SEC Issues Rules Outlining Mandatory XBRL Requirement
February 3, 2009
The US Securities and Exchange Commission (SEC) has issued final rules requiring certain foreign private issuers to provide financial statements in XBRL format. The rules, which were announced in late December, are largely as expected but do contain some helpful clarifications.
The final rules only apply to companies that file financial information prepared in accordance with US GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Foreign private issuers that file financial statements prepared in accordance with their home country GAAP are not, at this time, required to provide financial information in XBRL.
What is XBRL?
XBRL is a technology that relies upon the input of data tags to identify and describe information in a company’s financial statements. The information can then be searched, downloaded into spreadsheets or reorganized for analytical purposes. XBRL also allows financial statements in foreign languages to be translated into English.
The SEC expects that the use of XBRL will facilitate the comparison of financial and business performance across companies, reporting periods and industries; assist in automating regulatory filings and business information processing; and increase the speed, accuracy and usability of financial disclosure.
Three-Year Phase-in Period for XBRL Requirement
Foreign private issuers will first be required to provide XBRL financial statements in an annual report on Form 20-F or 40-F rather than in a Securities Act registration statement or Form 6-K. Accordingly, a company conducting an initial public offering (IPO) will not be required to include XBRL data in its IPO registration statement, even though, as discussed below, XBRL data is otherwise required to be provided in Securities Act registration statements.
Implementation of the XBRL requirement is also subject to a three-year phase-in period as follows:
Information Required to be Provided in XBRL
The new XBRL requirement will not change the substance or format of the information disclosed in the body of annual or current reports or registration statements but will require companies to include a new exhibit containing their financial statements, financial statement schedules and footnotes in XBRL. Companies are not required, or permitted, to provide their MD&A, executive compensation information or other financial, statistical or narrative disclosure in XBRL format.
Subject to the phase-in period discussed above, this XBRL exhibit must be submitted with:
XBRL data is not required in a Securities Act registration statement that does not contain financial statements, such as a Form F-1 or Form F-3 that incorporates financial statements by reference. This, coupled with the fact that, as mentioned above, XBRL data is not required in IPO registration statements, effectively means that only a limited number of Securities Act registration statements will actually include XBRL data.
Companies are also required to post the XBRL data on their public websites by the end of the calendar day on which the registration statement or periodic report was filed with the SEC or was required to be filed (whichever is earlier). The XBRL data must remain on the company’s website for 12 months.
Current Status for Purposes of Shelf Registration
Companies that do not provide the XBRL data to the SEC or post it on their website on the date required will lose Form F-3 eligibility until they provide the delinquent XBRL data to the SEC and/or post it to their website, as the case may be.
Exclusion from Certifications and Limited Liability for First Two Years
As expected, the XBRL data will be excluded from the scope of the officer certifications provided in connection with an annual report. Companies are also not required to obtain auditor assurance on their XBRL exhibits.
The rules also limit a company’s liability for XBRL data for the first two years the company is required to provide the data as long as the company makes a good faith attempt to comply with the XBRL requirements and promptly corrects any failure after becoming aware of it. These temporary liability limits are completely phased-out by October 31, 2014.
What Will Companies Need to Do in Order to Meet this New Requirement?
In order to convert its financial statement information to XBRL for purposes of the SEC’s requirements, a company may either:
Whichever approach a company chooses, the preparation of a company’s first set of XBRL financial statements will likely be very time and labor intensive because each financial statement item must be defined, or “tagged.” For example, the SEC estimates in the final rule release that, in the first XBRL submission, a company may spend well over 125 internal hours to tag the face of financials, footnotes and financial statement schedules. Accordingly, companies may wish to create an “XBRL team” with representatives from accounting, information technology and management to conduct this project. While the technology team members are best positioned to handle the mechanics of tagging, accounting personnel should review all of the tagging and confirm that it is correct. The preparation of subsequent sets of XBRL financial statements, while still time intensive, is typically less onerous because companies generally will be able to utilize the data tags put in place for a previous set of financial statements.
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If you have any questions about the matters covered in this newsflash, please contact any of the lawyers listed below or your regular Davis Polk contact.
Joseph Hall, Partner
Michael Kaplan, Partner
Janice Brunner, Associate