SEC Proposes New Rules Mandating XBRL-Format Filings. by Joseph D. Kline, Elaine Wolff and William L. Tolbert, Jr.

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1 Corporate SEC Client Alert May 22, 2008 SEC Proposes New Rules Mandating XBRL-Format Filings by Joseph D. Kline, Elaine Wolff and William L. Tolbert, Jr. On May 14, 2008, the Securities and Exchange Commission proposed new rules requiring all public companies to file versions of their financial disclosures with the SEC in an interactive data format called extensible Business Reporting Language ( XBRL ), as well as post the same disclosures in XBRL format on their corporate website. If adopted, the rules provide that the largest public companies would have to begin filing their financial disclosures in XBRL format in 2009, with all public companies being required to follow suit by On May 21, 2008, the SEC proposed rules that would require mutual funds to provide their registration statement filings in XBRL format beginning with such filings that become effective after Dec. 31, These proposals followed a three year, voluntary XBRL pilot program, which was expanded in 2007 to include mutual funds, and that allowed the SEC to evaluate the merits of XBRL filings. What is XBRL? XBRL, which stands for extensible Business Reporting Language, is a computer language used to communicate financial and business data electronically. Encoding financial statements and reports in XBRL allows computers with XBRLenabled software to automatically read such encoded statements and reports, making them easier to search, download into spreadsheets, reorganize in databases, and otherwise analyze. In order for a financial statement or report to be encoded in machine-readable, XBRL format, the information in that statement or report must be tagged with additional contextual data that allows the computer to make sense of that information. These machinereadable data tags function much like bar codes for financial information. The meta tags provide references to the full contextual data found in the XBRL US GAAP Taxonomy (for GAAP filers) or IFRS Taxonomy (for IFRS filers), which are standardized, electronic, machine-readable dictionaries and classification systems for financial reporting concepts. As SEC General Counsel Brian Cartwright has put it, XBRL tags are like bar codes on steroids because they are linked through the [XBRL US GAAP or IFRS Taxonomies] to so much useful information. For example, suppose a company reports on its income statement that it had $150,000,000 in net sales for the year ended December 31, A computer cannot make much sense of the raw information $150,000,000 in net sales contained in that line item on the income statement without further description and context, such as defining what the number represents (net sales), the currency in which it is reported (dollars), scaling and rounding (if applicable), time period covered (2008), and the identity of the company reporting such sales. Applying the standardized XBRL tags found in the XBRL US GAAP or IFRS Taxonomies to the raw financial information in the income statement provides the description and context that computers with XBRL-enabled software need to understand, classify, sort, and analyze such financial information. However, there is certain information found in financial statements and reports that the XBRL Taxonomies cannot and do not cover. This includes company-specific information like the company name and company-specific line items, as well as other statement or form details such as the ordering of line 2008 Jenner & Block LLP. Jenner & Block is an Illinois Limited Liability Partnership including professional corporations. This publication is not intended to provide legal advice but to provide information on legal matters. Transmission is not intended to create and receipt does not establish an attorney-client relationship. Readers should seek specific legal advice before taking any action with respect to matters mentioned in this publication. The attorney responsible for this publication is Elaine Wolff. Masthead image from the Collection of the Supreme Court of the United States. ATTORNEY ADVERTISING. PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME.

2 SEC Client Alert items in a particular statement. For this reason, XBRL is designed to be extensible, that is, XBRL allows companies to create their own data tags that add to, or are extensions of, the standard US GAAP or IFRS Taxonomies so that reporting needs that cannot otherwise be covered in the standard taxonomies are accommodated. Of course, the extensibility of XBRL, that is, the ability of users to create and apply tags other than those in the standard taxonomies (extensions) to financial information, could lead to inconsistencies in reporting across filers, making comparison more difficult. Further, use of such non-standard tags could introduce errors into the reporting. However, the SEC believes that the widespread availability and use of XBRL software and tools by investors and other users to analyze the filed XBRL data will not only allow such parties to quickly identify and evaluate alterations to the standard list of tags or mistakes in the use of such non-standard tags, but will also result in market forces that encourage companies to prepare and tag their XBRL filings consistently, accurately, and with care. When it comes time for a company to prepare its financial reports and statements in XBRL format, it will generally have two options: 1) outsource the creation of its XBRL-formatted financials to a service provider, such as a consultant, financial printer, or other intermediary; or 2) purchase a preparation software tool and do the formatting in-house. To demonstrate how XBRL data can be used to analyze financial information and filings, the SEC has posted web-based, demo XBRL viewers on its website that allow users to experience the potential advantages of this sort of interactive data. These can be found at xbrlwebapp.shtml. Specifically, the SEC has posted XBRL viewers for financial reports, mutual fund information, and executive compensation information. Those interested in a more detailed explanation of XBRL data and formatting may consult the XBRL U.S. Preparer s Guide available at PreparersGuide/Pages/default.aspx. Who will be subject to the proposed XBRL Rules and when? The following groups of filers will be subject to the proposed rules, if adopted, as of the dates listed below: 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 be subject to the proposed XBRL rules beginning in filers using U.S. GAAP would be subject to the proposed XBRL rules beginning in smaller reporting companies and all foreign private issuers that prepare their financial statements in accordance with IFRS (except as noted below), would be subject to the proposed XBRL rules beginning in The following groups of filers, or types of financial information, will not be subject to the proposed rules: statements in accordance with a variation of IFRS; issuers in Form 6-K or any financial information prepared with non-u.s. GAAP that must be reconciled to U.S. GAAP in the foreign private issuer s Exchange Act reports; the Investment Company Act; and Section 2(a)(48) of the Investment Company Act; Also, the SEC will be accepting test filings in advance of the mandatory filing deadlines to help filers assure the accuracy of their XBRL data, and has encouraged U.S. GAAP and foreign private issuers to file their required reports and statements in XBRL format during the phase-in period in order to gain experience in the process prior to the beginning of the mandatory period. 2

3 May 14, 2008 What must be submitted or posted in XBRL format and when must it be submitted or posted? The proposed rules would require companies to submit their registration statements, annual reports, quarterly reports, and transition reports, as well as all schedules and footnotes thereto, in XBRL format to the SEC as exhibits to the traditional filings of such statements and reports. The information in the XBRL submission for a document must be the same as the information in the corresponding HTML or ASCII submission for that same document. Generally, an XBRL exhibit would be required to be filed at the same time as the rest of the filing to which it relates. XBRL exhibits would be treated as part of the company s official filing, instead of a supplement as is the case in the voluntary program. As explained above, providing these statements and reports in XBRL format entails tagging the information in such statements and reports, as well as any schedules and footnotes thereto, with one or more tags from the standard list of XBRL tags promulgated by XBRL U.S. (for U.S. GAAP filers) or IASCF (for IFRS filers). In the first year in which a company would be required to file in XBRL format, only the face of the statement or report being filed would have to be tagged in detail, while each schedule and footnote thereto could be tagged once as a single block of text. To help companies comply with the new XBRL filing requirement in this first year, each company would be given a 30 day grace period beyond the due date or filing date for each report or statement to file the accompanying XBRL format exhibit. In the following year, the company would be required to tag in detail the statement or report being filed as well as each schedule and footnote thereto. As in the first year, in order to help companies comply with the detailed schedule and footnote tagging requirements in this second year, each company would be given a 30 day grace period beyond the due date or filing date for each statement or report to file the accompanying XBRL format exhibit. use of the new interactive XBRL data technologies, it may consider proposing rules to eliminate reporting in the HTML or ASCII formats or require a filing format that integrates HTML and/or ASCII with XBRL. Each company would be required to post the same raw XBRL data on its corporate website, if it has one, that it is required to submit to the SEC and would not be able to simply post a hyperlink to the XBRL document that is available on the SEC s website. However, the proposed rules do not impose any requirement that companies also provide on their websites the XBRL data in human readable format. Generally, a company would be required to post the raw XBRL data on its website on the earlier of the day it filed or was required to file with the SEC the statement or report to which the XBRL data relates. Further, though the SEC recently created an online database tagging executive compensation data for 500 large companies in XBRL format, such executive compensation information will not be required to be filed in XBRL format at this time under the proposed rules. Additionally, the proposed rules would not require companies to provide Management s Discussion and Analysis, or other financial, statistical or narrative disclosures in XBRL format. Note that the proposed rules do not require auditors to separately review or attest to a filer s XBRL data. However, the proposed rules do suggest that a filer and its auditor should evaluate any steps taken by the filer to integrate the XBRL data tagging process into its business information processing and financial statement preparation systems in the context of their reporting on internal control over financial reporting. Further, the proposed rules do not require any sort of SOX-like senior officer certification of the filer s XBRL data. Companies would continue to be required to submit these statements and reports to the SEC in the existing, official HTML or ASCII electronic formats. However, after the SEC has had time to evaluate the 3

4 SEC Client Alert What are the consequences for failing to file or post on time the required XBRL format submissions? Generally, under the proposed rules, if a company failed to file the required XBRL data exhibit with the SEC, or post the same raw XBRL data on its website, by the required due date (including the end of any applicable grace periods), it would be unable to use short form registration statements on Forms S-3, F-3, or S-8. This disqualification from use of these short form statements would continue for as long as the company did not provide the XBRL data. Further, during this period of disqualification, the company would be deemed not to have available adequate current public information for purposes of the resale exemption safe harbor provided by Rule 144. Once a company filed the required XBRL data and posted the same on its website, and assuming it had previously filed the corresponding report or statement in traditional format in a timely fashion, it would be deemed to have timely filed its required reports and statements. However, the proposed rules also would provide relief from this timely filing regime in some circumstances in the form of two different types of hardship exemptions: a temporary hardship exemption under a revised Rule 201 of Regulation S-T and a continuing hardship exemption under a revised Rule 202 of Regulation S-T. The temporary hardship exemption provided under Rule 201, as revised by the proposed rules, would apply without any action by the SEC if a company experiences unanticipated technical difficulties that prevent it from timely preparing and electronically submitting the required XBRL data. This temporary hardship exemption would cause the company to be deemed current for purposes of incorporation by reference, short form registration, and Rule 144 for up to six business days from the date the XBRL data were required to be submitted. A continuing hardship exemption would be potentially available to a company if it could not submit the required XBRL data to the SEC, or post the same on its website, without undue burden or expense. In order to receive a continuing hardship exemption under Rule 202, as revised by the proposed rules, a company would have to apply in writing to the SEC for such exemption and, if granted for only a specified period rather than indefinitely, the company would be deemed current up to the end of that period. Note that neither revised Rule 201 nor revised Rule 202 would require a company to first submit the XBRL data in paper in order to receive the exemption, as is currently required under both existing Rules 201 and 202 to receive exemptions in regards to the existing HTML or ASCII filing, because paper is meaningless in the case of XBRL interactive data. What is a company s liability in regards to the required XBRL data? The SEC has proposed a two-part liability regime in regards to the required XBRL data: one set of liability standards for the raw XBRL interactive data filed with the SEC, and another set of liability standards for XBRL data viewable by third parties through the use of viewer software. Raw XBRL Data would be subject to essentially the same set of liability rules that governed the voluntary XBRL program (except that, additionally, there will be no liability in regards to this data under Section 12 of the Securities Act). Specifically, the raw XBRL interactive data submitted as an exhibit to the SEC would be: o deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act, and would not be otherwise subject to the liabilities of these sections; o deemed not filed for purposes of Section 18 of the Exchange Act and Section 34(b) of the Investment Company Act, and would not be otherwise subject to the liabilities of these sections; o subject to other liability under these Acts for the substantive content of the financial disclosures. Substantive content refers to, for example, the numerical values in the financial statements or footnotes and the statements in the footnotes 4

5 May 14, 2008 rather than the process of tagging and formatting the content of the financial statements in XBRL; o deemed filed for purposes of (and, as a result, benefit from) Rule 103 under Regulation S-T; o protected from liability under these Acts for failure to comply with the requirements of proposed Rule 405 of Regulation S-T under certain circumstances, including that 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. submitted to the SEC or posted on a company s website will still be subject to the anti-fraud provisions under the federal securities laws. Viewable XBRL Data The viewable XBRL data would be subject to exactly the same potential liability as the current, official HTML or ASCII electronic formats are subject to today. For more information, please contact the following Jenner & Block attorneys: William L. Tolbert, Jr. Partner Tel: wtolbert@jenner.com Elaine Wolff Partner Tel: ewolff@jenner.com 5