SEC adopts mandatory XBRL phase-in

By Cydney Posner

This morning, the SEC voted to adopt amendments to provide for companies' financial statement information to be filed with the SEC in XBRL (eXtensible Business Reporting Language), an interactive data format, according to a specified phase-in schedule, slightly delayed from the proposal. Commissioner Aguilar, while in favor of adoption of the technology, voted against the proposal because he objected to the provisions limiting liability, discussed below.

While not quite as big a change as the Staff implied, with repeated allusions to the Wright Brothers as a point of comparison, the use of XBRL will certainly require some learning on the part of companies, accountants and lawyers. Financial printers are already gearing up (starting with this RR Donnelley webcast tomorrow, 12/18/08, at 11:00 AM PT/2:00 PM ET). Data tagging is intended to provide greater context to data through standard definitions that allow data in text-based EDGAR filings to be retrieved, searched and analyzed through automated means. The tags give data an identity that can be used with different software applications, enabling investors and analysts to analyze data from different sources more quickly and easily.

Under the new requirement, companies will be required to supplement their traditional filings with an exhibit in interactive format using data "tags" selected from a standard list (the "taxonomy"). The requirement will apply to financial statements (including schedules and notes) in 10-Ks, 10-Qs, 8-Ks (where applicable), registration statements and on corporate websites. In the first year, companies would be required to tag only the face of the financial statements, with tagging only of "block" text for notes and schedules. In the next year, more detailed tagging of notes and schedules would be required. Tagging of the narrative is permitted, but not required. Commissioner Paredes cautioned investors to beware of one unintended consequence of the new requirement: the possibility that they focus excessively on the historical data that has been tagged, to the exclusion of the important, but untagged, forward-looking data contained in the narrative. The interactive data exhibit must also be posted for at least 12 months on the company's website, if it maintains one. There will be a 30-day grace period for the first required exhibit and also for the first exhibit requiring detailed tags for notes and schedules. Otherwise, companies that fail to provide or post the required exhibit will be deemed to be late and not eligible for use of Form S-3 or Rule 144 until the exhibit is provided and posted. (Note that, as soon as the filing is corrected, S-3 would become available; no one-year wait would be imposed.)

The new XBRL requirement will be phased in. Domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public common equity float above $5 billion (estimated by the SEC at approximately 500 filers) would become subject to the requirement beginning with fiscal periods ending on or after June 15, 2009. For calendar-year companies, that would be the June 30 10-Q. (Note that the SEC had also estimated 500 companies at the time of the initial proposal in June, before the most recent market slides, so it's interesting that the Staff continues to use that estimate.) All other domestic and foreign large accelerated filers using U.S. GAAP would be subject to the same interactive data reporting requirements the following year, and all remaining filers using U.S. GAAP, including smaller reporting companies, and all foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB, would be subject to the XBRL reporting requirements in the third year. After the phase-in period, new public companies would begin filing interactive data with their first quarterly reports on Form 10-Q or annual reports on Form 20-F or Form 40-F.

The rules include provisions that limit liability related to the interactive data. As proposed and adopted, interactive data files will be excluded from the officer certification requirements, and issuers will not be required to obtain auditor assurance on their interactive data exhibits. Data in the interactive data file submitted to the SEC will be subject to limited liability but, in a change from the proposal, the limited liability provision has been streamlined (Note that, under the original proposal, viewable interactive data as displayed through the SEC's available software, and interactive data generally, were treated as part of the official filing, instead of as a supplement, while data in the interactive data file (i.e., the non-readable interactive data necessary to create human-readable disclosure) generally would be subject to certain liability limitations. There was not much detail provided at the meeting on that issue or the nature of the streamlining.) In another change from the proposal, the limited liability provisions will sunset on a rolling basis for each company 24 months after the requirement becomes applicable and, for all companies, by 2014. As summarized by Commissioner Aguilar, the liability carve-outs provide that the interactive data would be deemed not filed or part of a registration statement or prospectus and otherwise excepted from all liability to investors for false statements other than fraud. In addition, Aguilar described the exclusion as further limiting the residual antifraud liability if an issuer made a good faith attempt to prepare the interactive data file and amended the file if it became aware of a failure to prepare it properly, even if investors had relied on the inaccurate information. Commissioner Aguilar was concerned that these liability limitations were not advisable when the markets were in turmoil; the SEC's brief is to protect investors, and he believed that this action would dilute investor protection. Aguilar viewed these provisions as effectively shifting the risks and costs of errors to investors. In his view, if the SEC is not ready to impose full liability upon companies, then perhaps the technology is not yet ready for adoption.

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