December 17, 2008
On December 17, 2008, the Securities and Exchange Commission adopted a rule that will require issuers to file a supplemental exhibit "tagging" their financial statements with an interactive data format known as XBRL (eXtensible Business Reporting Language). This requirement will 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 rule, the XBRL requirements will apply to domestic and foreign public issuers that prepare their new 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 adopted 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 – will have to file XBRL exhibits in any periodic report filed for a period ending on or after June 15, 2009, and in any registration statements filed subsequent to such periodic reports.
A more detailed overview of the new XBRL rule, including liability implications, is provided below. This overview is based on information provided at today’s SEC open meeting, and therefore may not reflect nuances that will appear in the adopting release.
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 will 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.
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 over 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 discourages the creation of extensions when an appropriate financial statement element exists in the standard list of tags.
Schedule for Compliance
The SEC will phase in the XBRL requirements over a three-year period, with a relatively compressed compliance schedule for the largest issuers:
For an issuer’s first XBRL filing, the SEC will 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 periodic 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 will grant a 30-day grace period beyond the filing date.
In an effort to ease the transition to XBRL, in the first year that an issuer adopts XBRL, the issuer will 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 will be required to tag all relevant information in footnotes and schedules with XBRL tags. However, in a change from the proposing release, tagging of narrative disclosures will be permitted but not required.
As noted above, the SEC will require issuers to file XBRL data as a new exhibit to their filings. The new exhibit will be required to appear as Exhibit 101 under Item 601 of Regulation S-K.
The new exhibit will 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. It will not be required with registration statement filings that incorporate financial statements by reference from other filings. The new exhibit 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, the current financial statement filing requirements remain unchanged – financial statements thus will continue to be filed through EDGAR in the HTML or ASCII formats.
Importantly, the SEC noted at today’s open meeting that an issuer’s auditor will not be required to attest to or review XBRL data.
Website Posting of XBRL Data
An issuer will need to post its XBRL exhibit to its website on the same day that it files the exhibit with the SEC. A thirty day grace period will be permitted for the first interactive data exhibit of each filer and also for the first interactive data exhibit that is required to include the footnotes and schedules tagged in detail.
Liability Associated with XBRL
An issue of particular importance to issuers is the legal liability associated with XBRL exhibits. The SEC will have two standards of liability regarding XBRL data: one for "interactive data" – the "raw" XBRL data that 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 will be considered "furnished" and will be:
In contrast, viewable interactive data, to the extent identical in all material respects to the corresponding portion of the traditional format filings, will 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. This data will be subject to the CEO and CFO certifications filed pursuant to Section 302 of the Sarbanes-Oxley Act.
Failure to Comply with XBRL Requirements
An issuer that fails to file or post to its website the required XBRL exhibit on the date required will be deemed not current with respect to its Exchange Act reports. As a result, it will 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 will 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 will be deemed current and timely. Therefore, it will 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.
There are also two hardship exemptions from the XBRL requirements. First, Rule 201 under Regulation S-T will 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 will 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 Associated with XBRL Compliance
In order to comply with 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.
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, firstname.lastname@example.org)
Brian J. Lane (202-887-3646, email@example.com)
Ronald O. Mueller (202-955-8671, firstname.lastname@example.org)
Amy L. Goodman (202-955-8653, email@example.com)
Michael J. Scanlon (202-887-3668, firstname.lastname@example.org)
Elizabeth A. Ising (202-955-8287, email@example.com)
Joshua M. Humi (202-887-3635, firstname.lastname@example.org)
© 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.