SEC Releases Proposed Rules Requiring Financial Statements to Be Filed in XBRL Format

09 June 2008 Publication
Authors: Michael B. Kirwan

Legal News Alert: Transactional & Securities

The U.S. Securities and Exchange Commission (SEC) has proposed new rules requiring companies to provide financial statement information in periodic reports (Forms 10-K and 10-Q) and registration statements in an interactive data format using the eXtensible Business Reporting Language (XBRL). The proposed rules are intended to make financial information easier for analysts, investors, and others to search and analyze cost effectively across companies, reporting periods, and industries without manual data re-entry. The SEC envisions investors downloading and analyzing interactive data through off-the-shelf software as well as through custom-developed investment software. The SEC’s XBRL requirements would be implemented in three phases, with the initial phase consisting of the largest companies (estimated to be approximately 500) required to file XBRL data for fiscal periods ending on or after December 15, 2008.

What Is Affected?
The proposed rules, SEC Release Nos. 33-8924; 34-57896; File No. S7 – 11- 08 (see, would apply to the financial statements and accompanying footnotes and any required schedules included in a Form 10-K or 10-Q (but not Form 8-K) or in registration statements. The new XBRL data will be filed concurrently with and as an exhibit to such reports or registration statements, but will not otherwise change the disclosure and formatting standards of SEC documents, currently American Standard Code for Information Interchange (ASCII) or HyperText Markup Language (HTML).

Financial information found in management’s discussion and analysis, executive compensation disclosures, and other financial or narrative disclosure will not be subject to the new XBRL requirements. The SEC likely will address this information in the future. Business development companies and other companies that prepare their financial statements in accordance with Article 6 of Regulation S-X would not be subject to these new requirements, but may continue to participate on a voluntary basis. In a separate initiative that is not discussed here, the SEC also has proposed new rules for mutual funds to disclose their fees, performance, and strategies through the use of XBRL data.

The new XBRL data exhibit will not be in human-readable format since it is intended to be processed by software applications of those who are analyzing or reporting the data. There are a number of software applications that are currently available for such purposes. The SEC’s Web site currently provides links to applications that make the XBRL data readable at One of these applications shows the use of XBRL data for executive compensation disclosures even though executive compensation disclosures are outside the scope of the proposed rules. It is anticipated that additional software will become available in the near future.

The proposed rules further require every issuer to post its XBRL data on its corporate Web site, if it has one, on the earlier of the day the information was filed with the SEC or the day the information was required to be filed.

What Is XBRL?
Like HTML, XBRL is an electronic format that “tags” data using standard definitions. The tags provide a consistent identity structure for data that can be recognized and processed by a variety of software applications such as databases, spreadsheets, and financial reporting systems. For example, a data point of “$200,000” might be linked to an issuer and the accounting terms “U.S. Dollars,” “Net Profit,” “2nd Quarter,” and “2008.”

XBRL was developed and is supported by XBRL International, a global consortium of approximately 550 organizations interested in financial reporting. In 2006, the SEC contracted with XBRL International’s U.S. affiliate to develop the standard list of tags necessary for financial reporting under U.S. Generally Accepted Accounting Principles (GAAP) and SEC regulations. Currently available tags address approximately 13,000 different data elements. A separate set of tags has been created for International Financial Reporting Standards (IFRS) filers.

Because a filer may wish to use a non-standard financial statement line item that is not included in the standard list of tags, XBRL permits the filer to create a company-specific tag, called an extension. Current participants in the SEC’s voluntary XBRL filer program are averaging about 20 extensions each for their financial statements. Since customized tags make comparisons of multiple companies difficult, investors and financial analysts may urge companies to minimize their customization.

Current Use of XBRL
The proposed rules would formalize the SEC’s voluntary XBRL filer program that started in 2005. The SEC’s voluntary program had 78 participating companies as of April 17, 2008.

Within the United States, XBRL has been widely used by banking regulators. Since 2005, the Federal Deposit Insurance Corporation, the Federal Reserve System, and the Office of the Comptroller of the Currency have required the insured institutions that they oversee to file their Consolidated Reports of Condition and Income (Call Reports) in XBRL format.

Outside the United States, a number of foreign securities regulators require or encourage the use of XBRL. China was the first country to mandate XBRL reporting, doing so under the rules of the China Securities Regulatory Commission and the Shanghai Stock Exchange. Beginning in April 2008, public companies in Japan began using XBRL in their regulatory filings. XBRL programs exist in many countries including, among others, Australia, Canada, South Korea, and the United Kingdom.

The SEC is asking the public for comments on the proposed new rules by August 1, 2008 and is expected to adopt the new rules very quickly thereafter. The proposal contemplates that the new rules will be phased in as follows:

Phase 1 — December 15, 2008 (U.S. GAAP filers with float of more than $5 billion)
In the first phase, domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public common equity float above $5 billion as of the end of their most recently completed second fiscal quarter would provide a new exhibit to their periodic reports, registration statements, and transition reports that would contain their financial statements and financial schedules in the XBRL format. The requirement would apply beginning with fiscal periods, whether annual or quarterly, ending on or after December 15, 2008. It is estimated that approximately 500 companies will comprise this initial group.

Phase 2 — December 15, 2009 (Large accelerated U.S. GAAP filers)
All other domestic and foreign large accelerated filers using U.S. GAAP would be subject to the same XBRL reporting requirements beginning with fiscal periods ending on or after December 15, 2009.

Phase 3 — December 15, 2010 (all other U.S. GAAP or IFRS filers)
All remaining filers using U.S. GAAP, including smaller reporting companies, and all foreign issuers that prepare their financial statements in accordance with IFRS would be subject to the same XBRL reporting requirements beginning with fiscal periods ending on or after December 15, 2010.

After a company has been subject to the XBRL reporting requirements for a year, the XBRL requirements would increase to include detailed tagging of financial footnotes and schedules. During a company’s initial year, these items would have minimal XBRL tagging.

Every company would have a 30-day grace period for its initial XBRL filing and a 30-day grace period for its first filing in its second year of XBRL reporting when its footnotes and schedules would be required to be tagged in detail. To utilize a grace period, the SEC envisions an initial filer timely filing its periodic report or registration statement in its customary ASCII or HTML format and then filing an amendment within 30 days with an exhibit in the required XBRL format. After these initial grace periods, all XBRL exhibits will be required at the same time as the rest of the periodic report or registration statement.

Liability Issues
The XBRL data that is not human-readable will be subject to the anti-fraud rules of the federal securities laws. However, it will be excluded from the officer certification requirements under the Securities Exchange Act of 1934 (Exchange Act) and will not be audited. This data also will not trigger liability if it fails to meet the tagging and other requirements of the new rules “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.”

Issuers that do not timely file the XBRL data exhibit will be deemed to be not current with their Exchange Act reports and ineligible (until they file the required XBRL exhibit) (1) to use short-form registration statements on Forms S-3, F-3 and S-8 under the Securities Act of 1933 or (2) to elect to incorporate information by reference under Form S-4 or F-4. In addition, issuers that do not timely file XBRL data exhibits will not be deemed to have available adequate current public information; therefore, the resale exemption of Rule 144 will not be available until the exhibits are filed.

Next Steps
Companies that would be required under the proposed rules to file XBRL exhibits for the first phase-in period need to act now to decide whether they will use outside vendors for preparing and filing their XBRL exhibits or whether they will use commercially available tagging software to perform this function themselves. Voluntary participants have indicated that significant time is required to prepare XBRL exhibits even if an issuer uses an outside vendor. Companies should prepare a practice XBRL exhibit using their last 10-K in order to minimize future issues arising when preparing their mandatory XBRL exhibit.

XBRL International’s U.S. affiliate’s Web site,, is a good source for companies to learn about XBRL, the SEC’s requirements, and XBRL-enabled tools that companies may use to meet their reporting needs. Through this Web site, companies are directed to various applications and can see how data will look and be used.

Legal News Alert is part of our ongoing commitment to providing legal insight to our transactional & securities industry clients and colleagues.

If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or the following individual:

Michael B. Kirwan
Jacksonville, Florida

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