Written by Neal Hannon Posted on February 1, 2009
Neal Hannon is an XBRL consultant and the former Director, Financial Reporting Technologies for the Financial Accounting Foundation (FAF). Prior to joining the FAF, Neal was a member of the accounting departments at the University of Hartford and Bryant University. Active in the XBRL community since 2000, he served on the first XBRL US steering committee and has written over 60 articles on XBRL. You can contact him by email.
No doubt over the next few weeks you will hear and see quite a lot about the SEC’s release of the final rule on Interactive Data to Improve Financial Reporting (Release 33-9002). Although the rule will not be official until published in the Federal Register, there will be no additional substantive changes. Posted on the SEC’s website late Friday afternoon, the rule represents a significant milestone in the Commission’s five-year mission to boldly use XBRL as the preferred format for complying with disclosure regulations. While most of the rule remains unchanged from the preliminary rule published in May of 2008, there are certainly enough differences to warrant a close examination.
Outstanding Questions Answered
The final rule provides guidance on several important issues including:
- Valuation Date for determining when companies will be affected by the rule
- Clarification of how notes will be tagged, with a twist
- Grace period for filing XBRL exhibits
- Postings to web sites of XBRL exhibits
- Clarification of liability issues
- SEC’s use of XBRL to discover filing anomalies
There are three categories of qualification for required SEC filers. The first group includes large accelerated filers, domestic and foreign, whose total worldwide equity float exceeds $5 billion as of the end of the second quarter of the most recent year-end. For most companies, this means the company valuation as of June 30, 2008. The Dow Jones Industrial Average closed at 11,289 on June 30, 2008. By contrast, the Dow and other major stock indexes fell significantly in the second half of 2008.
Using Ford Motor as an example, on June 30, 2008, Ford had 2,198 million shares outstanding with a NYSE closing price of $4.42. Ignoring other equity markets, this would give Ford an equity float of over $9.7 billion, well over the $5 billion hurdle. If the SEC had chosen the end of January 2009 as the valuation date, Ford’s $1.87 closing price yields a $4.1 billion common equity float, under the hurdle set for the first group. First group companies will begin to report XBRL in periods ending after June 15, 2009.
Group two includes large accelerated filers with worldwide common equity float exceeding $75 million as of the end of the second quarter of the most recent year-end. The second group will begin filing XBRL schedules as of the end of the second quarter of the most recent year-end. All other SEC filing companies will begin in periods that end after June 15, 2011.
Tagging of Footnotes
From the rule:
Financial statement footnotes and financial statement schedules initially will be tagged individually as a block of text. After a year of such tagging, a filer also will be required to tag the detailed quantitative disclosures within the footnotes and schedules and will be permitted, but not required, to the extent they choose, to tag each narrative disclosure. (page 23)
Filers also will be required to include with their interactive data any financial statement schedules prescribed by Article 12 of Regulation S-X. These financial statement schedules will be tagged using two different levels of detail; only the first level will be required in the first year. Both levels will be required starting one year from the filer’s initial required submission in interactive data format. Similar in concept to the tagging approach adopted for the financial statement footnotes, the required levels of detail will be: (i) each complete financial statement schedule tagged as a block of text; and (ii) each amount (i.e., monetary value, percentage, and number) separately tagged. However, we will permit but not require each narrative disclosure in such schedule to be separately tagged to the extent desired by the filer. (page 64)
In essence, the final rule includes three levels of tagging, two of which phase in with the third level relegated to voluntary status. In year one, block tagging of individual footnotes will be required. In year two, all detailed quantitative disclosures and schedules within the footnotes will need to be tagged in XBRL. At any time during the phase-in period, companies will be permitted to tag each narrative disclosure as they see fit.
Will there be voluntary narrative disclosures? The answer to the question will hinge on two important points. First, is the taxonomy robust enough to support tagging each narrative disclosure without sending the system into custom tag proliferation? Depending on how filers interpret “each narrative disclosure,” this additional voluntary additional disclosure could lead either to additional rich disclosures or confusion.
Second, are companies willing to tag at minute levels of detail? The SEC is prepared to let market forces dictate the level of tagging of notes in XBRL filings. For example, companies who are already pushing the financial reporting envelope like United Technologies and Microsoft will most likely elect to tag at a very granular level. Will this result in other companies following suit?
The Grace Period
The initial grace period remains intact from the proposed rule. Filers will have 30 days to file XBRL exhibits. The exhibits may be filed as amendments to the required filings. Note the following from the SEC’s final rule:
The initial interactive data exhibit of a filer will be required within 30 days after the earlier of the due date or filing date of the related report or registration statement, as applicable. In year two, a filer will have a similar 30 day grace period for its first interactive data exhibit that includes detailed tagging of its footnotes and schedules. (page 24)
Additionally, the SEC provided this:
As noted above, interactive data will be required at the same time as the rest of the filing to which it relates. However, each company’s initial interactive data submission, regardless of filing type, will have a 30 day grace period, and therefore will be permitted as an amendment to a:
periodic report on Form 10-K, 20-F, 40-F or 10-Q within 30 days after the earlier of the due date or filing date of the related report;
Securities Act registration statement within 30 days after the filing date of the price or price range as part of the related registration statement; or
report on Form 8-K or 6-K that contains revised or updated financial statements that have been revised to reflect a subsequent event rather than the correction of an error within 30 days after the filing date of the related report.
In addition, as noted above, in year two for the first filing that is required to have footnotes and schedules tagged using all levels of detail, the interactive data exhibit will be required within 30 days after the due date or filing date of the related registration statement or periodic, current or transition report or Form 6-K, as applicable. (pages 70-71)
So the choices are clear. File XBRL at the same time as your regular filing, or wait and file XBRL later as an amendment but only during your grace period eligibility. After the first 24 months, XBRL exhibits will be due at the same time as regular filings and will carry full liability. We shall see if the investing public will notice that a company’s amendment is simply an XBRL filing within the 30 day grace period.
Web Site Posting Rules
The final rule will require the posting of XBRL documents to company web sites. From the SEC final rule:
New Rule 405 of Regulation S-T contains the Web site posting requirement. We also are providing, however, that Web site posting of the interactive data will not be required until the end of any applicable grace period that applies to the submission of the interactive data to the Commission. Similarly, we are providing that Web site posting of the interactive data will not be required before submission of the interactive data when submission of the data is delayed in accordance with and during the term of any applicable hardship exemption provided under Rule 201 or 202 as proposed to be revised. Revisions to Rules 201 and 202 are more fully discussed below in Part II.E. (page 75, footnote 206)
This passage confirms that the web site posting requirement will be the same as the timing on the submission of XBRL documents with any applicable grace periods taken into consideration.
The Liability Issue
The SEC is giving XBRL filers a 24 month window (from the time a filer is first required to submit interactive data files) for limited liability on filings, similar to the Voluntary Filing Program.
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. (page 27)
Interactive data files will also be excluded from the officer certification requirements under Rules 13a-14 and 15d-14 of the Exchange Act. Interactive data generally will be deemed not filed for purposes of specified liability provisions (Rule 402 under Regulation S-T provides these liability protections) during the first 24 months of any company’s required participation.
Using XBRL to Flag Problems
The SEC shows clear intention to use the XBRL filings themselves to highlight problems in XBRL filings. The final rule contains this passage on page 82:
Identify, count, and provide the staff with easy access to non-standard special labels and tags;227
227 For example, if a company uses the word “liabilities” as the caption for a value data tagged as “assets,” the software would flag the filing and bring it to the staff’s attention. In contrast, if the company used “Total Assets” or “Assets, Total,” the software would identify the use of these terms as a low risk discrepancy.
This is a clear message to companies that might want to obscure information by using inappropriate XBRL tags.The SEC intends to flag all nonstandard special labels and tags for further scrutiny.
In the next installment, I will explore how all companies can begin participating in XBRL filings starting with periods after June 15, 2009, regardless of size.