SEC to Require Electronic Financial Reporting in 2009
By Steven M. Packer
June 3, 2008
The Legal Intelligencer
Certain companies will soon be required to submit their financial results, including annual and quarterly required submissions, electronically using XBRL, a language for communication of financial data. On May 14, the Securities and Exchange Commission unanimously agreed to propose the mandatory use of this technology, which has been in development since 1998, to ensure that investors receive essential financial information in a more timely fashion, with increased levels of reliability and at a lower cost. This interactive reporting vehicle will not only provide information to investors more rapidly but will aid companies in preparing their financial reporting packages more accurately and efficiently. Interactive data will revolutionize how the SEC collects data and will change the backbone of the financial reporting system, improve analytic capabilities and put vital information at the fingertips of investors.
What is XBRL?
Extensible Business Reporting Language, or XBRL, is a language for the electronic dissemination and communication of business and financial data. It provides major benefits in the preparation, analysis and communication of business information. It offers cost savings, greater efficiency and improved accuracy and reliability to all those involved in supplying or using financial data. It is one of a family of XML languages that are becoming standard means of communicating information between businesses and on the Internet. Instead of considering financial information as text blocks, as in a standard Internet page or a printed document, it provides an identifying tag for each individual item of data. These tags are computer readable and enable the automated processing of business information by computer software, cutting out the laborious and costly processes of manual re-entry and comparison. XBRL greatly increases the speed of handling financial data, reduces the chance of error and permits automatic verification of information.
Anticipated Reporting Requirements
The SEC plan recommends a gradual, phased in implementation beginning in 2009. XBRL reporting for the 500 largest U.S. companies, specifically those companies reporting under U.S. Generally Accepted Accounting Principles, or GAAP, with a public float in excess of $5 billion, will be phased in over three years for financial periods beginning on or after Dec. 15, 2008, followed by all remaining public companies including U.S. and international filers who employ U.S. GAAP. Following the initial implementation, companies reporting under International Financial Reporting Standards will also be required to submit their quarterly and annual results to the SEC through XBRL, without the need for the currently required separate reconciliation analysis between foreign reporting standards and U.S. GAAP.
Companies that are not required to provide financial results, including 10-Ks and 10-Qs, electronically during the first two years of implementation are being encouraged by the SEC to consider converting early to the new reporting mechanism. Those companies that do not provide the required information with appropriate XBRL tags subsequent to required implementation will be deemed by the commission not to have provided adequate information and could jeopardize the status of their SEC registrations. Currently more than 70 companies voluntarily provide their financial information in XBRL format, participating in a pilot program with the SEC.
The SEC proposal will become final following a 60-day comment period, which allows for the resolution of any technical points and objections raised from critics. SEC Chairman Christopher Cox is a long-standing champion of XBRL, and heralded the rule proposal as "a revolution in corporate disclosure." Cox also indicated, "This is all about bringing investors better, faster, more meaningful information about the companies they own. It would transform financial disclosure from a 1930s form-based system to a truly 21st century model that taps the power of technology for the benefit of investors. The online EDGAR system is essentially an electronic version of the filing cabinets that were used to store the paper filing forms designed in the 1930s," Cox explained. (EDGAR refers to the electronic data gathering and retrieval system.)
CPAs played a key role in creating the new system and members of the American Institute of Certified Public Accountants have been involved in this project for the past decade. "They're helping us get better information from industry in the 21st century - once again we owe a great debt of gratitude to the accounting profession," Cox said. He added that "While EDGAR has made great contributions to furthering electronic filing and delivery, interactive data - commission-speak for XBRL - is a global language that knows no international boundaries."
Who is Using It?
XBRL boasts many forms of adoption, and is currently in live use for some critical financial industry applications. The Netherlands Treasury Department announced that Dutch banks ABN-AMRO and Rabobank have joined its project to evaluate credit risk using XBRL data. The project is intended to lower the cost of borrowing for small businesses and is expected to handle 10,000 filings by July. Spain now requires financial institutions to report with XBRL and is using the information to identify money-laundering activities. Additionally,
- U.K. Inland Revenue is using XBRL in electronic filing based on XBRL-UK GAAP.
- Australian lending (LIXI) information is being collected from all Australian banks in XBRL.
- Sumitomo Mitsui Bank of Japan integrated XBRL as interchange format for letters of credit for international trade as part of complex supply chain application.
- The Tokyo Stock Exchange has been accepting corporate financial information in XBRL format since early 2003.
Vendors have also shown substantial support for XBRL. Virtually all North American tax preparation software vendors have committed to supporting XBRL as an interchange format for importing and exporting data from their systems.
Legal Implications, Issues and Challenges
The potential exists for a wide range of legal challenges related to the communication of financial information over the Internet and in XBRL. There will certainly be questions about the integrity of financial information presented in this new format, as well as concerns related to security, privacy and accuracy. There may also be reservations regarding the differences between human readable output and computer tags, the reliance on technology to the disadvantage of capital markets, the loss of benefits and related damages by failing to redesign business processes to be more effective in light of the new technology and the potential loss or wasted effort from the inappropriate use of technology.
XBRL implementers will also face daunting changes and development issues that will arise when the EU consolidates its versions of accounting standards to International Financial Reporting Standards, also known as International Accounting Standards, which will affect all 7,000 listed corporate entities in the EU. Estimates of the systems-enhancement costs for global banks alone are astronomical, projected to be in excess of £100 million, more than half of it in IT costs. The goal of this change is to provide consistency and transparency in financial reporting information. Sound familiar?
Ultimately, it is hoped that XBRL will be the basis for improvements in domestic and international financial reporting. Users will begin to depend on ready access to financial information in XBRL form from which to base their decisions, once critics, who claim that the process is too complex, are convinced.
Steven M. Packer is a manager in the tax accounting group of Duane Morris, where he devotes his practice to federal, state and local income taxation and litigation consulting services. He is a past president of the Greater Philadelphia Chapter of the Pennsylvania Institute of Certified Public Accountants and a member of the chapter's executive committee.
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