UK regulators launch consultation on the future of digital financial reporting

The Financial Reporting Council (FRC) and other UK regulators have launched a wide-ranging consultation on the future of digital financial reporting in the country, signaling potential significant changes to how companies submit financial information.

The discussion paper, released on August 13, 2024, addresses key developments in the regulatory landscape following the UK’s exit from the European Union and the passage of the Economic Crime and Corporate Transparency Act 2023. It seeks input on crucial issues including alternatives to the European Single Electronic Format (ESEF) taxonomy, expansion of digital reporting requirements, and the implementation of “full tagging” mandates.

“We want to hear from our stakeholders about how we can continue to develop digital reporting in the UK and further enhance the benefits it offers,” says Mark Babington, Executive Director of Regulatory Standards at the FRC.

“Market intelligence, information, and data are increasingly important for both decision making and monitoring outcomes, so it is crucial that we set a strategy for UK taxonomies that will continue to deliver for business in the future.”

One key area of discussion is whether the UK should move away from the EU’s ESEF taxonomy towards a UK-specific alternative. The paper presents two main options: adapting the IFRS Foundation’s taxonomy or using the FRC’s existing UK-IFRS taxonomy.

The IFRS option would maintain alignment with international standards, potentially easing comparability for global investors and multinational companies. However, the UK-IFRS taxonomy is tailored to the UK’s specific reporting environment, which could benefit UK-incorporated preparers.

“We want to hear from our stakeholders about how we can continue to develop digital reporting in the UK and further enhance the benefits it offers,” says Babington.

The regulators are also exploring the extension of digital reporting requirements beyond current mandates. Potential areas for expansion include sustainability reporting, interim financial information, and prospectus data. The FCA is particularly interested in prioritizing areas that support market transparency and efficient pricing. The paper asks stakeholders to weigh in on which new types of information should be prioritized for tagging, both within and beyond the annual report.

“Full Tagging” Implementation

Recent legislation, including the Economic Crime and Corporate Transparency Act 2023, introduces the concept of “full tagging” for company accounts. The discussion paper seeks to define this term and establish methods to ensure the quality and consistency of tagged information.

This shift poses particular challenges for smaller businesses and charities. The Charity Commission for England and Wales notes that approximately 32,000 charitable companies will be in scope for digital filing with Companies House, many of which currently file on paper.

“The unique challenges that the charitable sector will face in engaging with digital technology, e.g., cost, skills gap/lack of expertise and access to professional services will need significant transitional support,” the paper states.

Assurance Considerations

Unlike EU member states, the UK does not currently require independent assurance of digital tagging. The consultation raises the question of whether such assurance should be mandated and, if so, what form it should take.

The paper asks stakeholders to consider the potential scope of assurance work, the materiality of the assurance opinion, and whether requirements should stem from legal mandates or regulatory rules.

Next Steps

The FRC is seeking responses to the discussion paper by November 1, 2024. While no immediate decisions will be made based on this consultation, the feedback will inform future policy decisions and potential rule changes by individual regulators.

As digital reporting becomes increasingly prevalent, these proposals could significantly impact how financial information is prepared, shared, and analyzed in the UK market. Stakeholders across the financial reporting ecosystem are encouraged to engage with this consultation to shape the future of digital reporting in the UK.

The consultation period runs until November 1, 2024. The outcome could reshape the landscape of financial reporting in the UK, with potential impacts on companies, investors, regulators, and software providers in the financial reporting ecosystem.

This article first appeared in Accountancy Age’s sister publication, The CFO.