THE US Securities and Exchange Commission (SEC) will meet on December 17 to decide whether to make eXtensible Business Reporting Language (XBRL) mandatory for public company financial statement information.
The move has been widely anticipated following the publication of a rule proposal in May. It was thought by some in the XBRL community that the meeting date might be announced by SEC Chairman Christopher Cox at an XBRL event in Washington on October 15, but that never happened.
There were also rumours that it might be put on hold indefinitely due to the current financial and economic crisis.
However, the SEC yesterday published a notice on its website scheduling a meeting for next Wednesday where it will decide whether to “adopt amendments to provide for companies’ financial statement information to be filed with the Commission in interactive data format, according to a specified phase-in schedule.”
What to watch for
A number of concerns have been raised in comments to the SEC and in other remarks about the rule proposal. Some of the key issues to watch for include:
- Phase-in: Under the proposal, the 500 largest companies that use US GAAP would begin filing XBRL attachments with their 2008 annual reports, followed a year later by approximately 1,700 additional companies, and all remaining smaller companies and foreign issuers using IFRS in 2011. That schedule doesn’t seem feasible now, especially for the first 500 companies. There was a strong theme in the comments on the proposed rule that the first filing for all companies should be a 10-Q quarterly report rather than an annual 10-K as this will ease the burden of first-time filers. The SEC will probably agree to this, but the question now is whether the first 500 companies will have to file their Q1 or Q2 filings in XBRL. I think the second quarter 10-Qs are the more likely scenario.
- Footnotes: Under the original proposal, in their first year of filing companies would have to “block tag” their footnotes and schedules, which means that each note has a single tag. However, in their second year companies would be required to tag their footnotes and schedules in detail, which would sharply increase the burden on companies. There has been a lot of resistance to the SEC’s proposed deep tagging of footnotes in the second year, with companies saying it will be too onerous. For a good discussion on this topic see Level 1 Block Tagging vs. Level 4 Deep Tagging: An XBRL Illustration on the Hitachi XBRL blog.
- Auditor attestation, validation. The original rule proposal does not require XBRL data to carry an auditor’s attestation. As Broc Romanek noted in November, the Council of Institutional Investors has criticized the reliability of XBRL data (PDF 45KB, 3pages) under the SEC’s proposal. Other investors may not be willing or able to use XBRL unless it is audited. Furthermore, given the lack of confidence in all things financial these days, it is feasible that the SEC will require some sort of independent assurance over the integrity of the XBRL data.
- Foreign companies. Under the proposal, foreign companies among the 500 biggest US GAAP filers will have to provide XBRL data starting next year. This apparently affects only a few companies, but at least one has complained that it should not be included because it is moving to IFRS. I expect the SEC will exclude these companies given that its recent rulemaking has caused some bad PR with foreign issuers.
- Other information. It is possible that the SEC will add other information types to the rule, such as executive compensation disclosures or earnings releases, but I doubt it.
How important is this?
It’s a milestone for XBRL, which was conceived of 10 years ago by Charles Hoffman, CPA. However, the mandate is still only a step towards widespread XBRL adoption and use by the markets and investors.
Until all companies are providing most or all of their disclosure information in XBRL, it’s unlikely that XBRL will be a big deal for anyone except those who have to do the work tagging their filings. Investors and software providers aren’t likely to develop tools for interactive data from just 500 companies.
Investors also have a very low level of familiarity with XBRL. An October member survey by the CFA Institute found that 75% of 1346 CFA members said they are “not familiar” with XBRL.
|A survey among analysts and portfolio managers found little familiarity with XBRL. Source: CFA Institute, Oct. 2008|
Barring unforeseen circumstances, the SEC’s open meeting will be webcast live via the commission’s website starting at 10:00am ET on Wednesday.
The commission will also decide at the same meeting whether to require mutual fund risk/return summary information to be filed in XBRL and consider allowing funds to voluntarily submit portfolio holdings information under the Commission’s interactive data voluntary program.