SEC Adopts Final Rules on XBRL: Mandates use of interactive data format for public company financial statements
On Jan. 30, 2009, the Securities and Exchange Commission (SEC) issued final rules regarding the provision of financial statements by public companies in an interactive data format known as XBRL. The rules will be phased in over the next three years, based on the market capitalization of a given registrant. Some commentators have expressed concern about the costs associated with the required use of the XBRL format, but the SEC believes that, over time, the process will lead to increased automation and decreased costs.
Following is an overview of XRBL: what it is, who must use it, when it will be phased in, rules relating to its use and a brief comment on practical considerations.
What is XBRL?
XBRL, which stands for eXtensible Business Reporting Language, is a format that defines or “tags” individual data items in financial statement disclosure in a standardized format. With data formatted in this manner, investors and analysts can easily download financial statement data from public filings directly into spreadsheets and other software tools, enabling quick analysis and comparison among multiple companies, reporting periods and industries. Currently, the public often relies on third-party, fee-based service providers to perform these functions, and the existing process of incorporating text-based disclosure into spreadsheets and similar formats can be subject to human error.
The SEC Web site contains links to various XBRL filings that have already been made on a voluntary basis by certain issuers.
Companies and documents covered
After the phase-in period described below, all companies that file financial data under the Securities Act or the Exchange Act, including foreign private issuers, will be required to provide their financial statements in this interactive data format. The interactive data version of the financial statements will be required as a separate exhibit to all Securities Act registration statements containing financial statements (except for registration statements for initial public offerings), Exchange Act quarterly and annual reports, and reports on Form 8-K (or 6-K) that contain revised or updated financial statements.
The new rules will not, however, alter any existing substantive disclosure requirement. The text-based financial statements will still be required to be included in the base filing, separate from the new requirement to include a new XBRL-formatted exhibit.
The rules will be phased in as follows:
- Domestic and foreign large accelerated filers that use U.S. Generally Accepted Accounting Principles (GAAP) and have a worldwide public common equity float above $5 billion as of the end of the second fiscal quarter of their most recently completed fiscal year (approximately 500 companies) will be required to comply beginning with the first Form 10-Q1 (or Form 20-F or Form 40-F) containing financial statements for a fiscal period ending on or after June 15, 2009;
- All other domestic and foreign large accelerated filers (meaning companies that have a market capitalization for shares held by non-affiliates of more than $700 million as of the end of the second quarter of their most recent fiscal year) that use U.S. GAAP will be required to comply beginning with the first Form 10-Q (or Form 20-F or Form 40-F) containing financial statements for a fiscal period ending on or after June 15, 2010; and
- All remaining filers that use U.S. GAAP, including smaller reporting companies, and all foreign private issuers that prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) will be required to comply beginning with the first Form 10-Q (or Form 20-F or Form 40-F) containing financial statements for a fiscal period ending on or after June 15, 2011.
Filers that become subject to the SEC's reporting requirements after this phase-in period will be required to comply beginning with their first Form 10-Q (or Form 20-F or Form 40-F).
Other applicable rules
The SEC also adopted a number of other rules relating to mandatory use of XBRL, the most significant of which are:
- Tagging of Footnotes and Schedules. Initially, financial statement footnotes and schedules will each be tagged individually as a block of text. Beginning after one year of such tagging, a filer will also be required to tag the detailed quantitative disclosures within the footnotes and schedules.
- Grace period. The interactive exhibits will generally be required to be filed at the same time as the main filing to which it relates, except in the case of the first interactive exhibit filing (and the first filing with detailed tagging of footnotes and schedules), where there will be a 30-day grace period following the due date during which the interactive exhibit may be filed.
- Posting on company Web site. Interactive data financial statements that are required to be included with an SEC filing must also be posted on the filer's corporate Web site not later than the end of the calendar day it filed or was required to file the report or registration statement, whichever is earlier.
- Effect of non-compliance. Filers that do not file interactive data exhibits on a timely basis will be deemed not current with their Exchange Act reports for purposes of eligibility for Form S-3, S-8 and other forms and will be deemed not to have available adequate public information for purposes of Rule 144. The eventual filing of the required exhibits will cause the filer to immediately regain compliance for these purposes.
- Voluntary filing of interactive exhibits. Filers may voluntarily provide interactive exhibits before they are required to do so and, once commenced, may cease providing the exhibits if they are not yet required to do so under the phase-in rules.
- Liability considerations. For the first 24 months of required filing of interactive data exhibits and no later than Oct. 31, 2014, they will be deemed “furnished,” not “filed,” for liability purposes and will be subject to a safe harbor from liability for failure to comply with tagging requirements under certain circumstances if the filer is acting in good faith and if the failure is corrected promptly after the filer becomes aware of it.
- Officer certification. The interactive data exhibits will be excluded from the officer certification requirements under Rules 13a-14 and 15d-14 of the Exchange Act.
- Exclusion of non-financial statement disclosure. Non-financial statement disclosure (e.g., management's discussion and analysis, executive compensation disclosure) will not be required to be presented in interactive form.
Companies that use financial printers or other third-party filing service providers for their SEC filings should ensure that the tagging of the first required report is commenced sufficiently in advance of the due date to provide for a smooth transition period. Companies that currently handle these functions in-house should ensure that they are in a position to perform the tagging functions well in advance of the initial due date. There are several third-party service providers and software products available to assist companies in this regard.
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Additional information concerning this rule can be found in the final rules located on the SEC's Web site.
1 Note that the first required filing will not be a Form 10-K, which would otherwise be the case for companies with a June 30 fiscal year end. The SEC's reasoning in this case was to allow companies to ease in to the process by starting with a less-involved filing.