Davis Polk & Wardwell Newsflash

SEC Issues Rules Outlining Mandatory XBRL Requirement

February 3, 2009

The SEC has issued final rules requiring companies 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.

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

In an attempt to lessen the burden of this new requirement, US issuers will first be required to provide XBRL financial statements in a Form 10-Q filing rather than a Form 10-K filing or a registration statement.  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:

  • Large accelerated US filers that have a worldwide public float above $5 billion will be required to comply with XBRL reporting requirements starting with their first quarterly report on Form 10-Q containing financial statements for a fiscal period ending on or after June 15, 2009.  For a calendar year-end company, this means that it will need to provide XBRL data in its 2009 second quarter Form 10-Q.  In the case of a company that has a June 30 year-end, its first XBRL filing will be made in its Form 10-Q for the quarter ended September 30, 2009.
  • All other large accelerated US filers will be required to comply with XBRL reporting requirements starting with their first quarterly report on Form 10-Q for a fiscal period ending on or after June 15, 2010 (i.e., the 2010 second quarter Form 10-Q for calendar year-end issuers and the Form 10-Q for the quarter ended September 30, 2010 for those with a June 30 year-end).
  • All remaining US filers will be required to comply with XBRL reporting requirements starting with their first quarterly report on Form 10-Q for a fiscal period ending on or after June 15, 2011 (i.e., the 2011 second quarter Form 10-Q for calendar year-end issuers and the Form 10-Q for the quarter ended September 30, 2011 for those with a June 30 year-end).

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 the registration statements or periodic reports 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:

  • Quarterly and annual reports and transition reports.
  • Reports on Form 8-K.  XBRL data is only required to the extent the Form 8-K contains a revised or updated version of financial statements that were previously filed with the SEC.
  • Limited Securities Act registration statements.  In a change from the proposal, XBRL data is only required in a Securities Act registration statement once a price or price range has been determined and at any later time when the financial statements are changed (rather than in each filing or amendment as was proposed).  In the context of a business combination, XBRL financial information will be required for the filer (the acquiring company) but not for the company being acquired.
  • XBRL data is also not required in a Securities Act registration statement that does not contain financial statements, such as a Form S-1 or Form S-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.

Website Posting

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 and Rule 144 

Companies that do not provide the XBRL data to the SEC or post it on their website on the date required will not satisfy Rule 144’s current public information requirement and will lose Form S-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 the periodic 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:

  • upgrade its systems to produce XBRL financial statements internally and integrate the use of XBRL throughout its systems; or
  • continue to prepare its financial statements as it has historically and work with an XBRL service provider (such as a financial printer) to have them converted to XBRL.

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
212-450-4565 | joseph.hall@dpw.com

Michael Kaplan, Partner
212-450-4111 | michael.kaplan@dpw.com

Janice Brunner, Associate
212-450-4211 | janice.brunner@dpw.com

Davis Polk & Wardwell