In recent years, there have been many changes with new concepts in the reporting frameworks as regulators strive to assert their authority and ensure the free flow of information on financial reports for listed companies in various capital markets across the world.
This has created a need for solutions that enable capital market participants, regulators such as the Securities and Exchange Commission (SEC) and the European Union, as well as tax authorities and other users of financial information, to efficiently search, extract, analyze, and compare financial data across different companies. For instance, companies reporting under IFRS may classify and describe the same financial items differently, making comparisons challenging.
Digital financial reporting addresses this challenge, with regulators adopting computer-readable formats such as the IFRS Digital Taxonomy for IFRS reporting and the European Single Electronic Format (ESEF) taxonomy for EU-regulated listed companies.
In this article, we introduce digital financial reporting and IFRS Digital Taxonomy, highlight some of the benefits of digital financial reporting as we illustrate how to prepare digital financial reports. We will also mention some of the stakeholders who may use such reports and finally, we shall summarise what entities need for successful digital reporting.
What is digital financial reporting?
Digital financial reporting refers to financial reporting in a structured, computer-readable format. It enables the efficient collection, consumption, and disclosure of financial and sustainability data in a standardized digital format, allowing investors and other users to easily search, extract, and compare information across entities, jurisdictions, and even languages.
With this approach, data from different companies’ digital financial reports can be seamlessly accessed, analyzed, and traced back to the original report when needed.
Why do regulators insist on using digital financial reporting?
Digital financial reporting benefits both regulators and companies for several reasons. Key advantages include automated data collection and analysis, reduced search costs, and broader access to financial data for investors. For companies, digital reporting enhances visibility among a larger pool of investors, making it easier and more cost-effective to raise capital.
Regulators, on the other hand, benefit from improved transparency and oversight. Digital financial reports provide clear visibility into the financial performance of regulated entities, enabling more efficient market supervision and enforcement. published information.
Who are the stakeholders in the digital financial reporting process?
Digital financial reporting serves a broad range of users, making it essential to identify key stakeholders when setting up a digital financial reporting framework.
Stakeholders in this process can be categorized into:
- Report Producers: Entities that prepare and publish digital financial reports.
- Report Users: Includes data aggregators, investors, lenders, regulators, and other financial information consumers.
- Enablers: Those who facilitate digital financial reporting, including:
- Regulators: Establish industry policies and guidelines to enforce digital reporting requirements.
- Professional Associations: Promote the adoption of high-quality digital financial reporting standards.
- Software Companies & Tagging Agents: Develop tools and services for structuring and tagging financial reports.
- Centralized Repositories: Provide secure storage for digital financial reports.
- Auditors: Ensure the accuracy and compliance of digital financial reports through assurance processes.
This ecosystem ensures that digital financial reporting is standardized, accessible, and reliable for all participants.
Preparing digital financial reports
To prepare digital financial reports, an entity must first have a digital taxonomy that provides guidelines on presenting reports in a machine-readable format. The reports are then prepared through a process known as tagging, which involves mapping codes from the digital taxonomy to an entity’s financial reports. Tagging can be carried out using either a content-first approach or an integrated approach:
- Content-first approach; the reporter will first prepare the financial statements in PDF format before the tagging process starts. It is common practice in this approach to outsource the tagging process. However, despite outsourcing, the reporting entity remains responsible for the accuracy and compliance of the digital report, necessitating an independent review.
- Integrated approach: In this approach, tagging is embedded directly into the entity’s management and reporting system, eliminating the need for outsourcing.
Once tagging is complete, the financial reports are presented in a structured, computer-readable format such as eXtensible Business Reporting Language (XBRL), which is widely used in Europe, the United States, and Japan. While the above reflects the standard procedure for preparing digital reports, some regulators simplify the process by providing MS Excel templates, which reporters populate before converting the data into XBRL reports.
Conclusion
This article serves as a call to action for stakeholders, including software companies and developers, to explore the two tagging approaches and develop solutions that make digital financial reporting easier, faster, and more seamless. Digital financial reporting is transforming how financial information is shared, analyzed, and regulated.
By adopting structured, computer-readable formats such as the IFRS Digital Taxonomy, entities can enhance transparency, improve efficiency, and ensure compliance with evolving regulatory requirements. As more stakeholders recognize its benefits, the shift towards digital financial reporting will continue to drive comparability, accessibility, and informed decision-making in global capital markets.
By Fredrick Tito,
Senior IFRS consultant and trainer at AARO Academy
