Publicly traded companies will need to change the format of their financial filings to make them more searchable and comparable under a mandate voted on by the Securities and Exchange Commission today. The requirement makes good on one of chairman Christopher Cox’s pet projects, just before he is expected to leave office when the Obama administration takes over.
The vote did not go smoothly, however. Commissioner Luis Aguilar, a Democrat who joined the SEC earlier this year, criticized the XBRL proposal for sheltering companies when they first begin using the technology from some liability. He called the safeguards “unacceptable.”
The SEC is giving companies some room to make mistakes in their XBRL filings for their first two years of getting used to the technology, an allowance they also gave to the nearly 100 companies that tested XBRL. “Limiting liability puts investors at greater risk for misleading disclosures and for suffering losses,” Aguilar added.
In the meantime, the tagged data will not be subject to antifraud claims by investors even if the information is inaccurate, assuming the mistake was made with good faith, explains Howard Berkenblit, a corporate attorney with law firm Sullivan & Worcester.
The traditional financial statements still filed with the commission will continue to be subject to current securities regulations, said John White, the SEC’s corporation finance director. The limited liability provisions for XBRL will expire for all companies in 2014.
Aguilar’s dissenting vote was the only negative element connected with the XBRL project at today’s meeting. Cox said so-called interactive data will actually protect investors by providing them with “full and timely disclosures of all material information about their particular investments.” Also getting self-described “passionate” support for the project are two senior officials at the commission whose last open meeting was today: White and chief accountant Conrad Hewitt. White said the rules will require public companies to provide financial information in a format that can be easily analyzed and searched.
The new rules phase in companies of all sizes over three years to turn their traditional, static financial statements into an interactive format. To be sure, the transition to moving all companies to the technology will rest on CFOs’ shoulders. They’re the ones who influenced the SEC to push back its proposal’s timeline by six months after saying the deadlines were too tight. This means that the first round of companies required to use XBRL — considered the largest with over $5 billion in market cap — will be expected to file XBRL-prepared filings on their first quarterly or annual report for fiscal periods ending on or after June 15, 2009. The SEC estimates about 500 companies are eligible for this requirement.
One year later, accelerated companies will be expected to comply, followed by smaller companies and foreign companies that use international financial reporting standards.
In addition to submitting their XBRL-prepared statements with the SEC, companies will have to provide the same filings on their website at the same time. The SEC is giving companies until their second year of using XBRL before they have to tag their footnotes and schedules, a task predicted to be more difficult than tagging line items.