EU helps to introduce new financial reporting system for businesses

A new, simplified system of preparing and filing XBRL-compliant financial statements is being implemented for public-interest entities. This decision was made by the National Securities and Stock Market Commission with the support from international partners: USAID’s Financial Sector Transformation Project and EU-FINSTAR program. In the context of development of Ukraine’s financial market, such a precedent is unique, and it would have far-reaching consequences. Therefore, let’s find out what the new financial reporting system is going to change.

XBRL specifics: area of application and taxonomy

The XBRL (Extensible Business Reporting Language) standard was developed by XBRL International Inc. for transmission of business reports between various information systems. First of all, it is intended to facilitate the transmission of financial statements in a unified electronic format from businesses to tax authorities or statistics organizations.

A telling example of using this standard is the United States, where it has been used since 2008 to file reports by public companies. The successful experience in the implementation of XBRL in the United States, United Kingdom, Germany, China and India makes it the de-facto leading electronic language used to exchange business information.

The key notion for understanding of XBRL specifics is “taxonomy”. It is a certain collection of metadata, data models, descriptions of report forms and procedure of their generation and control, set in accordance with certain general rules.

To put it simply, taxonomy determines what a report should contain by defining certain rubrics (concepts). An XBRL-compliant report containing certain facts to be transmitted to regulatory authorities or other market participants refers to taxonomy to clarify these facts by relating them to particular rubrics.

Advantages and disadvantages of XBRL

One of the disadvantages of XBRL is the initial cost of implementing and optimizing it for a particular market. Before launching it, a huge work needs to be done on creating an own taxonomy. But even this downside contains an advantage: the extensibility of this language allows to create and update specific concepts within an own taxonomy while simultaneously supporting other taxonomies, even in other countries. Let me try to explain it using a classic example.

Imagine that the EU puts forth a new requirement to business reports in its member states. Most likely, the requirement itself will be in the English language (possibly also with German and French versions). But, say, Polish companies would want to have a report form in their own language, which presents a complex problem of translating business terminology. It may also be possible that such a requirement already does exist in a certain EU member state, but it most certainly has some country-specific features, and therefore, there is a problem of creating a new version of a common report form.

The XBRL standard answers these challenges. In the former case, the EU could create a uniform taxonomy containing reporting requirements, while the translation of business terminology (concepts) would be included to the sort of a glossary base (label linkbase) with labels in selected languages. But in the case of the existence of a specific (for general taxonomy) concept, a EU member state could create an own taxonomy while referring to the EU’s general taxonomy with regard to common concepts, and determine only the concept that does not belong to the EU taxonomy.

Ukrainian context: what has already been done

The new standard is expected to be launched in 1Q 2019. According to the Law of Ukraine on the Accounting and Financial Reporting, public-interest entities are required, beginning from 2019, to prepare and file financial statements with public regulatory authorities in a uniform electronic format in accordance with international standards. The XBRL standard was chosen as the uniform electronic format.

The list of entities that will be required to file financial statements in the new format includes:

  • issuers whose securities are admitted for trading at a stock exchange;
  • banks;
  • insurers;
  • nongovernmental pension funds;
  • other financial institutions and large enterprises.

As of November 2018, the Ukrainian taxonomy has already been developed (UA IFRS). It is based on the International Financial Reporting Standards, and can be used by all participants of the Ukrainian financial market. The winner of the tender for the procurement of a financial reporting system is also known: the Irish company Vizor Software. Together with DAI Global, a company responsible for implementation of USAID’s Financial Sector Transformation Project, the Irish company will handle the entire process of transition to the new financial tracks: from development and testing to implementation of the new system and personnel training.

The meaning of changes and complexity of transition

The key innovation of this system is the filing of reports based on the “single window” principle, i.e. in a unified universal format accepted by all government regulators of the financial market.

While in the past, a company had to file reports in different forms, for example, separately with the Finance Ministry and separately with the National Securities and Stock Market Commission, now it will need to prepare only one, uniform report. The specifics of this standard bear upon optimization of the completion of reports, accelerating and automating this process. There will also be no excessive or duplicated data thanks to a single information gathering and processing system, which means that a business will no longer have to fill in the same information several times.

And now, the most important aspect: the problem of transition to the new system. In the opinion of lawmakers, the transition won’t be painful for the financial market, because almost all participants of this market are already filing reports compliant with international standards. For instance, securities issuers have been using these standards since 2012 and professional participants of the stock market gradually completed the transition during 2012-2015, while the history of implementing the International Financial Reporting Standards in the banking sector dates back to 1998.

To provide professional consultations, a special project was launched under EU-FINSTAR program, featuring training and explanatory events for those switching to the new system.

The implementation of the XBRL standard would hardly complicate operations of Ukrainian companies, because the calls for changes in recent years were coming from them. The key objectives of the innovations are to increase automation in the public-private relationships, create open and comprehensible principles of interaction, and integration with the international financial market.

By Maria Galeliuka, Head of MASTER:Accounting project

Source – Na chasi