SEC Adopts Rules to Require Filing of Financial Statements in Interactive Data (XBRL) Format

At its open meeting on December 17, 2008, the SEC voted to adopt rules that will require companies reporting under U.S. GAAP or IFRS to provide their financial statements to the SEC in interactive data (XBRL) format, after a phase-in period. Although the text of the adopting release is not yet available, based on the description provided by the SEC Staff at the open meeting, the new rules appear to have been adopted largely as proposed, with one major adjustment: the limitations on liability for errors in the XBRL file will be phased out after two years for each issuer, and will be eliminated altogether after 2014.

XBRL is an interactive data format that renders individual financial items in a company’s financial statements machine-readable by coding them using a standard list of data “tags.” XBRL is expected to make it easier and more efficient for investors, research analysts and companies to analyze financial data by allowing the data to be downloaded directly into spreadsheets and similar applications.

Under the new rules, a company will be required to include in its SEC filings a new exhibit, called the interactive data file, presenting the financial statements, including the related footnotes and schedules, in XBRL format. This requirement will apply to the company’s annual and quarterly reports, transition reports for a change in fiscal year, reports on Forms 8-K and 6-K that contain updated or revised versions of financial statements that appeared in a prior periodic report, and Securities Act registration statements. This disclosure will supplement, but not replace or change, the existing financial disclosure in the body of the SEC report or registration statement, which will continue to be presented in the traditional ASCII and HTML electronic filing formats currently used on EDGAR. Companies will also be required to provide the interactive data on their corporate websites.

The final rules will be phased in over a three-year period, and provide for initial compliance dates that are six months later than originally proposed.

• In the first year, the rules will apply only to U.S. and foreign large accelerated filers that use U.S. GAAP and have a worldwide public float above $5 billion (approximately 500 filers). These filers will become subject to the requirements beginning with their first quarterly report on Form 10-Q or annual report on Form 20-F or Form 40-F for fiscal periods ending on or after June 15, 2009. For a U.S. calendar year-end company, the first required interactive data exhibit would be in connection with its June 30, 2009 Form 10-Q, if the company had a public float above $5 billion as of June 30, 2008. (Public float calculations for purposes of the XBRL rules are to be determined as of the last business day of the issuer’s most recently completed second fiscal quarter.)
  
  
• In the second year (for fiscal periods ending on or after June 15, 2010), the requirements would be extended to all other U.S. and foreign large accelerated filers (worldwide public float above $700 million) using U.S. GAAP.
  
  
• Beginning with the third year (for fiscal periods ending on or after June 15, 2011), all remaining filers using U.S. GAAP would become subject to the requirements, as would all foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB.

After the phase-in period, new public companies would begin filing interactive data with their first quarterly report on Form 10-Q or annual report on Form 20-F or Form 40-F. The SEC did not adopt any interactive data requirements (including in respect of U.S. GAAP reconciliation) for issuers that prepare their financial statements in accordance with accounting principles other than U.S. GAAP or IFRS as issued by the IASB.

The proposed rules include several accommodations designed to ease the initial compliance burden:

• During each filer’s first year of XBRL reporting, only the face of the financial statements will be required to be fully tagged at the individual data element level; the financial statement footnotes and financial statement schedules will be required to be tagged only as block text. After the first year, a filer will be required to tag the detailed disclosures within the footnotes and schedules. In a change from the proposed rules, tagging of narrative disclosures will be permitted but not required.
  
  
• A 30-day grace period after the filing of the related report or registration statement will be provided for each filer’s first XBRL exhibit, and also for the first XBRL exhibit required to tag the footnotes and schedules in detail.

Subject to the above grace periods, interactive data will be required to be provided to the SEC and posted on a company’s website at the same time as the related report or registration statement, and will have to remain on the company’s website for 12 months. Filers failing to provide or post interactive data when required will be deemed not current with their Exchange Act reports, and as a result will be ineligible for short-form Securities Act registration and will not have adequate current public information for purposes of Rule 144 resales. Cure provisions under the new rules will permit a filer to reestablish its “current” status upon the filing of the required interactive data exhibit.

In an effort to promote rapid adoption of the rules without undue cost and expense for filers, the SEC’s original proposal proposed that issuers, underwriters and others would be exempt from some of the liability provisions of the securities laws for information contained in the interactive data file. The Firm’s June 23, 2008 alert summarizes the liability provisions in the proposed rules. The final rules will include provisions designed to limit liability for errors in the interactive data file, but, in a major change from the original proposal, the SEC staff indicated at the open meeting that the exemptions will be phased out for each issuer after two years, and will be eliminated altogether after October 31, 2014. Further detail will be available once the adopting release is published. The decision to adopt exemptions from the liability regime led one of the SEC Commissioners, Commissioner Luis Aguilar, to dissent from the SEC’s decision adopting the new rules.

Consistent with the original proposal, the new rules will not require the interactive data file to be audited or subject to certification by a company’s CEO or CFO.

The SEC staff statement describing the new rules can be accessed at http://www.sec.gov/news/speech/2008/spch121708mwg.htm. The statement of Commissioner Aguilar dissenting from the adoption of the new rules can be accessed at http://www.sec.gov/news/speech/2008/spch121708laa.htm.

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