Companies’ annual financial reports are to be made machine-readable under new rules proposed by the European Securities and Markets Authority (ESMA).From 2020, companies with securities trading on a regulated market are to prepare their annual financial reports in a new electronic format, XHTML.This format can be opened with standard web browsers and can be prepared and displayed depending on the preferences of an individual issuer.Where a company’s annual financial report contains IFRS consolidated financial statements, these are to be labelled with XBRL tags. These make the labelled disclosures structured and machine-readable, according to an ESMA statement. Source: ESMASteven Maijoor, chair, ESMA“The introduction of the new reporting format in 2020 will make financial statements more accessible and more easily comparable for investors across the EU, supporting transparency and contributing to increased investor protection.”The rules are not yet final, as the European Commission has to decide whether or not to endorse the standards proposed by ESMA.Jonathan Labrey, chief strategy officer at the International Integrated Reporting Council (IIRC), suggested the new reporting format could be beneficial by making it easier for investors to use financial information to gain insight into a company’s strategy and business model.Investors were having to spend too much time mining financial data and the notes to financial statements to find strategically important information, he said, which limited the time they had to “probe and test” a company’s strategy or scenario planning.“If this can improve connectivity of information from data to strategy and ease the burden on investors so they can focus on strategy then I think this is a good development,” he told IPE. The IIRC is a multi-stakeholder coalition promoting change in the thinking and communication about corporate value creation.Some people have expressed doubts about investor demand for the type of financial reporting ESMA’s rules would require.The supervisory authority said most accounting bodies, auditors, regulators and service providers were overall supportive of the mandatory introduction of structured reporting for annual financial reports, but many report preparers and their representative bodies raised objections, considering that not sufficient evidence of the need for electronic reporting had been provided.“A considerable number of these respondents hold the opinion that the [European Single Electronic Format (ESEF)] should require the use of PDF [format] only,” ESMA relayed.Summarising the feedback it received from its stakeholder group, the supervisory authority said that its members were divided in their views about whether the ultimate benefits of structured financial reporting to users, including the issuers, would outweigh the costs. This was considering the absence of a full impact analysis having been carried out.In coming up with rules for structured financial reporting, ESMA has followed through with a requirement of the 2013 EU Transparency Directive. Recital 26 of the legislation says that “a harmonised electronic reporting format would be very beneficial for issuers, investors and competent authorities, since it would make since it would make reporting easier and facilitate accessibility, analysis and comparability of annual financial reports”.Key terms (or, help!)XHTML – Extensible Hypertext Markup LanguageXHTML is a freely usable electronic reporting format that is human-readable without specialised software. A reporting format that may be more familiar to readers is PDF (Portable Document Format), or perhaps HTML (HyperText Markup Language). XBRL – eXtensible Business Reporting LanguageXBRL is a language used to mark-up, or tag, financial statements. By marking-up the information with XBRL it can be processed by software for analysis and thus becomes machine-readable and ‘structured’.According to ESMA, XBRL is well-established and in use in a number of jurisdictions and is currently the only appropriate markup language to mark up financial statements. An “extensible” XBRL report significantly decreases the comparability of automated data, it noted. iXBRL – Inline XBRLA freely licensed technology used to embed XBRL data into XHTML documents. An Inline XBRL document is a XHTML document in which XBRL data is embedded, which means machine readable XBRL tags and the human readable representation are encapsulated within a single document. Because an iXBRL file is human-readable in the XHTML format, it is said to offer the features and functionalities of the PDF format, but some that a pure PDF file might not be able to provide, for example search functions that are not available for many PDF documents that were only scanned. ESMA said this would facilitate software-supported analysis and comparison of different reports, granting investors a key tool to support their investment decisions.Steven Maijoor, chair of ESMA, said publication of the rules marked “a significant step forward in the digitalisation of financial information of European issuers”.