial statements and the notes to the consolidated financial statements.
1.4 The monitoring role of auditors under RTS
Pursuant to the issuance of the Commission Interpretative Communication on the preparation, audit and publication of the financial statements included in the annual financial reports drawn up in accordance with the RTS, statutory auditors are now required to provide an audit opinion on whether the annual financial statements included in the annual financial reports comply with the ESEF requirements.
Therefore, and in practice, the audit report shall now include:
- An opinion on whether the presentation of the financial statements included in the annual financial report either (i) complies in all material aspects, with the ESEF, (ii) complies with the ESEF, with the exception of material misstatement(s) or non-compliance clearly explained in a specific paragraph and mentioned in the opinion, or (iii) does not comply with the ESEF because of the pervasive effect of material misstatement(s) or non-compliance clearly explained in a specific paragraph and mentioned in the opinion; or
- A statement of the auditors’ inability to conclude on the compliance of the presentation of the financial statements in the ESEF, in cases where the auditors were unable to obtain sufficient appropriate evidence in this regard. In such a case, the auditors shall provide the reasons for this inability in the audit report.
1.5 Deadline for the implementation of the ESEF
As mentioned above, in Luxembourg the RTS requirements only apply to the annual financial reports containing financial statements for financial years beginning on or after 1st January 2021.
It should be noted that the implementation of the ESEF regime has not changed the deadline for publication of the annual financial report. In accordance with article 3 of the Transparency Law, the issuer shall make public its annual financial report at the latest four months after the end of each financial year.
1.6 Disclosure of annual financial statements under the Transparency Law
In accordance with the Transparency Law, three disclosure obligations need to be met with respect to the annual financial report which qualifies as regulated Information within the meaning of the Transparency Law:
- The effective dissemination of the annual financial report to the public;
- The storage of the annual financial report with the officially appointed mechanism (the '"OAM" which in Luxembourg is operated by the Luxembourg Stock Exchange); and
- The filing of the annual financial report with the CSSF.
It is to be noted that the Luxembourg Stock Exchange now proposes a new reporting tool named "FIRST" (for "Financial Instruments Reporting Services Tool"), that enables one to simultaneously distribute announcements (i) to the market, (ii) to the OAM and (iii) to the regulator, all through a single portal.
For more information please feel free to check out our separate in-depth Ashurst newsletter on the Luxembourg Stock Exchange's electronic platform. [please insert link]
The use of this new tool is however not mandatory and it is still possible for issuers to proceed with the traditional way of publications, OAM storages and filings.
2. SPECIFICITIES FOR THIRD-COUNTRY ISSUERS DRAWING UP THEIR CONSOLIDATED ANNUAL FINANCIAL STATEMENTS UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
The XHTML format must be used by all issuers subject to the Transparency Law when drawing up their annual financial statements, regardless of their nationality.
However, one must pay particular attention to the specificities of the tagging requirement for issuers from third countries. Indeed, only issuers drawing up their consolidated annual financial statements under IFRS will be required to tag their consolidated annual financial statements using XBRL tags. Consequently, issuers from third countries, establishing their accounts under local standards other than IFRS (e.g. US GAAP, JAP GAAP etc.), to the extent permitted, will not have to use XBRL tags.
3. FURTHER CONSIDERATION: THE APPLICATION OF THE NEW DISCLOSURE OBLIGATIONS UNDER ARTICLE 8 OF TAXONOMY REGULATION AS OF 1ST JANUARY 2022
At the beginning of this year, issuers must remain vigilant in applying the requirements of article 8 of the Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (the "Taxonomy Regulation"), which came into force on 1 January 2022. Pursuant to this article, any undertaking which is subject to an obligation to publish non-financial information pursuant to article 19a or article 29a of Directive 2013/34/EU shall include in its non-financial statement or consolidated non-financial statement information on how and to what extent the undertaking’s activities are associated with economic activities that qualify as environmentally sustainable under articles 3 and 9 of the Taxonomy Regulation. For more information please feel free to check out our separate in-depth Ashurst briefing on the CSSF's transparency enforcement campaign containing more information on the Taxonomy Regulation.
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