Introduction

The Securities and Exchange Commission (the “SEC”) adopted final rules that require companies to provide financial statement information in an interactive data format using the eXtensible Business Reporting Language (“XBRL”). XBRL is an electronic format, similar to HyperText Markup Language (“HTML”), that tags or labels financial data using a standard set of definitions. The new rules apply to domestic and foreign public companies that prepare their financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), and foreign private issuers that prepare their financial statements using International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The new rules are intended to make financial information easier for investors to analyze and also to assist in automating regulatory filings and business information processing.

Under the new rules, companies will provide their financial statements in an interactive data format using XBRL on their corporate web sites and as an exhibit to registration statements filed with the SEC under the Securities Act of 1933, as amended (the “1933 Act”), as well as annual reports, quarterly reports, and transition reports, as well as reports on Forms 8-K or 6-K that contain specified financial statements, filed pursuant to the Securities Exchange Act of 1934, as amended (the “1934 Act”). The companies must also continue to submit the existing ASCII and HTML electronic formats currently used in filings. The rules will be phased in over a three year period.

XBRL: Interactive Data Format

Under the new rules, companies are required to use XBRL to tag information in their financial statements, financial footnotes, and financial schedules using a standardized, pre-determined list of tags. These tags classify and define financial information in accordance with U.S. GAAP and IFRS.¹ The tagged financial statements would then be used to create an interactive data file that can be viewed using various software.² The use of XBRL-tagged data is intended to create consistency in financial statements and enable the SEC to review and process filings more quickly. Investors will be able to download the financial statements into various file formats including spreadsheets or other software, enabling them to evaluate companies or incorporate the data in investment models.

Regulation S-T and the EDGAR Filer Manual will require companies to tag items in their financial statements, footnotes, and schedules, in addition to a limited number of document and identifying elements, including form type, company name, and public float.³ Companies must tag the various line items in their financial statements using labels such as “gross profit” or “net revenues.” Initially, each financial statement footnote and financial schedule must be tagged individually as a single block of text, however, after one year of such tagging, a company will be required to tag the detailed disclosures within the footnotes and schedules. Specifically, after the first year, companies are required to separately tag:

• each significant accounting policy within each significant accounting policies footnote;
• each table within each footnote as a separate block of text; and
• within each footnote and schedule each amount (i.e., monetary value, percentage, and number) and narrative disclosure required to be disclosed by U.S. GAAP or IFRS.

Due to the additional requirements, there will be a 30 day grace period for filing the interactive data requirement in the second year.

Filing and Posting of Interactive Data

The interactive financial statements and accompanying footnotes and schedules must be provided to the SEC as exhibits to a company’s registration statement, quarterly statement, if applicable, annual reports, and transition reports as identified in Item 601(b) of Regulation S-K and Forms F-9, F-10, 20-F, 6-K and 40-F.⁴ This requirement will not otherwise alter the disclosure or formatting standards of the required filings. For registration statements, the interactive data must be submitted only after a price or price range is determined and any time thereafter when the financial statements are changed. Companies will be able to make a test submission to verify the accuracy of the data. For live filings, if a major error is found in the interactive data but not the remainder of the filing, the interactive data exhibit will be held while the remainder of the filing will be accepted. If only a minor error is detected, the whole filing, including the interactive exhibit, will be accepted. During the first two years of filing interactive data, a company will be able to correct a major error by submitting an amendment within 30 days and the amended filing will be considered timely if filed within that 30 day period. Companies are also required to file revised interactive data if they revise their financial statements in any other circumstances.

Companies who are required to use the interactive data format in their SEC filings are required to post the interactive financial statements on their corporate web site, if they have one, by the earlier of the end of the calendar day they filed or were required to file the statement or report with the SEC. The data must remain on the web site for at least twelve months.

Phase-in Period

The use of the XBRL interactive reporting format in financial statements is phased in over a period of three years. The new rules will initially require interactive data reporting only by domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public common equity float above $5 billion as of the end of the second fiscal quarter of their most recently completed fiscal year. These filers will be subject to the requirements of the new rules beginning with their first quarterly report on Form 10-Q or annual report on Form 20-F or Form 40-F that contains financial statements for fiscal periods ending on or after June 15, 2009.

All other domestic and foreign large accelerated filers using U.S. GAAP must provide their initial interactive data submissions in year two, beginning with a fiscal period ending on or after June 15, 2010. All remaining filers using U.S. GAAP, as well as foreign private issuers with financial statements prepared in accordance with IFRS, must use interactive data submissions for all financial statements in year three, beginning with the fiscal period ending on or after June 15, 2011. While the SEC suggests that other U.S. GAAP filers provide interactive data during the phase in, it is not required.

New reporting companies that become subject to the SEC reporting requirements after the three year phase in of this rule will first be required to submit an interactive data file for their first periodic report on Form 10-Q or first annual report on Form 20-F or Form 40-F, as applicable.

Filers not required to provide interactive data until a later time may voluntarily opt to comply with these requirements earlier. Companies may stop this voluntary submission at any time. This voluntary program also extends to investment companies registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”) and business development companies or other entities that report under the 1934 Act and prepare their financial statements in accordance with Regulation S-X. However, these entities are not required to comply with the new rules.

Interactive data will be required to be filed at the same time as the rest of the filing to which it relates. However, each company’s initial interactive data submission will have a 30 day grace period and will be permitted to be filed as an amendment. Additionally, in year two, for the first filing that is required to have detailed tagging of its footnotes and schedules, the interactive data exhibit will be required within 30 days after the due date or filing date.

Consequences of Failure to Timely File XBRL Exhibits and Hardship Exemption

Companies that do not provide an interactive filing when required or that fail to post the required data on their web site will be deemed not current with filings under the 1934 Act. Consequences of not being current include:

• inability to use short form registration statements on Form S-3, Form F-3, or Form S-8; and
• loss of the ability to utilize the resale safe harbor exemptions under Rule 144 as it would not meet the rule’s current public information requirement.

However, upon filing the interactive data, the company will be deemed current and timely and regain the ability to utilize the forms and exemptions described above.

There are also two hardship exemptions which apply to compliance with these new rules. The exemption under Rule 201 gives a filer up to six business days from the date the interactive data was required to be submitted to comply with the requirements if it experiences unanticipated technical difficulties that prevent the timely preparation and submission of interactive reports or posting on the reports on the filer’s Web site. Rule 202 grants a continuing hardship exemption for filers who cannot file information in an electronic format because of undue burden or expense.

Liability for Contents of Interactive Data

The viewable interactive data, the data displayed on the SEC’s web site, will be subject to modified liability treatment under the federal securities laws only for those filers who submit their interactive files within 24 months of the time the filer is initially required to submit them and no later than October 31, 2014. Rule 406T provides that during the modified treatment period, interactive data files are:

• not deemed filed or part of a registration statement or prospectus for purposes of liability provisions of Sections 11 and 12 of the 1933 Act, Section 18 of the 1934 Act, and Section 34(b) of the Investment Company Act and not otherwise subject to liability under these sections; and
• protected from liability for failure to comply with the tagging and related requirements if the interactive data file failed to meet the requirements, but the company used good faith efforts to comply, and the company corrected the failure promptly.

The interactive data will be deemed filed under Rule 103 of Regulation S-T and subject to the anti-fraud provisions of Section 17(a)(1) of the 1933 Act, Section 10(b) of, and Rule 10b-5 under, the 1934 Act, and Section 206(1) of the Investment Advisers Act of 1940. The financial statements and disclosures in the traditional format part of the filing would continue to be subject to the applicable liability provisions of the federal securities laws.

The interactive data files will be excluded from the officer certification requirements under Rules 13a-14 and 15d-14 of the 1934 Act both during the modified treatment period and afterwards.

Practical Considerations

Since the initial phase of XBRL-tagging applies to large accelerated filers for fiscal periods ending on or after June 15, 2009, it is imperative that companies begin planning for these requirements. Companies should first consider whether they will tag their own financial statements or whether they will have an outside vendor, such as a financial printer or other third-party provider, perform this function. If an outside vendor will be used, companies should begin the process of choosing and coordinating a timeline with their chosen vendor. Companies should also review the required list of tags and confer with their accountants to determine how those tags relate to the terms currently used in the financial statements. Finally, other companies who have consistently used the same terms and line items in their financial statements may consider tagging their financial statements now, as this new requirement will significantly increase the amount of time to prepare the first filing where these tags are utilized.

From a compliance perspective, companies will need to consider who should be involved in monitoring web site compliance with the requirements of the XBRL rules.

Questions

Any person who has a question regarding the issues raised in this Corporate and Securities Update may obtain additional guidance from a member of our Public Companies Group.

1. The tags for companies using U.S. GAAP are grouped into five industry-specific lists that can be found online at http://xbrl.us/pages/us-gaap.aspx. The list of tags for companies using IFRS can be found online in the IFRS Taxonomy 2009 at http://www.iasb.org/News/XBRL/IFRS+Taxonomy+final+release.htm.
2. Viewing software and additional information on the use of interactive data can be found at http://www.sec.gov/xbrl.
3. Rule 405 of Regulation S-T establishes the tagging requirements and the EDGAR Filer Manual contains the technical tagging requirements.
4. The interactive data requirements do not apply to Forms 10, 20-F or 40-F when used as registration statements under the 1934 Act.

Notice: The purpose of this newsletter is to review the latest developments which are of interest to clients of Blank Rome LLP. The information contained herein is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.