Required Reading for the XBRL Mandate

Corporate compliance officers who don’t already know the Securities and Exchange Commission’s adopting release for its XBRL mandate—and know it well—ought to put it on their summer reading list.

That was the advice of SEC officials during a recent public seminar aimed at helping issuers prepare to comply with the new rule that requires them to tag their financial statements using XBRL technology. The rule goes into effect for the largest U.S. public companies this month.

“To the extent that lawyers have been deferring reading the release, now is probably a good time to start,” Tom Kim, chief counsel in the SEC’s Division Of Corporation Finance, told attendees at the June 10 forum. He noted that the rules have “a lot of bells and whistles.”

Kim and other SEC officials who spoke offered an overview of how the XBRL mandate works, answered some frequently asked questions, and gave observations on what the SEC staff has seen in XBRL submissions so far.

Broadly speaking, XBRL (known in the SEC as “interactive data”) is a technology that lets the data in financial statements be “tagged” so computers can quickly find specific pieces of information. That ability, in turn, will let investors sift through a company’s financial information more quickly and allow the information to be displayed in more customized formats.

The SEC passed the XBRL mandate at the start of this year, and the 500 largest filers in the United States must start compliance with their first periodic reports filed after June 15. All other large filers will follow in June 2010, and then everyone else in June 2011.

Kim said interactive data files “are no longer the exclusive province of the IT folks or financial printers or accountants,” because failure to comply with the rule will affect a company’s short-form eligibility and the ability to offer securities quickly under Rule 144. It will also endanger a company’s disclosures about the effectiveness of controls and procedures.

That said, SEC officials repeatedly urged people to contact the SEC staff for help with any questions on XBRL. The Commission has even established an Office of Interactive Disclosure to be the liaison for filers still trying to figure out what XBRL means to them.

Shelley Parratt, acting director of Division of Corporation Finance, said the Division’s initial focus will be on helping filers succeed in complying with the XBRL filing requirements. The agency will not, she said, be looking to punish anyone for non-compliance. “We are not out to play a game of gotcha,” she said.

Filers can use the SEC’s adopting release as a primary source of guidance. SEC staffer Mark Green, one of the authors of the rule, said companies should also review related staff Compliance & Disclosure Interpretations and the Small Business Compliance Guide for Interactive Data, both of which have been published by the SEC this spring. (For links to those and other related resources and coverage, see the Related Resources box at right.)

“To the extent that lawyers have been deferring reading the [adopting] release, now is probably a good time to start.”

—Tom Kim,

Chief Counsel,

SEC’s Corp. Finance Division

Meanwhile, Kim highlighted some of the nuances of the XBRL mandate that might create confusion. For instance, interactive data exhibits are required for Securities Act registration statements that contain financial statements and a price or a price range, but they are not required for initial public offerings. And while the term “disclosure controls and procedures” in Item 307 of Regulation S-K includes the controls applicable to the filing of XBRL exhibits in periodic reports, for the officer certifications under Section 302 of Sarbanes-Oxley, that phrase is deemed not to cover any controls with respect to the filing of interactive data file exhibits—a distinction that Kim said is described in the adopting release, “but is not intuitive.”

Questions and Answers

Staff members also addressed common questions. Green clarified that the measurement date to determine when an issuer must comply with the XBRL rule is the same date used to determine a company’s accelerated-filer status: The last business of the second quarter of the most recently completed fiscal year. So domestic filers that had a $5 billion float at measurement date would be in the first group of companies to comply, even if their float has subsequently dropped below that threshold. Issuers that file with the SEC on a voluntarily basis would be in the third group that will comply for periods ending on or after June 15, 2011.

Companies can opt to comply early on a voluntary basis and can stop doing so any time prior to when they’re required to comply. Green clarified that the mandate’s initial 30-day grace period applies to an issuer’s first XBRL submission, even if that submission is on a voluntary basis. The same goes for the grace period for the first XBRL submission that includes detailed tagged footnotes and schedules. (Filers must start tagging footnotes and schedules in detail one year after their first filing; in the first filing itself, they need only tag footnotes and schedules as one block of data.)

A temporary hardship exemption, set forth in Item 201 of Reg S-T for “unanticipated technical difficulties” is available by submitting notice to the staff. That exemption provides companies an additional six business days to submit their XBRL filing. A continuing hardship exemption, under Item 202 of S-T, requires an application explaining why the deadline would pose an undue burden or expense. The staff would determine how long any such extension would be—but Green said he expects there to be “few circumstances” where that exemption would apply.

FILER REQUIREMENTS BY STATUS

The following tables identify the reports for which a filer would first be required to

include interactive data for the company’s financial statements according to the company’s filing

status:

Filing Status strong >

Required Reports

Domestic and Foreign Large Accelerated Filers

Using U.S. GAAP with Worldwide Public

Common Equity Float above $5 Billion as of

the End of the Second Fiscal Quarter of Their

Most Recently Completed Fiscal Year

Quarterly report on Form 10-Q or annual

report on Form 20-F or Form 40-F containing

financial statements for a fiscal period ending

on or after June 15, 2009.

All Other Large Accelerated Filers Using U.S.

GAAP

Quarterly report on Form 10-Q or annual

report on Form 20-F or Form 40-F containing

financial statements for a fiscal period ending

on or after June 15, 2010.

All Remaining Filers Using U.S. GAAP

Quarterly report on Form 10-Q or annual

report on Form 20-F or Form 40-F containing

financial statements for a fiscal period ending

on or after June 15, 2011.

Foreign Private Issuers with Financial

Statements Prepared in Accordance with IFRS

as Issued By the IASB

Annual reports on Form 20-F or Form 40-F for

fiscal periods ending on or after June 15, 2011.

Source

SEC Rule on Interactive Data (Jan. 30, 2009).

Joel Levine of the SEC’s Office of Interactive Disclosure advised financial statement preparers, technologists, and those responsible at the corporate level for the XBRL tagging “to be aware” of the roughly 200 instructions related to interactive data that have been added to the EDGAR filing manual. Some are very technical and can be tested, he said, but others “require some level of human judgment.”

For instance, he noted that some judgment is required when tagging text block elements in footnotes, to ensure that the element “with the narrowest definition that captures all of the material information” is chosen.

He also pointed out some common errors. For example, many issuers using the 30-day grace period and submitting interactive data exhibits in connection with their Form 10-Q are mistakenly filing them as an exhibit to Form 8-K, instead of an exhibit to Form 10-Q/A. Some companies are posting only the XBRL instance document to their Website, when they should be posting all of the files submitted for the XBRL exhibit.

If a company decides to include an XBRL “extension”—that is, to write its own tag for a particular piece of financial data, rather than rely on the standard XBRL taxonomy for U.S. Generally Accepted Accounting Principles—the SEC staff will check to see whether an appropriate tag already exists in the XBRL taxonomy, and whether the extension provides all necessary information, Levine said. Definitions are required for monetary elements that don’t have debit or credit attributes, such as those created for the Statement of Cash Flow; definitions for other new elements are permitted but not required.

While it’s not required, Levine said it’s “good practice” for companies to document their decisions to create new extensions or to choose one tag over another when it seems more than one could be used.

“As taxonomies change over time, you may need to reconsider your choices … and the people who made those decisions may not be with the company,” he said. Further, he noted, “If you get a call from us asking how you considered this or that tag, you’ll have a record.”

Issuers can begin submitting XBRL exhibits to the SEC using the updated 2009 taxonomy for U.S. GAAP starting July 22. Levine encouraged companies “to use it as soon as they can,” but noted that filers in the first group have the option to submit their initial XBRL exhibit using the 2008 taxonomy still on the books right now.