The SEC’s proposed ruling came out on Wednesday, pretty much in line with what we expected. The bottom line is that all companies will be required to file,including all foreign filers that prepare using IFRS. There is a healthy three-year transition period, with only the largest 500 or so companies coming first. However, there are a couple of surprises in the announcement that are worth thinking about.

Note that there will be another proposed ruling, covering investment funds, next week.

Straight up

Most of the proposed changes are in line with the recommendations of the CIFR Committee. Three year transition, starting with the largest companies. No audit obligation initially – that deserves a blog entry all of its own. At
this early stage of the implementation, accounts in XBRL format will be provided as an additional exhibit and will be "subject to liability similar to that of the voluntary program and, as a result, would be subject to only limited liability". It’s not entirely clear what this means. The voluntary phase has seen materials furnished to the EDGAR system, instead of filed, which means that the liability imposed on companies is fairly minimal. They didn’t say that in the statement on Wednesday, but presumably it will be something similar to "furnished" even if the Staff has decided that wording is inappropriate. In any event, like the audit requirement, I expect that the liability arrangements will have to change over the next 2-3 years, but it is the right thing to do initially.

Here’s an excerpt from the speech given by James Lopez of the Commission, setting out the way that the SEC proposes to phase in the requirements for filing, for all SEC registrant companies.

  • In year 1, the proposed rules would apply only to domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public float above
    $5 billion, which we estimate would cover approximately 500 companies.

  • In year 2, all other domestic and foreign large accelerated filers using U.S. GAAP would be subject to interactive data reporting.

  • In year 3, all remaining filers using U.S. GAAP, including smaller reporting companies, and all foreign private issuers that prepare their financialstatements in accordance with IFRS as issued by the IASB, would be subject to the same interactive data reporting requirements.

For all those foreign filers that thought they might not have to worry about XBRL for a while – take note! If you prepare your financials in US-GAAP, XBRL comes early. Note also that the SEC will be encouraging early adoption by companies. Until the analysts start telling companies that the XBRL makes their lives easier, I would be surprised to see very many firms rushing to take them up on that.

The Twist

There were two parts to the announcement that I didn’t expect and would suggest are worth concentrating on. The first is that the Commission is requiring that, as well as providing their XBRL quarterly and annual filings in interactive data as a supplementary exhibit, they propose that companies publish the XBRL materials on their corporate web sites – simultaneously with the provision of those materials to the SEC.

If, like me, you interpret what the SEC is doing with XBRL as acting as a large and particularly effective (and in many respects, a self-interested) catalyst for bringing financial reporting into a new and far more usable era, this move should be read in the same way. In fact, if you heard about Eddy Wymeersch’s speech in Eindhoven last week, you might think that the SEC is contemplating a fairly radical step. Lighting a fuse under a lot of today’s received wisdom. Mr Wymeersch is the Chairman of CESR, the European umbrella body for Securities Regulation. In a speech to the XBRL conference last Wednesday, he suggested a distributed storage mechanism – specifically, company web sites – could be used to facilitate XBRL-based reporting, a step which he described as an essential building block for full and fair pan-European disclosure. Interesting.

The other bit that I didn’t expect was that the SEC is proposing that companies provide XBRL versions of the notes to the accounts, initially in the form of block tagging, which is quite coarse-grained mark-up, but then in companies’ second year of interactive data disclosure, in full: in a very fine-grained manner. To be clear, that means that initially, companies will be free to mark up entire sections of their notes to the accounts with tags that are more or less headings. They will identify the Pension note, for instance, which often runs to pages and pages, as just one block of text and numbers. After a year of doing that, corporates will need to drill down to all of the detail, tagging sections of text and individual numbers that appear within the Pension note, as well as all the other notes to the accounts.

Some commentators have suggested that this will be very burdensome. I happen to think that the next generation of tagging tools, which I expect to be available
before too long, will take most of the pain out of the process. I think that the SEC is trying to ensure that XBRL can eventually replace traditional filings, and, in any event, by ensuring that notes are tagged in detail, they are guaranteeing that the markets will get their hands on the structured data that they really want.

By the way. Once you’ve tagged your financial statements in detail, what’s th marginal cost to publish an earnings release (i.e. market moving data) in that format? What do analysts really, really want in a structured form? Don’t say I didn’t warn you.

A balancing act

The SEC’s announcement is a pretty nuanced one. They’ve approached the topic with a lot of determination from the outset, and they’ll need to keep it up for several more years. However, it really will alter the way that companies think about disclosure and the manner in which those disclosures are analysed. I don’t suppose it will be plain sailing, but it’s a journey that is well worth taking. Sometimes, notwithstanding the tight-rope walk between competing interests that needs to be carefully judged, real leadership, like that which Chairman Cox is displaying here, pays off in a big way. I’m betting this will be one of those times.