June 6, 2008
On May 30, 2008, the Securities and Exchange Commission proposed that issuers be required to file a supplemental exhibit “tagging” their financial statements with an interactive data format known as XBRL (eXtensible Business Reporting Language). This requirement would apply to periodic reports (Forms 10-K and 10-Q) and registration statements filed with the SEC. The existing financial statement requirements for these periodic reports and registration statements remain unchanged.
Under the SEC’s proposal, the XBRL requirements would apply to domestic and foreign public issuers that prepare their financial statements in accordance with U.S. GAAP and foreign private issuers that prepare their financial statements using International Financial Reporting Standards (“IFRS”) as promulgated by the International Accounting Standards Board (“IASB”). The SEC has proposed an ambitious phase-in schedule under which the first XBRL filers — U.S. domestic and foreign large accelerated filers that use U.S. GAAP and that have a worldwide public float above $5 billion — would have to file XBRL exhibits by April 15, 2009 (and potentially even before that, if the issuer files a registration statement that includes financial statements other than through incorporation by reference).
The proposing release is available at: http://www.sec.gov/rules/proposed/2008/33-8924.pdf.
What is XBRL?
XBRL is a collection of standardized, machine-readable “tags” for line items in financial statements (and notes and exhibits to financial statements). It is similar in concept to bar codes used to identify products. For example, line items such as revenue or operating income will be specifically tagged and identifiable as such with the use of XBRL software.
Investors would be able to download XBRL financial data directly into spreadsheets, analyze it using commercial off-the-shelf software, and use it within investment models in other software formats. Investors could also search and analyze financial data across issuers, reporting periods, and industries.
Under the SEC’s proposal, issuers will use the list of tags established by XBRL U.S. (which is the U.S. representative of a consortium of financial reporting organizations, see www.xbrl.org), or the International Accounting Standards Committee Foundation (http://eifrs.iasb.org/). These tags are set forth in the SEC’s EDGAR Filer Manual. Currently, there are approximately 15,000 terms for use in tagging financial data.
If an issuer’s financial statements include unique line items, it may “extend” a standard tag to modify the nomenclature so that it corresponds to its existing unique line items. This is known as creating an “extension.” For example, if a company refers to “net revenues” as “operating revenues,” it may extend the “net revenues” tag to refer instead to “operating revenues.” To maximize comparability of data among issuers, however, the SEC’s proposal discourages the creation of extensions when an appropriate financial statement element exists in the standard list of tags.
Proposed Schedule for Compliance
The SEC has proposed to phase in the XBRL requirements over a three-year period, with a relatively compressed compliance schedule for the largest issuers:
U.S. domestic and foreign large accelerated filers that use U.S. GAAP and that have a worldwide public float above $5 billion as of the end of their most recently completed second fiscal quarter. These filers would be required to file financial statements in XBRL format beginning with fiscal periods ending on or after December 15, 2008. The SEC estimates that this equates to roughly 500 filers.
All other U.S. domestic and foreign large accelerated filers (worldwide public float above $700 million) using U.S. GAAP. These filers would be required to file financial statements in XBRL format beginning with fiscal periods ending on or after December 15, 2009. The SEC estimates that this equates to roughly 1,300 additional filers.
All remaining filers using U.S. GAAP and all foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB. These filers would be required to file financial statements in XBRL format beginning with fiscal periods ending on or after December 15, 2010.
For an issuer’s first XBRL filing, the SEC proposes to grant a 30-day grace period beyond the filing date. Thus, for example, an issuer would have 30 days from the date that it files its annual report to file its first XBRL exhibit; issuers taking advantage of the grace period would file the new exhibit as an amendment to the original filing. Similarly, for an issuer’s first XBRL filing that includes detailed tagging of financial statement footnotes and schedules, the SEC proposes a 30-day grace period beyond the filing date.
In an effort to ease the transition to XBRL, the SEC has proposed that in the first year that an issuer adopts XBRL, the issuer would only be required to label the face of the financial statements with detailed XBRL tags. The financial statement footnotes and financial statement schedules could be tagged only as “block text,” which essentially means that each note to the financial statements could be identified with one tag, rather than multiple tags. Thereafter, an issuer would be required to tag all relevant information in footnotes and schedules with XBRL tags.
Proposed Filing Requirements
As noted above, the SEC has proposed that issuers file XBRL data as a new exhibit to their filings. The XBRL proposal provides that the new exhibit would appear as Exhibit 101 under Item 601 of Regulation S-K.
The new exhibit would have to be included with all Exchange Act periodic reports on Forms 10-K, 10-Q, and 20-F, transition reports that include financial statements, and all Securities Act registration statements that contain financial statements. The new exhibit will not be required with registration statement filings that incorporate financial statements by reference from other filings. Under the proposal, it also will not be required for financial statements that are filed on Form 8-K, including when financial statements are filed on Form 8-K as a result of an acquisition.
As noted earlier, under the SEC’s proposal, the current financial statement filing requirements would remain unchanged — financial statements thus would continue to be filed through EDGAR in the HTML or ASCII formats.
Importantly, the SEC expressly noted in its proposal that an issuer’s auditor will not be required to attest to or review XBRL data.
Website Posting of XBRL Data
The SEC proposes that an issuer will need to post its XBRL exhibit to its website on the same day that it files the exhibit with the SEC.
Liability Associated with XBRL
An important issue addressed in the release relates to the legal liability associated with XBRL exhibits. The SEC has proposed two standards of liability regarding XBRL data: one for “interactive data” — the “raw” XBRL data which is only machine readable — and one for “viewable interactive data” — the XBRL data that can be downloaded and viewed from the SEC’s website or the issuer’s website using commercial software.
Interactive data would be considered “furnished” and would be:
excluded from the officer certification requirements under Rules 13a-14 and 15d-14 of the Exchange Act;
deemed not filed for purposes of Sections 11 and 12 of the Securities Act, Section 18 of the Exchange 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 if the interactive data file either: (a) met the requirements; or (b) 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.
In contrast, viewable interactive data would be considered “filed” and subject to all the same liability under the federal securities laws as the corresponding information in the traditionally formatted financial statements included in the filing.
Failure to Comply with XBRL Requirements
Under the SEC’s proposal, an issuer that fails to file or post to its website the required XBRL exhibit on the date required would be deemed not current with respect to its Exchange Act reports. As a result, it would not be eligible to use the short Forms S-3, F-3, or S-8, or elect under Form S-4 or F-4 to provide information at a level prescribed by Form S-3 or F-3. Similarly, such a filer would not be deemed to have available adequate current public information for purposes of the resale safe harbor provided by Rule 144.
However, once an issuer files the required XBRL exhibit, it would be deemed current and timely. Therefore, it would regain the ability to incorporate by reference, regain short form registration statement eligibility, and re-acquire current status for purposes of determining adequate current public information under Rule 144.
The SEC also has proposed two hardship exemptions from the XBRL requirements. First, Rule 201 under Regulation S-T would provide a temporary hardship exemption from electronic submission of information when an issuer experiences unanticipated technical difficulties that prevent timely preparation and submission of an electronic filing. Second, Rule 202 under Regulation S-T would permit a filer to apply in writing for a continuing hardship exemption if information otherwise required to be submitted in electronic format cannot be filed without undue burden or expense.
Efforts and Benefits Associated with XBRL Compliance
In order to comply with the proposed XBRL requirements, issuers will have to either tag their financial statements in-house or outsource the work. Commercial, off-the-shelf software is available to assist issuers in tagging their financial statements. Issuers also will need to consider what modifications need to be made to their disclosure controls and processes.
Some issuers have expressed concern about the time and cost that will be involved in making XBRL filings. Based on the experiences of issuers in a voluntary XBRL pilot program that the SEC initiated in 2005, the SEC estimates that for the first three years of complying with XBRL rules, the average issuer will incur a yearly burden of approximately 250 internal hours and $27,400 in out-of-pocket expenses. Notably, the SEC expects compliance costs to decline after the second year of adoption by an issuer, after an issuer has completed the initial efforts to tag its financial statements, footnotes and schedules.
XBRL filing also is expected to provide issuers with a number of benefits. First, using XBRL provides issuers an opportunity to reduce the manual efforts associated with producing financial reports. Second, the availability of tagged information will allow issuers to more easily benchmark against others. And third, XBRL technology will allow issuers to more quickly spot accounting discrepancies and changes in their financial statement over different reporting periods.
SEC Chairman Christopher Cox has stated that XBRL adoption is a high priority issue, and, given his commitment, it is anticipated that the SEC will adopt a final rule this fall.
The proposed XBRL rules are subject to a 60-day comment period, expiring August 1, 2008. Among the issues the SEC has solicited comments on are the following:
the appropriateness of the XBRL format;
the usefulness of XBRL data;
the proposed schedule for adoption;
the costs associated with XBRL compliance; and
whether interactive data should be extended to executive compensation disclosure, Management Discussion & Analysis sections, and earnings releases.
In addition to commenting on the proposals, large accelerated filers, to the extent they have not done so already, may wish to start experimenting with XBRL software and processes given the compressed time period before compliance is proposed to be required.
Gibson, Dunn & Crutcher’s Securities Regulation and Corporate Governance Practice Group is available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
John F. Olson (202-955-8522, [email protected])
Brian J. Lane (202-887-3646, [email protected])
Ronald O. Mueller (202-955-8671, [email protected])
Amy L. Goodman (202-955-8653, [email protected])
Michael J. Scanlon (202-887-3668, [email protected])
© 2008 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.