On May 30, the SEC published a proposal to require domestic and foreign public companies that prepare their financial statements in accordance with US GAAP to file financial statements contained in registration statements and periodic reports in an interactive data format using XBRL, or "eXtensible Business Reporting Language." The new requirements also would apply to foreign private issuers that prepare their financial statements using International Financial Reporting Standards (IFRS), as promulgated by the International Accounting Standards Board. The interactive data would be filed as an exhibit to the company's registration statements and periodic reports and would be required to be posted on the company's web site. Mandatory use of XBRL initially would apply only to filings containing financial statements for fiscal periods ending on or after December 15, 2008 by large accelerated filers that use US GAAP and that have a worldwide public common equity float of more than $5 billion. Use of XBRL by all other companies would be phased in over a subsequent three-year period. Comments on the proposal, which are published in Release No. 34-57896, are due by August 1.

XBRL

The SEC believes that financial reporting based on the XBRL format would create new ways for investors, analysts, and others to retrieve and use financial information in documents filed with the SEC. Under the proposed rules, users of financial statement information filed in this format could download the information directly into spreadsheets, analyze the information using commercial off the- shelf software, and use the information within investment models in other software formats. The SEC expects that the ability to search and analyze this information will facilitate the comparison of financial and business performance across companies, reporting periods, and industries.

XBRL, like the other electronic formats currently used by registrants in their SEC filings, defines or "tags" data using standards definitions. The tags are similar to definitions in an ordinary financial dictionary, and cover a variety of financial concepts that can be read and understood by software applications, such as databases, financial reporting systems, and spreadsheets. For financial statements prepared in accordance with U.S. GAAP, the list of tags contains descriptive labels, definitions, authoritative references to U.S. GAAP and SEC regulations where applicable, and other elements. These provide the contextual information necessary for interactive data to be recognized and processed by software applications.

Financial statements are tagged by mapping information in the financial statement to the appropriate tags in the standard list. If a company wishes to use a non-standard financial statement line item not included in the standard list of tags, the company can create a companyspecific tag, called an "extension." For example, a company that uses "operating revenues" instead of the standard tag "net revenues" would need to extend the standard label to refer to "operating revenues." To promote comparability across companies, however, the SEC's proposed rules would limit the use of extensions, as discussed below.

Companies may choose to tag their own financial statements using commercially available software or may choose to outsource the tagging process. The SEC cautions in its proposing release that, to the extent a company relies on a service provider to tag the company's financial statements, the company should "carefully review" the tagging done by the service provider to ensure that the tagged financial statements are accurate and consistent with the information presented in the company's traditional format filings.

Overview of Proposal

Building on its experience monitoring the voluntary XBLR program it inaugurated in 2005, the SEC is now proposing rules to require financial reporting using XBRL. The principal elements of the proposal are as follows:

  • The XBRL tagging requirements would not change the current disclosure or formatting standards of periodic reports or registration statements, but would add a requirement to include financial statements in the new format as an exhibit.
  • Domestic and foreign large accelerated filers that use US GAAP and have a worldwide public common equity float of more than $5 billion as of the end of their most recently completed second fiscal quarter would file the required financial statements in XBRL format as a new exhibit to their registration statements, quarterly reports (if applicable), annual reports and any transition reports that contain their financial statements. Mandatory use of XBRL for these filers would apply beginning with fiscal periods ending on or after December 15, 2008. Thus, for calendar-year companies, XBRL tagging would first apply to their December 31, 2008 annual reports on Form 10-K or Form 20-F and any Securities Act registration statement that contains financial statements for a fiscal period ending on or after December 15, 2008.
  • All other domestic and foreign large accelerated filers using US GAAP would become subject to the XBRL requirements beginning with fiscal periods ending on or after December 15, 2009. The remaining filers using US GAAP, including smaller reporting companies, and all foreign private issuers that prepare their financial statements in accordance with IFRS would have to comply with the XBRL requirements beginning with fiscal periods ending on or after December 15, 2010. The proposed rules would not apply to registered investment companies, business development companies or Canadian filers that file registration statements or reports under the multijurisdictional disclosure system (MJDS).
  • "Financial statements" as used under the proposed rules would include the balance sheet, income statement, statement of comprehensive income, statement of cash flows, and statement of owners' equity, as applicable, and accompanying notes and schedules to the financial statements. In addition, all registration statements filed under the Securities Act, including those filed for initial public offerings, would be required to include interactive data when financial statements are included directly in the registration statement, rather than incorporated by reference. Accordingly, interactive data would not be required as an exhibit to Form S-3 where the filer incorporates by reference all required financial statements.
  • Financial statement notes and financial statement schedules would initially be tagged individually as a block of text, so that the entire note or other discrete item, such as a schedule or table, would be tagged as an individual element. After the filer's first year of XBRL tagging, however, the filer also would be required to tag the detailed disclosures within the notes and schedules. For example, separate tagging would be required for each significant accounting policy within the significant accounting policies note and for each amount (monetary value, percentage, and number) within each note.
  • The proposed rules would require that company-specific tags, or extensions, be limited to circumstances where the appropriate financial statement element does not exist in the standard list of tags. In addition, the rules would require that, wherever possible, filers change the label for a financial statement element that exists in the standard list of tags, instead of creating a new customized tag. The SEC sites as an example a filer that uses the term "gross margin," which does not exist in the standard US GAAP list of tags because this term is definitionally the same as "gross profit," which is included in the standard list of tags. Under the proposed rules, the filer would use the tag for "gross profit" and change the label for the item to "gross margin."
  • If a filer revises its previously filed financial statements, the filer would be required to provide revised interactive data at the same time it files the revised financial statements with the traditional format filing.
  • A filer's initial interactive data exhibit would be required within 30 days of the earlier of the due date or filing date of the related report or registration statement. In the second year, a filer would have a similar 30-day grace period for its first interactive data exhibit that includes detailed tagging of its financial notes and schedules. Filers would be able to file the exhibit as an amendment to the previously filed report or registration statement during this period. " A filer required to provide financial statements in XBRL format also would be required to post the financial statements on its corporate web site (if it maintains a web site) on the same day it files or was required to file the related registration statement or report with the SEC, whichever is earlier. Web site posting of the interactive data would not be required, however, until the end of any applicable grace period, as discussed above. Filers would not be permitted to comply with the web site posting requirement by including a hyperlink to the SEC's web site.

The SEC encourages US GAAP filers not in the first phase of required XBRL tagging, as well as foreign private issuers that prepare their financial statements in accordance with IFRS, to file voluntarily their financial statements in XBRL format during the phase-in period. These voluntary interactive data submissions would be governed by the proposed rules (including the liability provisions, as discussed below) instead of the existing rules of the current voluntary XBRL program.

Consequences of Noncompliance

A filer that fails to provide or post the required XBRL data on the date required would be deemed not to be current with its Exchange Act reports and thus not eligible to use the short-form registration statements under Forms S-3, F-3, and S-8 or to incorporate certain information by reference into Form S-4 or F-4. The delinquent filer also would be deemed not to have available adequate current public information for purposes of the resale exemption safe harbor afforded by Rule 144 under the Securities Act. Eligibility for short-form registration and compliance with the Rule 144 current public information requirement would be regained as soon as the filer submits the required XBRL exhibit and posts the information on its web site.

Liability

A key issue of concern for many filers under the SEC's proposed XBRL filing regime will be their liability for the interactive data they are required to provide. The SEC has proposed the following bifurcated approach to liability:

  • The viewable interactive data displayed through software available on the SEC's web site, to the extent identical in all material respects to the corresponding portion of the traditional format filings, would be deemed "filed" and thus subject to the same liability provisions of the Securities Act and Exchange Act as the traditional financial statements and would be subject to the CEO and CFO certifications filed pursuant to Section 302 of the Sarbanes-Oxley Act. Thus, the viewable interactive data would be part of the company's official filing. Under these circumstances, for example, a Form 10-K's viewable interactive data would be deemed filed and subject to the liability provisions of the Exchange Act, consistent with the liability applicable to the corresponding part of the traditional Form 10-K, while a Form 10-Q's viewable interactive data would be deemed "furnished" and thus not subject to such liability.
  • Data in the interactive data file (i.e., the interactive data itself) submitted to the SEC would be excluded from the CEO and CFO certifications and would be deemed furnished, and not filed, for liability purposes. In addition, companies would be protected from liability for failure to comply with the proposed tagging requirements if the tagging was made in the filer's good faith and with reasonable effort and the filer corrected any failure as soon as reasonably practicable after becoming aware of it. Filers would continue to be liable for the su bstantive content of their financial disclosures in the same way and to the same extent as they are for traditionally filed financial statements, and the anti-fraud provisions of the federal securities laws would continue to apply.

The SEC did not propose to involve third parties, such as auditors or consultants, in the creation of the interactive data provided as an exhibit to a filer's periodic reports or registration statements. The SEC did note, however, that, as the preparation of financial statements and XBRL tagging process become more interrelated, filers and their auditors should evaluate these changes in the context of their reporting on the company's internal control over financial reporting. This evaluation would not require an auditor to report separately on a filer's XBRL exhibits.

Additional Sources of Information

In addition to reviewing the proposing release, companies seeking more information on XBRL tagging may want to consult the following sources:

  • Regulation S-T, which will include the rules proposed by the SEC;
  • The SEC's EDGAR filer manual;
  • The XBRL U.S. Preparers Guide;
  • User guidance accompanying tagging software; and
  • Financial printers and other service providers.

Analysis

SEC Chairman Christopher Cox has been a staunch proponent of XBRL reporting and, in light of the presidential elections this fall and the reported moratorium on rulemaking by the current administration beginning November 1, 2008, we anticipate that the SEC will push for adoption of final rules in early fall. The proposing release solicits comment on the advisability of permitting optional XBRL filings with respect to financial disclosures such as MD&A, executive compensation, or other financial, statistical, or narrative data, including such information provided under Forms 8-K and 6-K and earnings releases. This suggests that XBRL tagging of financial statements represents only the SEC's first step in moving toward more widespread adoption of XBRL reporting. Accordingly, despite the proposed three-year phase-in period for full use of XBRL, companies of all sizes would be well-served to begin educating their internal staff on XBRL tagging and considering how they wish to modify their processes and procedures for the preparation of financial disclosures to prepare for mandatory XBRL filing requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.