The Securities and Exchange Commission has proposed new rules which would require companies to provide financial statement information in an interactive data format using eXtensible Business Reporting Language. XBRL is an electronic format, similar to HTML, that tags or labels financial data using a standard set of definitions. The proposed rules would apply to domestic and foreign public companies that prepare financial statements in accordance with U.S. generally accepted accounting principles and to foreign private issuers that prepare their financial statements in accordance with international financial reporting standards.
Under the proposal, these companies would provide their financial information in an interactive data format using XBRL on their websites and as an exhibit to registration statements filed with the SEC under the Securities Act of 1933, as amended, 1 as well as annual reports, quarterly reports, 2 and transition reports filed pursuant to the Securities Exchange Act of 1934, as amended. 3 However, these rules, if adopted as proposed, would be phased in over a period of three years. The proposed rules are intended to make financial statements easier to analyze and facilitate the comparison of financial and business metrics across companies, reporting periods, and industries. The SEC is accepting comments on the proposed rules through August 1, 2008.
XBRL: Interactive Data Format
Under the SEC proposal, companies would be required to use XBRL to tag information in their financial statements, financial footnotes, and financial schedules using a pre-determined list of tags. They would also have an ability to create custom tags if necessary. These tags classify and define financial information in accordance with U.S. GAAP and IFRS. 4 The tagged financial statements would then be used to create an interactive data file that can be viewed using various software. 5 The use of XBRL-tagged data will create consistency in financial statements and enable the SEC to review and process filings more quickly. Investors will be able to download the financial statements into various file formats including spreadsheets or other software, enabling them to evaluate companies or incorporate the data in investment models. While companies may initially prepare their financial statements and then convert them into the interactive data file, the SEC envisions that companies will integrate this tagging into their financial reporting process, substantially reducing costs after the initial tagging of financial statement and footnotes.
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According to the proposed changes to Regulation S-T and the EDGAR Filer Manual, companies would tag items in their financial statements, footnotes and schedules, in addition to a limited number of document and identifying elements, including form type, company name and public float. 6 Companies would tag the various line items in their financial statements using labels such as gross profit or net revenues. Initially, each financial statement footnote and financial schedule would be tagged individually as a block of text, however, after one year of such tagging, a company would be required to tag the detailed disclosures within the footnotes and schedules. Specifically, after the first year, companies would be required to separately tag: 1) each significant accounting policy within the significant accounting policies footnote; 2) each table within each footnote and 3) within each footnote, each amount (i.e., monetary value, percentage and number) and narrative disclosure required to be disclosed by U.S. GAAP or IFRS. For financial schedules, after the first year, companies would be required to individually tag each amount and narrative disclosure required to be disclosed by U.S. GAAP or IFRS.
Filing and Posting of Interactive Data
The interactive financial statements and accompanying footnotes and schedules would be provided to the SEC as exhibits to a company’s registration statement, quarterly statement, if applicable, annual reports and transition reports as identified in proposed Item 601(b)(101) of Regulation S-K and Form 20-F. Companies will be able to perform a test file to verify the accuracy of the data. For live filings, if a major error is found in the interactive data but not the remainder of the filing, the interactive data exhibit would be held while the remainder of the filing would be accepted. During the first two years of filing interactive data, a company would be able to correct the error by submitting an amendment within 30 days and the filing would be considered timely. Companies would also be required to file revised interactive data if they revise their financial statements in any other circumstances. Companies who are required to use the interactive data format in their SEC filings would also be required to post those interactive financial statements on their corporate Web site the same day it filed or was required to file the statement or report with the SEC.
Transition Period
The SEC has proposed a transition period for the use of the XBRL interactive reporting format in financial statements. Beginning with fiscal periods ending on or after December 15, 2008, domestic and foreign large accelerated companies 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 quarter would be required to provide the new exhibit with XBRL-tagged data. All other domestic and foreign large accelerated companies using U.S. GAAP would be subject to the interactive reporting requirements beginning with fiscal periods ending on or after December 15, 2009. All remaining companies using U.S. GAAP, including smaller reporting companies, and all foreign private issuers that prepare their statements in accordance with IFRS would be subject to the interactive reporting requirements beginning with fiscal periods ending on or after December 15, 2010.
During the first and second years in which a company must file the interactive data as Exhibit 101, a company would be permitted to file the exhibit as an amendment to the filing within 30 days of the earlier of the due date or filing date of the related report or registration statement, respectively. All other interactive data exhibits would be filed at the same time as the rest of the related report or registration statement.
Consequences of Failure to Timely File XBRL Exhibits
Companies that do not provide an interactive filing when required will be deemed not current with filings under the 1934 Act. Consequences of not being current include:
not being able to use short forms S-3, F-3 or S-8;loss of the ability to incorporate by reference; and loss of the ability to utilize the resale safe harbor exemptions under Rule 144.
However, upon filing the interactive data, the company will be deemed current and timely and regain the ability to do all of the above.
Liability for Contents of Interactive Data
The viewable interactive data, the data displayed on the SEC’s website, would be subject to all the liability provisions of the federal securities laws as the corresponding data in the traditional format part of the official filing. Data in the interactive data file submitted to the SEC would be:
excluded from the officer certification requirements under Rules 13a-14 and 15d-14 of the 1934 Act;deemed not filed for purposes of liability provisions of Sections 11 and 12 of the 1933 Act, Section 18 of the 1934 Act, and Section 34(b) of the Investment Company Act and
protected from liability for failure to comply with the proposed tagging and related requirements of proposed Rule 405 if the interactive data file either met the requirements or failed to meet the requirements, but the company used good faith and reasonable efforts to comply, and the company corrected the failure as soon as reasonably practicable.
However, the interactive data will be deemed filed under Rule 103 of Regulation S-T and subject to liability under the 1933 Act, 1934 Act, and Investment Company Act for its substantive content. The financial statements and disclosures in the traditional format part of the filing would continue to be subject to the usual liability provisions of the federal securities laws.
Practical Considerations
Since the initial phase of XBRL-tagging will impact large accelerated filers with fiscal periods ending on or after December 15, 2008, it is imperative that companies begin planning for these requirements. Companies should first consider whether they will tag their own financial statements or whether they will have an outside vendor, such as a financial printer or other third-party provider, perform this function. If an outside vendor will be used, companies should begin the process of choosing and coordinating a timeline with their chosen vendor. Companies should also review the required list of tags and confer with their accountants to determine how those tags relate to the terms currently used in the financial statements. Finally, companies who have consistently used the same terms and line items in their financial statements may consider tagging their financial statements now, as this new requirement will significantly increase the amount of time to prepare the first filing where these tags are utilized.
Questions
Any person who has a question regarding the issues raised in this Corporate and Securities Update may obtain additional guidance from a member of our Public Companies Group.
1 In the context of business combinations, interactive data would be required for the acquiring company and the filer, but not the company being acquired.
2 Foreign private issuers filing on Form 10-Q would be required to provide financial statements in quarterly reports using interactive data.
3 The proposed rules do not apply to investment companies registered under the Investment Company Act or any business development company, as defined in the Investment Company Act.
4 The tags for companies using U.S. GAAP are grouped into five industry-specific lists that can be found online at http://xbrl.us/pages/us-gaap.aspx. The 2008 list of tags for companies using IFRS can be found online at http://www.iasb.org/xbrl/taxo.asp.
5 Viewing software and additional information on the use of interactive data can be found at http://www.sec.gov/xbrl.
6 Proposed Rule 405 of Regulation S-T would establish the tagging requirements and the EDGAR Filer Manual would contain the technical tagging requirements.
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