#sec reporting

According to the EU’s new Corporate Sustainability Reporting Directive (CSRD), the introduction of Inline XBRL in mandatory sustainability reporting is becoming increasingly vital. Investors, regulators, and stakeholders are placing greater emphasis on Environmental, Social, and Governance (ESG) issues, resulting in new demands for companies to provide ESG data with greater transparency.

What is the ESG Proposal all about?

The European Commission has approved a proposal to reform and replace the present Non-Financial Reporting Directive (NFRD) with a Corporate Sustainability Reporting Directive (CSRD). It will entail the use of Inline XBRL (or iXBRL) in reporting detailed and consistent structured data. This will usher in a new era of environmental, social, and governance (ESG) disclosure, providing far more useful and comparable information for investors and other stakeholders.

Why iXBRL?

XBRL is without a doubt the industry standard for digital financial reporting. Inline XBRL is the obvious choice for digital and transparent integrated reporting. The new CSRD reporting criteria must include ESG reporting as a core duty for them to join their financial counterparts in the EU’s ESEF framework.

Pillars of ESG

ESG stands for Environmental Social and Governance. These are the three important characteristics to consider when assessing an investment’s long-term viability and ethical impact –

Environment – includes energy use, waste management, and climate change.

Social – includes labor relations, human rights, diversity and inclusion, and product liability.

Governance – includes compliance, business ethics, controls, and procedures.

Management firms and investors can assess a range of criteria or specific concerns within each pillar to determine how a company performs.

How is ESG reporting affecting various areas?

Most investors prefer to remain committed to companies that consider ESG parameters and support resolutions on ESG issues, including climate change. ESG concerns are material to a company’s fundamental strategy and long-term value generation. Understanding how ESG helps drive a business’s purpose will help CFOs and other leaders better position their firms for a sustainable tomorrow.

Investors don’t just need reliable and comparable information; they need it in a machine-readable and easily consumable form.

What are the different ESG Frameworks?

ESG frameworks in use today to implement efficient reporting are as follows:

The Global Reporting Initiative (GRI)

GRI was the first and most widely used framework. Its accountability standards metrics include environment, human rights, governance, and social well-being.

This framework implements a holistic approach by working with stakeholders to determine how a company affects the world.

 United Nations Sustainable Development Goals (SDGs)

The SDGs, which were adopted by member states in 2015 as part of the larger 2030 Agenda for Sustainable Development, is a set of 17 goals aimed at creating a better future for people and the planet.

Although it is known worldwide, it lacks the sense of industry-specific indicators.

Morgan Stanley Capital International

Morgan Stanley specifically identifies ESG risk in the investment decisions taken by the firm. These ESG risks are determined through a scoring system covering data points and ratings ranging from CCC (laggard) to AAA (leader).

The Sustainability Accounting Standards Board (SASB)

The Sustainability Accounting Standards Board (SASB) brings together businesses and investors to discuss sustainability’s financial implications. SASB standards are industry-specific and are intended to help investors make informed decisions while also being cost-effective for businesses. They are created through an evidence-based and market-driven process.

SASB XBRL taxonomy is open for a 60-day trial period. (Find it here). This taxonomy encompasses SASB’s 77 industry Standards.

Challenges When Adopting ESG Frameworks

Some of the many hindering obstacles to meaningful reporting directly stem from the ESG framework themselves.

Different methodology and scoring systems –

 Various methodologies are used in ESG frameworks, resulting in different scoring systems and data interpretations. Scores can differ dramatically amongst frameworks, reducing the utility of the data. It’s difficult to choose the one that best fits the company out of all of them.

Lack of Coordination

There is a lack of harmonized standards within different ESG frameworks which complicates the task even more in terms of which reporting standards to choose.

In the recent chain of developments, the IFRS Foundation trustees released documents regarding sustainability reporting. The first, a Feedback Statement, summarises the major issues expressed by respondents to the Sustainability Reporting Consultation Paper. The second is an Exposure Draft, which details suggested targeted adjustments to the IFRS Foundation Constitution to allow for the establishment of an International Sustainability Standards Board (ISSB) to develop IFRS sustainability standards. The proposed revisions will be open for public discussion until July 29, 2021.

Additionally, the International Federation of Accountants (IFAC) has published a paper titled ‘Enhancing Corporate Reporting: Sustainability Building Blocks,’ which elaborates on the building blocks method and lends its support to it.

Conclusion –

Investors and acquirers are paying more attention to ESG rankings as evidence mounts those sustainable corporate practices are linked to success. ESG is here to stay. It may change names—it was previously known as corporate social responsibility—and it’s linked to an increase of interest in corporate purpose.

XBRL US announced today the public review of the third version of the demonstration Comprehensive Annual Financial Reporting (CAFR) Taxonomy, which now includes seven financial statements, two footnotes, and two schedules from the Single Audit Report. The taxonomy will be published for a 60-day review period to give state and local governments, software providers, municipal securities analysts, and other users of government financial data, the opportunity to review the new and revised data standards and provide input on definitions, references, and the structure of the taxonomy. The taxonomy and supporting materials were prepared by the XBRL US Standard Government Working Group; it is available at https://xbrl.us/xbrl-taxonomy/2020-cafr/

The new release expands on the previous version which contained the Statement of Net Position; Statement of Activities; Governmental Fund Balance Sheet; and Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances.

Version 0.3 now also includes Proprietary Funds statements for Net Position; Statement of Revenues, Expenses and Changes in Net Position; and Statement of Cash Flows. The new release also contains footnotes for Pension and OPEB; as well as the Schedule of Expenditures of Federal Awards, and the Schedule of Questioned Cost, both of which are used in the Single Audit Report.

Single Audits must be filed annually by federal grantees who expend more than $750,000 in federal funds; about 15,000 of single audit filers are state and local governments. With the enactment of the GREAT (Grants Reporting Efficiency and Transparency) Act in December 2019, data standards that render data machine-readable and fully searchable, will be required for information reported in Single Audit Reports submitted by grantees by 2023.

“With the passage of the GREAT Act for grants reporting, building data standards to accommodate Single Audit information is no longer optional,” said Marc Joffe, Senior Policy Analyst at the Reason Foundation and chair, XBRL US Standard Government Reporting Working Group, “XBRL is the most effective means to not only satisfy requirements in the legislation, but to ensure a successful rollout, resulting in greater timeliness, accuracy and automation of reported government financials.”

Materials available for reviewers include the Taxonomy, in XML and spreadsheet format, and a sample XBRL instance document. Those reviewing the taxonomy will have an opportunity to post comments related to individual elements and the structure of the taxonomy.

Members of the XBRL US Standard Government Reporting Working Group include Aquorn Inc., Bond Intelligence, DataTracks, Crowe LLP, Gray CPA Consulting, Intrinio, IRIS Business Services LLC, Lehigh University, Middle Tennessee State University, Novaworks LLC, Reason Foundation, Thales Consulting (CAFROnline), Touro College, Truth In Accounting, Northern Illinois University, the University of Maryland, the University of South Florida, and Workiva. Observers to the Working Group include NASACT (the National Association of State Auditors, Comptrollers and Treasurers) and the US Census Bureau, among other organizations.

The issues with tagging for Levels 3 and 4 requirements are varied but not as daunting as some experts have opined. People have bandied around estimates of over 200 hours just for detailed tagging notes (Levels 3 & 4 requirement). Their concerns are understandable but let us look closer at the pieces of the puzzle and see how they can be put together, particularly by putting to use a combination of intelligent heuristic tools and/or processes.

There are some important items to consider here. Most companies have elaborate disclosures in the form of footnotes and tables that provide details on a range of things including financials, accounting policy changes and business segment reporting. Specifically with the segment reporting, many companies provide a lot of tabular data in their footnotes. These tables vary from a simple two-dimensional structure (such as reporting revenues, expenses or profit details on the vertical axis and business segments on the horizontal axis) to 3, 4 or 5 dimensional tables. Things can get difficult when companies try to map these multi-dimensional tables to the XBRL US-GAAP taxonomy.

To start with, you need to do a detailed company profiling in advance of creating an XBRL filing. This process, I believe as most of the existing filers would have figured out by now, is most critical. The XBRL software used in the mapping process needs to be able to assist users in locating and using these multiple dimensions as well as the respective domain and its members within the taxonomy. Further, ascertaining the requirement of creating a new dimension, domain or member (a matching concept could already exist in a different part of the taxonomy) users also have to deal with the nuances of defining these concepts with pre-specified (required) attributes. Dealing with these details requires a radically different approach to mapping data to the XBRL taxonomy. An efficient and simple tool should enable users to add complex concepts such as a new Member practically on-the-fly.

Narrative paragraph-based footnotes contain numerical data as well as dates that also need to be tagged in XBRL. Reading through the narrative text is informative, imperative and inevitable. However, mapping and tagging is much simpler if the data and dates are in a tabular layout (I am sure SEC considered this as well, which is why they mandated only table tagging in Level 1). Reading and mapping tables is easier than mapping textual paragaphs and it definitely would be a wish-come-true to have a XBRL tool that could translate text into a table on-the-fly.

Certain products provide in-place tagging in the actual document. While, in theory, this is a great feature, in practice the tagging process can break down since users still have to tag individual values and dates to separate XBRL elements. Besides, tools must generate valid XBRL to create the instance document. While the end-result can be accomplished using this method, tagging the data in paragraphs is not quite as simple as it looks.

Having gone through this exercise once, most users would like their XBRL software to have repeatability built into it for that same section of financials the next time around. The software should remember what was mapped from a previous filing so that the time for tagging the new data is shortened. If there are substantial changes to the figures and text in a subsequent quarter or year, users will need to set aside adequate time to ensure that all facts and figures are tagged properly. In conclusion, it is fair to say that tagging of footnotes can be time-consuming and you must set aside enough time and resources to thoroughly analyze your documents before starting the process. You might want to give Ez-XBRL a try and be pleasantly surprised at the powerful and simple way in which it handles a whole host of footnotes tagging issues.