Why ESMA’s ESEF is a Good Place to Start Transforming the Finance Function

insightsoftware -
April 30, 2021

insightsoftware is the global provider of enterprise software solutions for the Office of the CFO to connect to & make sense of data in real time, driving financial intelligence across […]

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CFOs and their teams are overseeing more strategic initiatives and are being called upon to provide more insight and guidance at board level. That’s encouraging for finance leaders who want their teams to be involved in value-adding activities like detailed forecasting, competitor analysis, and advising business units on strategies to maximize revenue and profitability.

All the evidence shows that finance teams have more opportunities to provide these capabilities and that their influence across the business is increasing. But while the focus in businesses has been on cost reduction and automation of basic processes, there is still a long way to go.

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Research from McKinsey & Company shows that finance functions have reduced costs by 29 percent, and that leading teams spend 19 percent more time on value-added (versus transaction-processing) activities than a typical finance department.

“Achieving the next frontier in finance efficiency and effectiveness will likely require finance executives to shift their thinking from the priorities of the past,” says the firm. “Four moves are especially critical for delivering greater real-time insights, minimizing human error and biases, and driving speed in workflows and decision-making.”

McKinsey explains the priorities as follows: “The first is to cast a wider net for new efficiency opportunities, reaching beyond the transactional activities that have long been the primary focus of attention. Second, boost finance’s role in managing data, whether consolidating, simplifying, or controlling the flood of information flowing across the organization. Third, strengthen decision-making through widespread adoption of data-visualization, advanced-analytics, and debiasing techniques. Finally, reimagine the finance operating model so that it fosters new skills and capabilities.”

Kickstarting Change

One place for many organizations to kickstart this change is with the transition to the European Single Electronic Format (ESEF), mandated by the European Securities and Markets Authority (ESMA). Since 1 January 2020, companies listed on a regulated exchange in the European Economic Area (EEA) must adopt a new framework for formatting and filing annual financial reports (AFRs) relating to financial years that started on or after that date.

ESEF is mandatory for all 7,500 listed companies and involves producing the annual report in a web-native XHTML format, rather than the more traditional downloadable PDF.

The 5,300 companies that file annual reports using International Financial Reporting Standards (IFRS) are also required to tag the consolidated financial statements in those reports with Inline eXtensible Business Reporting Language (XBRL). This is a machine-readable format that makes financial statements easy to compare with those of other companies.

The introduction of the XBRL requirement in particular will have an impact on the way finance teams prepare and produce annual financial reports. The process of embedding XBRL tags into the XHTML document to produce the Inline XBRL (iXBRL) output requires software.

While many finance teams have considered the XBRL mandate of ESEF to be just another compliance headache, forward-thinking teams have viewed it as an opportunity to automate an area of finance work that’s often very manual.

Find out how to use software to manage the transition to ESMA’s ESEF

Understand more about the background to ESMA and ESEF

Seeking Additional Value

ESEF will require finance teams to invest in some form of software for iXBRL tagging, so it makes sense to look at what additional value that software might be able to deliver—over and above the ability to add XBRL tags to consolidated financial statements.

The opportunity that finance teams have is to invest in a full platform that automates other aspects of financial report creation beyond just the iXBRL tagging. Today, finance functions have whole teams dedicated to producing reports that combine numbers and narrative (known as narrative reports). This isn’t just confined to annual and other external reports, but also internal management reports, board books, and reports for individual business units.

These are predominantly created from scratch—or nearly from scratch—each time, generally using Microsoft Word, Excel, and PowerPoint. Considerable amounts of time are spent setting up the template for the report, chasing individual contributors for data, copying and pasting information into the report, and checking and re-checking that the data are current, correct, and consistent.

Then there’s the work of formatting the report and proofing it before it is distributed to its intended recipients in time to meet their deadline, whether that’s the date of an internal board meeting or a statutory reporting deadline.

The effort of creating these reports and validating the data is often enough to keep a dedicated, highly paid team busy full time. When the pressure is on to deliver the data, it leaves little time for team members to add any further value. This additional value might be providing a meaningful narrative to explain the context behind the numbers or making recommendations to stakeholders on how to act on what the data are telling them.

If the work of gathering the data and populating the reports could be automated, it would free up a significant amount of time for finance teams to work on the narrative behind the numbers and make strategic recommendations to the business.

Boosting the Role of Finance Professionals

Although interpreting the data may not be the primary function of the financial reporting team today, it’s something that could form part of their professional development. It could be part of a general upskilling that could see the finance team delivering more strategic insight to the business.

Of course, such transformations don’t happen overnight. But automating parts of the report creation process is a solid first step in the right direction for finance teams wanting to be seen as a source of intelligence, insight, and advice to the business as a whole.

While few finance teams relish the idea of root-and-branch digital transformation of their function, many aspire to be strategic advisers to the business. They want to use their financial acumen to recommend strategies for maximizing profitability and growth and for weathering periods of economic uncertainty.

By using the introduction of ESEF as a trigger for automating the admin-heavy and cyclical process of financial report creation, finance teams in EEA listed companies can start to free up more time to spend on analyzing the numbers and driving strategic company growth.

To learn about how Certent Disclosure Management from insightsoftware can help simplify compliance with ESEF and streamline report creation more broadly, download the whitepaper below.

Esma S Esef A Roadmap To Ixbrl Compliance

ESMA's ESEF: A Roadmap to iXBRL Compliance

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