United States: SEC Adopts Mandatory Inline XBRL

This morning, the SEC voted (by a vote of four to one) to adopt rules mandating the use of Inline XBRL (eXtensible Business Reporting Language) for the submission of financial statement information for operating companies. The rulemaking is part of the SEC's disclosure modernization initiative. For the most part, the Commissioners showed a lot more enthusiasm for this proposal than for the changes to the definition of "smaller reporting company" also adopted earlier today. (See this PubCo post.)

Currently, companies are required to provide the financial statements and schedules accompanying their Exchange Act reports and Securities Act registration statements in "structured," i.e., machine-readable, format using XBRL, but they provide this XBRL data as an exhibit to their filings and are required to keep it posted on their websites for at least 12 months. Inline XBRL allows data tagging to be embedded directly in the text of an HTML document, and to include the rest in an exhibit to that document. The portion filed as an exhibit to the form would contain contextual information about the XBRL tags embedded in the filing. The new rules also eliminate the requirement for filers to post Interactive Data File exhibits on their websites. In June 2016, the SEC began a voluntary program allowing companies to file structured financial statement data using Inline XBRL. (See this PubCo post.) The progress of this sample suggested that a wider use was feasible. The amendments do not change the categories of filers or scope of disclosures subject to XBRL requirements. (Note that the new rules also require the use of XBRL for mutual funds, not addressed in this post.) (Here is the press release.)

The amendments are expected to reduce preparation time by eliminating duplication, give the preparer "full control" over the presentation, reduce inconsistencies and improve quality, and enhance usability through greater accessibility and transparency. In addition, tools like the open source Inline XBRL Viewer are available for "filers and the public to review and analyze the XBRL data more efficiently."

While the SEC believes that embedding the data tags will reduce the likelihood of inconsistencies, one issue that may arise relates to technical errors. Currently, if filings contain a major technical error in the XBRL data submitted in an exhibit, EDGAR causes the exhibit to be removed from the submission, but the submission as a whole is not suspended. With Inline XBRL, the EDGAR validation system would suspend an Inline XBRL filing that contains a major technical error in embedded XBRL data, which would require the filing to be revised before it could be accepted by EDGAR." However, the staff believes that, with available tools, these types of errors would be rare.

The new rules for Inline XBRL will have a three-year phase-in:

• For large accelerated filers that use U.S. GAAP, compliance will be required beginning with fiscal periods ending on or after June 15, 2019.
• For accelerated filers that use U.S. GAAP, compliance will be required beginning with fiscal periods ending on or after June 15, 2020.
• For all other filers, compliance will be required beginning with fiscal periods ending on or after June 15, 2021.

To ease the transition, filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date. Early compliance is permitted; however, EDGAR is not expected to be ready to process Inline XBRL until March 2019. So filers that want to comply before then will need to look to the earlier exemptive order (See this PubCo post.)

(The following is based solely on notes, so standard caveats apply.)

Staff members observed at the open meeting that the new technology would allow users to make broad comparisons and discern patterns among filers. Perhaps in response to the criticism that neither investors nor analysts really used XBRL (see this Cooley News Brief), the staff noted that XBRL data had been accessed over 53 million times in the in the second quarter of 2017. In addition, as of May 21, under the voluntary program for Inline XBRL commenced in 2016, over 500 filings had been submitted by over 100 filers.

At the open meeting, staff indicated that the legal framework would remain the same. In addition, while XBRL is subject to disclosure controls, the data files are excluded from officer certifications and audit assurance.

Commissioners Stein and Piwowar expressed almost unbridled enthusiasm for these new rules. Commissioner Stein observed that the change would not only modernize data collection and improve transparency and accessibility, but also shift the focus "from documents to data." Commissioner Piwowar was "proud" that he had cast a vote to propose this rulemaking with Commissioner Stein (the only two Commissioners at the time of the proposal). He did not believe that the new rules would add appreciably to compliance burdens and that it appeared, based on studies, that the costs of XBRL had declined over time. He expected that this rulemaking would result in further cost reductions. Commissioner Jackson was also keen for the rulemaking. He appreciated that the use of this technology would make more accessible information that was "public, but hidden," that is, public information that is otherwise accessible only to a select few.

The only naysayer in the bunch was Commissioner Peirce. She was not convinced that either this tool or this timeline were appropriate for all and indicated that it should have been made voluntary for smaller companies. In addition, she disapproved of "privileging" one form of technology over competitors. She also noted that the uptake in the voluntary program had been minimal, leading her to question the wisdom of making it mandatory for all.

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