SEC Proposes Mandatory Filing of Financial Statements in Interactive Data (XBRL) Format

At its open meeting on May 14, 2008, the SEC voted to propose new rules that would require companies reporting under U.S. GAAP or IFRS to provide their financial statements to the SEC in interactive data (XBRL) format, after a phase-in period.

XBRL is an interactive data format that renders individual financial items in a company’s financial statements machine-readable by coding them using a standard list of data “tags.” XBRL is expected to make it easier and more efficient for investors, research analysts and companies to analyze financial data by allowing the data to be downloaded directly into spreadsheets and similar applications.

Under the proposed rules, a company would be required to include in its SEC filings a new exhibit presenting the financial statements, including the related footnotes and schedules, in XBRL format. This requirement would apply to the company’s annual and quarterly reports, transition reports and Securities Act registration statements. This disclosure would supplement, but not replace or change, the existing financial disclosure in the body of the SEC report or registration statement, which would continue to be presented in the traditional ASCII and HTML electronic filing formats currently used on EDGAR. Companies would also be required to include the information on their websites.

In keeping with the recommendations of the SEC’s Advisory Committee on Improvements to Financial Reporting, the requirements initially would apply only to the largest U.S. GAAP filers, an approach designed to allow the SEC to assess the experience, costs incurred and benefits achieved by larger companies before the requirements become mandatory for smaller companies. The rules would be phased in over a three-year period:

• In the first year, the rules would apply only to U.S. domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public float above $5 billion (approximately 500 filers). These filers would become subject to the requirements beginning with reports containing financial statements for fiscal years ending on or after December 15, 2008.
  
• In the second year, the requirements would be extended to 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 reports containing financial statements for fiscal years ending on or after December 15, 2009.
  
• Beginning with fiscal years ending on or after December 15, 2010, all remaining filers using U.S. GAAP would become subject to the requirements, as would all foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB.

At the open meeting, the SEC staff did not suggest any interactive data requirements for issuers that prepare their financial statements in accordance with accounting principles other than U.S. GAAP or IFRS as issued by the IASB. Nor did the SEC staff indicate that there would be a requirement for non-U.S. GAAP filers to tag information in their U.S. GAAP reconciliation footnotes.

The proposed rules include several accommodations designed to ease the initial compliance burden:

• During each filer’s first year of XBRL reporting, only the face of the financial statements would be required to be fully tagged at the individual data element level; the financial statement footnotes and financial statement schedules would be required to be tagged only as block text. After the first year, a filer would be required to tag the detailed disclosures within the footnotes and schedules.
  
• A 30-day grace period after the filing of the related report or registration statement would be provided for each filer’s first XBRL exhibit, and also for the first XBRL exhibit required to tag the footnotes and schedules in detail.

Subject to the above grace periods, interactive data would be required to be provided to the SEC and posted on a company’s website at the same time as the related report or registration statement. Filers failing to provide or post interactive data when required would be deemed not current with their Exchange Act reports, and would as a result be ineligible for short-form Securities Act registration and would not have adequate current public information for purposes of Rule 144 resales. At the open meeting, John White, the Director of the Division of Corporation Finance, indicated that cure provisions would be provided to permit a filer to reestablish its “current” status upon subsequent filing of the required exhibit.

The SEC staff indicated in its remarks that data in the interactive data file submitted to the SEC would be subject to limited liability “similar” to that in the current voluntary XBRL filing program. It is not clear from the Staff’s remarks how the liability limitations will be structured. We expect this to be clarified in the proposing release.

In addition to proposing mandatory XBRL filing of financial information, the SEC staff indicated at the open meeting that it also expects to solicit comment on whether the rules should be expanded to require tagging of other portions of company disclosure, such as executive compensation data.

Click here for copies of the SEC press release

Click here for copies of the SEC staff statement describing the proposal

The proposing release is not yet available. The proposal will be subject to a 60-day comment period.

Please feel free to contact any of your regular contacts at the firm or any of our partners and counsel listed under the “Capital Markets” section of this website if you have any questions.