Financial reporting via XBRL: is mandate on the horizon?

On May 30, the U.S. Securities and Exchange Commission posted its proposed rule for extensible Business Reporting Language (XBRL) reporting by public companies. The comment deadline is August 1.

With this news, which was originally voted upon by the SEC on May 14, many CFOs and other financial executives of public companies are likely thinking, "That's one." The "one" in this case refers to the two expected major reporting rules for public companies that are expected to be announced--or at least "roadmaps" for transition to them--by November (when the U.S. presidential elections may mean a soon-thereafter departure for SEC Chairman Christopher Cox). The two: International Financial Reporting Standards (IFRS) and XBRL.

Indeed, the SEC proposal, if enacted, will require domestic and foreign issuers that use U.S. generally accepted accounting principles (GAAP) to submit their primary financial statements and footnotes in XBRL format.

The proposal calls for a phased-in approach, with the largest 500 companies--specifically those that file in U.S. GAAP and have a worldwide public float of over $5 billion--being required to provide financial statements in XBRL for fiscal periods ending on or after Dec. 15, 2008. In that first year, the SEC would permit footnotes to be provided in blocked tags. Thereafter, the detail within each footnote would have to be individually tagged.

Smaller U.S. public companies and companies filing in IFRS would be phased in during the following two years. The SEC noted that it will monitor initial adoption by the largest companies to determine if any adjustments are necessary.

The filing deadline for XBRL data would be the same as that for the related SEC filings currently (annual reports, interim reports, registration statements, transition reports). However, an additional 30-day "grace period" would be provided for the initial XBRL filing of the financial statements, and a similar grace period would be provided for the initial filing of the detailed footnotes required in the second year.

The proposed rule addresses liability considerations by stating that XBRL data, which is "viewable" through use of the SEC's XBRL reader--"to the extent identical in all material respects to the corresponding portion of the traditional format filing"--has the same liability as in traditional filings. Other data in the interactive file has a lesser level of liability, similar to the SEC's current voluntary filer program.

Additionally, the SEC proposal discusses implications for auditors and internal control reporting. The proposal does not require a separate attestation by the auditor on the reported XBRL information or tagging process. However, it states that as the interactive data tagging process becomes more integrated with the financial reporting process, an issuer and its auditor should evaluate these changes in the context of their reporting on the effectiveness of internal control under Sarbanes-Oxley Section 404.

FEI Committee Comments on XBRL

A number of FEI member companies, including several from FEI's Committee on Finance and Information Technology (CFIT) and Committee on Corporate Reporting (CCR), were among the 76 voluntary filer companies; the SEC thanked the voluntary filers for providing important information.

SEC staff spoke of filing certain XBRL information in exhibits to SEC filings, and certain XBRL information would also have to be provided on corporate websites. Reference should be made to the rule proposal when published.

FEI's CFIT--a proponent of XBRL--submitted a comment letter to the International Accounting Standards Committee Foundation (IASCF) on June 5 in regard to the release of the near-final version of the IFRS XBRL Taxonomy 2008, the IFRS Taxonomy Architecture Exposure Draft and the IFRS Taxonomy Style Guide Exposure Draft. The committee stated the intent of its letter is to "raise awareness of specific considerations to ensure that adoption can happen as quickly, efficiently and effectively as possible."

Specifically, the letter, which is available on FEI's website (www.finanancialexecutives.org), addressed these areas:

* Expansion of the taxonomy to include common disclosures;

* Interoperability facilitates convergence;

* Interoperability is attained through proactive collaboration on explicit and agreed definitions and concepts;

* Interoperable taxonomies facilitate taxonomy component reuse;

* Commitment to a reliable and embedded maintenance program is critical to broad market adoption; and

* Collaboration on the development and use of the XBRL Specification.

XBRL US Supports the Proposal

In an executive summary on the SEC rule proposal prepared by XBRL US, XBRL US noted it supports the phased approach, as it will: " 1) give public companies sufficient time to familiarize themselves with the software tools and the taxonomies; 2) initiate the development of content to provide investors with the XBRL-formatted data they need; and 3) provide the impetus for more software providers, including the large ERP/financial management services, to build out their XBRL-enabled tools."

XBRL US believes that "the market is ready for wider adoption of XBRL on a wider scale." In its executive summary of the SEC's proposed rule, XBRL US provides highlights of XBRL use for preparers, investors and software providers.

Four areas for preparers include:

* Today and in the short term, a rule change will result in incremental cost and effort beyond what companies currently expend on their financial reporting.

* Longer term, the paper notes, companies will be able to recognize benefits through the integration of XBRL into their financial management systems, including improved consistency, reliability, accuracy and speed of reporting.

* A phased-in approach, where XBRL data is a supplement to the traditional filing, will allow companies to familiarize themselves with XBRL software tools and the U.S. GAAP taxonomies.

* Small companies will not be overburdened with XBRL implementation, as the cost is minimal and the process for small companies likely less complex than for large ones.