The Securities and Exchange Commission has finally delivered its mandate—all 206 pages of it—that corporations start filing financial statements using XBRL technology.
Published on Jan. 30, the adopting release still follows the schedule SEC commissioners approved in December: The 500 largest public companies must start XBRL compliance this summer, followed by other large filers in 2010, and all remaining companies in 2011. Most other main points in the rule are also in step with the original proposal, although experts say the final version does contain a few differences that filers should appreciate.
Still, for companies that aren’t yet familiar with interactive data (and that would be most of you), compliance is likely to be a somewhat daunting task the first time around.
Ohata
“This is more than just a file conversion,” says Michael Ohata, a managing director at KPMG and chairman emeritus of XBRL International. “Companies have to manage the quality of their XBRL the same as they do with any other filing.”
XBRL documents will not replace the standard corporate filings per se. Rather, companies will append XBRL documents as exhibits to their usual filings to the SEC and post them to their corporate Websites as well. The rule applies to periodic reports, registration statements, and transition reports for a change in fiscal year.
Specifically, the vanguard of XBRL filers will be domestic and foreign large accelerated filers that use U.S. Generally Accepted Accounting Principles and have a worldwide public float above $5 billion at the end of the second fiscal quarter of their most recently completed fiscal year—that is, roughly the 500 largest public companies in the United States. They must comply with the mandate starting with their first periodic filing after June 15, 2009.
That’s six months later than originally proposed, and the timing change means many companies won’t have to tackle their Form 10-K as their first XBRL submission, which should be a relief, says Bruce Pounder, chairman of the Institute of Management Accountants’ small-business committee. Even so, he says, “That’s still coming up quickly, so this requires registrants to get on the ball fast.”
The final XBRL rule is new, but the financial reporting community has had ample time to prepare. The SEC first undertook an initiative to assess the benefits of interactive data back in 2004. In 2005, then-chairman Christopher Cox began pushing fervently for the adoption of XBRL, and he announced intentions for an eventual mandate more than a year ago.
The interactive data requirement also ties into SEC plans to replace its 20-year-old EDGAR filing system with a new reporting structure called IDEA, for Interactive Data Electronic Applications. IDEA is already operating on a preliminary basis to display XBRL filings, which typically give investors far more control, speed, and detail when viewing companies’ financial information.
Rolling Up the Sleeves
Richman
Still, while companies that participated in the SEC’s voluntary XBRL filing program are already familiar with “tagging” data according to various XBRL labels, those that haven’t participated may find the experience a bit bewildering. Laura Richman, counsel in the law firm Mayer Brown, notes that the final XBRL rule gives companies a two-year grace period for legal liability in their filings, which she calls “a good compromise.”
“We hope the SEC will be paying attention to the experience of early filers in terms of cost-benefit to be able to better gauge the cost-benefit for smaller filers later.”
— Bruce Pounder,
Small-Business Committee,
Institute of Management Accountants
“That should be comforting for people as they build up their learning curve,” she says. “This is a new, very technical requirement.”
Scanlon
In the guts of XBRL compliance, a company must match each piece of financial information with the proper tag from an XBRL taxonomy of U.S. accounting terms; that lets computers quickly find the precise data an investor wants to see. Michael Scanlon, a partner in the law firm Gibson Dunn & Crutcher, says the toughest (and most time-consuming) part of XBRL compliance for first-timers will be finding the correct tag for each line item and sub-line item on the financial statement.
“For companies that haven’t gone through this yet, there will be a fair amount of pushing and pulling to make sure the company’s definitions match up to the taxonomies,” he says. Even if a company outsources that process—and many IT vendors stand eager to help with the task—Scanlon says companies need knowledgeable professionals on their financial reporting staffs “to make sure they’re comfortable with the definitions being applied.”
Regardless of whether an XBRL document is prepared internally or externally, management is responsible for its accuracy. That means companies should allow ample time for review, particularly for their first submission, Ohata says. He says issuers should expect to spend about 20 hours collectively reviewing their first exhibit. (Scanlon also cautions that financial reporting teams will need to stay abreast of any changes to XBRL taxonomy that could affect the tags their companies use.)
In their first year of compliance, companies will only need to tag items on the face of their financial statements; footnotes and schedules can be tagged only as solid blocks of text. In the second year, filers will need to tag the detailed disclosures within the footnotes and schedules themselves.
In a departure from the original XBRL proposal, however, the final rule says tagging of narrative disclosure will be “permitted, but not required.” That should ease the burden of detailed tags.
The SEC also eased the timing of the required Website posting. Filers now must post their interactive data exhibits on corporate Websites by the end of the calendar day they submitted their filings or were required to submit them, whichever is earlier (rather than by the end of the business day, as originally proposed). Interactive data must be posted on an issuer’s site for at least 12 months.
XBRL FINAL RULE
The principal changes from the proposing release include:
Modified treatment of liability for the interactive data files under the federal securities
laws only will be available for interactive data files that a filer submits within 24
months of the time the filer first is required to submit interactive data files and no
later than October 31, 2014.
The phase-in schedule has been changed from the proposal. The filers that will be
phased in during year one will first be required to submit an interactive data file for a
periodic report on Form 10-Q, Form 20-F or Form 40-F containing financial
statements for a fiscal period ended on or after June 15, 2009. Filers that are phased
in during years two and three will be treated in a similar manner. Filers that first
become subject to the requirement to submit interactive data after year three will first
be required to submit an interactive data file for a quarterly report on Form 10-Q or
annual report on Form 20-F or Form 40-F, as applicable.
The amendments will require that interactive data be submitted with a Securities Act
registration statement filing only after a price or price range has been determined and
any later time when the financial statements are changed, rather than requiring
interactive data submissions with each filing.
The amendments will require companies to submit interactive data for financial
statements contained in additional forms—Securities Act registration statements on
Forms F-9 and F-10 and periodic reports on Forms 40-F as well as reports on Forms
8-K and Form 6-K that contain revised or updated financial statements.
The timing of the required Website posting has been eased. A filer must post the
interactive data exhibit on its corporate Website not later than the end of the calendar
day it submitted or was required to submit the interactive data exhibit, whichever is
earlier. As proposed, Website posting would have been required by the end of the
business rather than calendar day.
Interactive data will be required to be posted for at least 12 months on an issuer’s
Web site. The proposing release did not specify this, but commenters requested
clarification.
While the amendments will require filers to tag separately each amount within a
footnote or schedule (i.e., monetary value, percentage, and number), the rules will
permit, but not require, filers to tag, to the extent they choose, each narrative
disclosure.
We intend to monitor implementation and, if necessary, make appropriate adjustments to
the adopted amendments.
Source
SEC’s Rule: Interactive Data to Improve Financial Reporting (Jan. 30, 2009).
The final rule keeps the two proposed 30-day grace periods: one for the issuer’s first interactive data exhibit, and another in the second year for the first XBRL exhibit that includes detailed tagging of footnotes and schedules.
Pounder
The cost of compliance with the mandate is an obvious question, and Pounder says it weighs heavily on the minds of many companies. The SEC estimates in its final rule that the average yearly burden of the mandate over the first three years would be 226 man-hours and $27,300 per filer. But, Pounder says, “It’s totally a guess as to what it will actually cost.”
“We hope the SEC will be paying attention to the experience of early filers in terms of cost-benefit to be able to better gauge the cost-benefit for smaller filers later,” he says.
The adopting release says the SEC intends to monitor implementation “and, if necessary, make appropriate adjustments to the adopted amendments.”
That language will probably help soothe companies scared that XBRL will somehow spiral into a costly compliance nightmare like Sarbanes-Oxley did several years ago. But Richman says it also gives the Commission room to expand the requirements to other disclosures sometime in the future, should XBRL implementation go well.
For example, while the SEC didn’t require companies to tag their Management Discussion and Analysis or executive compensation disclosures, the rule specifically notes that the SEC will continue to consider “the advisability of permissible optional or required interactive data for disclosures made outside a set of financial statements.”
“I suspect we haven’t heard the last on that,” Richman says.
Ohata, meanwhile, says companies should designate in-house experts in both technology and financial reporting to manage the XBRL preparation process. If they haven’t already, he recommends that those assigned to oversee the process read the XBRL U.S. Preparers Guide and review the XBRL U.S. GAAP Taxonomies. Companies must, he says, put a process in place for XBRL submissions, just as they do for external reporting.
“They need to understand how XBRL is put together, and they’ll need to review and sign off not only that they followed procedures, but that there are checkpoints around quality, and that’s supported by documentation,” he says.
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