SEC posts proposal on mandatory XBRL

By Cydney Posner

On Friday, the SEC posted its 143-page release proposing rules that would require companies to provide financial statement information to the SEC and on their corporate websites in interactive data format using XBRL, eXtensible Business Reporting Language. The interactive data would be provided as an exhibit to periodic (and transition) reports and registration statements. The rules would apply to domestic and foreign public companies that follow U.S. GAAP and foreign private issuers the follow IFRS (IASB version). The SEC believes that the new requirement would benefit investors by enabling them to download financial statement information directly onto spreadsheets, analyze it in a variety of ways using commercial off-the-shelf software and within investment models in other software formats, thus facilitating the comparison of financial and business performance across companies, reporting periods and industries. The SEC also believes that interactive data has the potential to help automate and process filings, increase the speed, accuracy and usability of financial disclosure, enhance the staff's review of SEC filings and help to uncover errors and, eventually, reduce costs. Since 2005, over 75 companies have participated in the SEC's voluntary XBRL program. Although the release does not propose at this time to require interactive data for executive compensation disclosure (because a definitive list of tags for this purpose has not yet been completed), the SEC is soliciting comment on its potential value in that context.

The SEC estimates that the average annual burden over the first three years by an average of 4708 filers would be 247.4 internal hours and $27,400 in out-of-pocket expenses per filer. In the fifth year under the proposed requirements, the average annual burden on the 11,893 filers is estimated to be 314.8 internal hours and $27,800 in out-of-pocket expenses per filer. (Let's hope that this venture into XBRL does not amount to another SOX 404 misunderestimation (to quote a famous person)).

XBRL is an open standard that involves application of standard financial definitions to "tag" data, thereby establishing a consistent structure that can be recognized and processed by a variety of different software applications, such as databases, financial reporting systems and spreadsheets. XBRL was developed and is supported by XBRL International, a consortium of approximately 550 organizations representing many elements of the financial reporting community worldwide. At the request of the SEC, XBRL U.S. developed the interactive data taxonomy, essentially a standard list of tags, necessary for financial reporting in interactive format consistent with U.S. GAAP and SEC regs. The list of tags contains descriptive labels, definitions, authoritative references to U.S. GAAP and SEC regs where applicable, and other elements, all of which provide the "context" necessary for interactive data to be recognized and processed by software. (The release provides the following illustration: A hypothetical filer converting its traditional electronic disclosure of $1,000,000 of net sales would have to create interactive data that identify what the 1,000,000 represents, net sales, and the currency in which it is disclosed, dollars. The "context" would provide identifying information, such as the identity of the entity by CIK number and other information as necessary, such as whether it relates to an annual report or quarterly report, the financial reporting period, continuing or discontinued operations, or actual, restated, forecast, pro forma or other type of disclosure.)

Companies can either apply the data tags to financial statements internally using commercial software or outsource the tagging process. The commercially available software helps the preparer map information in the financial statements to the appropriate tags in the standard list by matching a standard label to a caption in the financial statements. A company using a non-standard line item could create a company-specific element, or "extension" (hence the name "eXtensible"). The SEC cautions that a company relying upon an outside service provider will need to carefully review the tagging for accuracy and consistency with the traditional financial statements. Unprocessed interactive data is not readable and requires "viewers" to convert the interactive data file to human-readable format. The SEC's website currently provides links to four of these viewers.

Phase-in Periods. The new XBRL requirement would 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 as of the end of their most recently completed second fiscal quarters (approximately 500 filers) would become subject to the requirement beginning with fiscal periods ending on or after December 15, 2008 (assuming adoption this fall). Accordingly, for calendar year companies, this requirement would first apply to their December 31, 2008 annual reports filed on Form 10-K and any Securities Act registration statements that contains financial statements for a period ended on or after December 15, 2008. 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, beginning with fiscal periods ending on or after December 15, 2009. 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 same interactive data reporting requirements beginning with fiscal periods ending on or after December 15, 2010. The extended phase-in is designed to allow the SEC to monitor implementation and make appropriate adjustments where necessary. Companies would be permitted to comply earlier on a voluntary basis.

Requirements. Companies subject to the rule would be required to provide an exhibit containing their financial statements and notes (for all required periods, including comparative periods), and any applicable financial statement schedules in XBRL interactive data format. Filers’ interactive data elements must reflect the same information as the corresponding traditional format elements, and no data element could be changed, deleted or summarized in the interactive data file; that is, the line item descriptions and amounts presented on the face of the financial statements in the traditional format filing must be the same in the interactive data format. The exhibit requirement would apply to registration statements, quarterly and annual reports and transition reports. The proposed rules require the financial information and document and entity identifier to be tagged in accordance with Reg S-T and the EDGAR Filer Manual using the most recent and appropriate list of tags released by XBRL U.S. or the IASCF. Each company would be required to use one or more of the five standard industry-specific lists identified in the EDGAR Filer Manual, as is appropriate for its business (with the vast majority of companies falling under the Commercial and Industrial industry group). The list of tags would be updated regularly, and interim extensions may be made available for download in order to reflect changes in accounting and reporting standards. (The SEC expects to provide advance notice before requiring use of an updated list of tags.) To promote comparability across companies, the proposal would limit the use of "extensions" to circumstances where the appropriate financial statement element did not exist in the standard list of tags and require filers, wherever possible, instead of creating a new customized tag, to change the label for a financial statement element that exists in the standard list of tags. Filers must also tag a limited number of document and entity identifier elements, such as the form type, company name and public float, using the list of tags as required by the EDGAR Filer Manual. Each filer would also be required to post its financial statements in interactive format on its corporate website on the same day it filed or was required to file, whichever is earlier, the related registration statement or report with the SEC.

Financial statement footnotes and financial statement schedules initially would be tagged individually as a block of text. ("Block" text means that the entire footnote or other discrete item, such as a schedule or table, would be tagged as an individual element.) In subsequent years, the filer would be required to tag the detailed disclosures within the footnotes and schedules. Footnote data would be tagged using four different levels of detail; for the first year of interactive data reporting, only the first level would be required:

• each complete footnote tagged as a single block of text;
• each significant accounting policy within the significant accounting policies footnote tagged as a single block of text;
• each table within each footnote tagged as a separate block of text; and
• within each footnote, each amount (i.e., monetary value, percentage and number) separately tagged and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS, if applicable), and SEC regs separately tagged. .

Financial statement schedules would be tagged using two different levels of detail; only the first level would be required in the first year. The required levels of detail would be:

• each complete financial statement schedule tagged as a block of text; and
• each amount (i.e., monetary value, percentage and number) separately tagged and each narrative disclosure required to be disclosed by SEC regs separately tagged.

Other types of required financials, such as those of acquired businesses, would not be covered. The requirement does not apply--yet--to MD&A or other financial and statistical information. If financial statements are revised, the proposed rules would require a filer to provide revised interactive data at the same time it files revised financial statements with the traditional format filing.

Registration Statements Covered. The proposal would require that, subject to the phase-in period, all registration statements filed under the Securities Act, including IPOs, include interactive data when financial statements are included directly, rather than incorporated, in the registration statement, including all periods required by Reg S-X and SEC rules. For business combination transactions, interactive data would be required for the acquiring company, the filer, but not for the company being acquired.

Initial Filing Grace Period. The proposal would provide a 30-day grace period for the initial filing. The initial interactive data exhibit would be required (in an amendment to the filing) within 30 days of the due date for a periodic report or filing date of the registration statement. In year two, a filer would have a similar 30-day grace period for its first interactive data exhibit that includes detailed tagging of its footnotes and schedules. All subsequent interactive data exhibits would be required at the same time as the related report or registration statement.

Website Posting. Under the proposal, each filer would be required to provide the same interactive data on its corporate website, if it has one, as required to be provided to the SEC on the earlier of the day it filed or was required to file the related registration statement or report, as applicable. Website posting would not, however, be required until the end of the applicable grace periods described above. The website posting requirement would not be satisfied by a hyperlink to the document on the SEC's website.

Liability. The SEC plans to use validation software to check interactive data for compliance with many of the applicable technical requirements and to help identify data that may be problematic. "Human-readable" interactive data as viewed through software available on the SEC's website, and to the extent identical in all material respects to the corresponding portion of the traditional format filing, would be subject to all the same liability provisions of the federal securities laws as the corresponding data in the traditional format in the official filing. That is, the proposed rules would treat viewable interactive data as displayed through the SEC's available software, and interactive data generally, as part of the official filing, instead of as a supplement (as is the case in the voluntary program). However, data in the interactive data file (i.e., the non-readable interactive data necessary to create human-readable disclosure) generally would be subject to liability-related provisions, including:

• deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act and not filed under Section 18 of the Exchange Act (subject to other liability under these Acts for the substantive content of the financial disclosures);
• deemed filed for purposes of (and, as a result, benefiting from) Rule 103 under Reg S-T;
• protected from liability under these Acts for failure to comply with the requirements of proposed Rule 405 if the interactive data either:
  • met the requirements of proposed Rule 405 of Regulation S-T; or
  • failed to meet those requirements but the failure occurred despite the issuer’s good faith and reasonable effort and the issuer corrected the failure as soon as reasonably practicable after becoming aware of it; and
• excluded from the officer certification requirements under Exchange Act Rules 13a-14 and 15d-14.

None of these proposed provisions would affect the application of the federal anti-fraud provisions, whether the interactive data is submitted to the SEC or posted on an issuer’s website. In addition, the financial statements and other disclosures in the traditional part of the related official filing would continue to be subject to the usual liability provisions of the federal securities laws.

The SEC is not proposing that filers be required to involve third parties, such as auditors or consultants, in the creation of the interactive data exhibit, including assurance. The proposal would not require or permit cautionary disclosure for required interactive data stating that investors should not rely on the interactive data information in making investment decisions. To the extent that issuers integrate interactive data technology into their business information processing, the SEC suggests that issuers and auditors evaluate these changes in the context of their internal control reporting. However, the evaluation would not require an auditor to separately report on an issuer’s interactive data provided as an exhibit to a filer's reports or registration statements.

Consequences of Failure to Comply. Filers that do not provide or post required interactive data on the date required would be deemed not current with their Exchange Act reports and, as a result, would not be eligible to use the short forms S-3, F-3 or S-8, or to elect under Form S-4 or F-4 to provide information at a level prescribed by Form S-3 or F-3 and would not be deemed to have available adequate current public information for purposes of Rule 144. However, if the filer was timely with respect to the rest of its filing and deemed not current solely as a result of failure to provide an interactive data exhibit when required, the filer would be deemed current and, in contrast to other SEC rules, timely upon providing the interactive data (i.e., it would not lose its status as having "timely" filed its Exchange Act reports solely as a result of the delay in providing an interactive data exhibit.)

The proposed rules provide hardship exemptions for the inability to timely submit interactive data electronically. Rule 201 of Reg S-T would provide a temporary hardship exemption, without SEC action, when a filer experiences unanticipated technical difficulties that prevent timely preparation and submission of the interactive data filing. The filer would be deemed current for a period of up to six business days from the date the interactive data were required to be submitted, but then must submit the interactive data by the end of the six business days. Rule 202 would permit a filer to apply in writing for a continuing hardship exemption if filing in electronic format could not be achieved without undue burden or expense. If the staff granted the request, but only for a specified period rather than indefinitely, the filer would be deemed current up to the end of that period. If the filer did not electronically submit the interactive data by the end of that period, from the next business day forward, the filer would not be deemed current until it did electronically submit the interactive data. The exemption would also extend to failure to post on the filer's corporate website.