Introduction
Security and Exchange Commission (SEC) is a US agency whose responsibility is to oversee the security markets. The agency has introduced a rule that is aimed at protecting the investors by providing them with adequate information that will enable them to make viable investment decisions. The rule mandates companies that operate under the US Generally Accepted Accounting Principles (US GAAP) to upload financial statements into their websites in an interactive data format that will enable investors to download the information in spreadsheets, analyze and interpret it in other convenient software. The rule requires posting complete financial reports that include all disclosures in Interactive Data Electronic Application (IDEA) system using Extensible Business Reporting Language (XBRL).
The advent of information technology is shaping up financial reporting systems and therefore SEC has taken this advantage by introducing more efficient automated reporting guidelines. Indeed, SEC established an electronic filing system for companies through its Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) in 1993, which has been using American Standard Code for Information Interchange (ASCII) and HyperText Markup Language (HTML). Due to the flexibility weaknesses of the EDGAR system, SEC is striving to ensure a system that will enable investors to search the information they need with ease thus reducing the time and inaccuracy of making investment decisions.
Under the new rule, disclosure reporting will still follow the existing regulations but the only change will be filing financial statements as an exhibit in new interactive data format, which will enhance speed, accuracy, and reliability of accessing and analyzing information. Moreover, the investor will experience a cost-saving since there will be no additional cost incurred on data conversion as experienced in the current system.
SEC was formed after the passing of the 1933 Securities Act and 1934 Securities Exchange Act by Congress following the 1929 crash of the stock market – commonly referred to as Great Depression- aimed at restoring the public confidence in the stock market. The primary purpose of these legislations was to enforce public companies wishing to be listed to ensure their prospectus contained all the relevant information describing the company, securities being offered, and the risks involved in purchasing such shares; and all the dealers and brokers in the stock market must address the investor’s interests with fairness and honesty.
The main responsibilities of the SEC are overseeing the inspection of dealers and brokers, creation of new and reinforcing current security laws, interpreting and enforcing federal securities legislation, and overseeing private regulatory entities operating in the fields of securities, auditing, and accounting (SEC: investors Advocate 2008).
It is in this Endeavour to create efficient markets that SEC has proposed to enforce electronic filing rules in a new interactive data format. This paper will review the current rule and its weaknesses, analyze the new rule’s pros and cons, and finally make recommendations.
The Current Rule
Since 1993, SEC has required companies operating under US GAAP and IFRS as issued by IASB to electronically file their quarterly, annual, and other periodic financial statements in the EDGAR system using ASCII, HTML and to some extent XML (Extensible Markup Language). Although these systems have provided substantial information through electronic filing, they are less flexible and do not allow interactive comparison and manipulation of data to the investor’s requirements. Under this rule, users requiring certain information have to go through volumes of data before they can locate their desired information.
Under the current rule, an investor can access the data from the company’s website or SEC’s website but will have to engage a third party to reformat the data into an interactive data format that can be used or analyzed with other software. This makes it costly as the investor will have to pay both information access charges and third-party reformatting charges.
Companies are supposed to submit their financial statements to SEC which will post them in the EDGAR system and at the same time post the statements on their corporate websites. Although the information filed in EDGAR is static, filings made using PDF files are not accepted under the current rule. The only accepted filing formats are ASCII and HTML although a filer may opt to accompany the documents with a PDF file.
Given the limitations of EDGAR, SEC proposes to establish a new system that will be more interactive and suitable in using the XBRL tags to provide interactive data to the investors. In this regard, the IDEA system will be implemented in phases until it replaces EDGAR completely.
The new rule – Interactive Data Format
Assessment of interactive data format started in 2004 following the difficulties experienced by investors in the analysis of electronic information filed in the EDGAR system. It was in 2005 that SEC introduced, voluntarily, the filing of financial statements in an interactive data format as exhibit using XBRL which is more flexible and suitable for investors’ data analysis. The voluntary program has enabled companies to file periodic reports in an interactive data format as exhibit together with corresponding old format reports. The voluntary programs have been revised to apply to companies registered under Investment Act, and Exchange Act.
The new rule proposes to make amendments to the current rule on various fronts and the amendments will be adopted in phases over three years. The new exhibit on all securities Act registration statements, quarterly and annual reports, and transition reports will include financial statements and other financial disclosures filed in an interactive format.
The first phase will see large accelerated companies (with over $5 billion equity at the end of the second quarter in the last fiscal year ) using US GAAP being the first to file their financial statements for the fiscal year ending June 15, 2009, followed by other domestic and foreign accelerated companies reporting under US GAAP to file their financial statements for the fiscal year ending June 15, 2010, and finally, all other small filers using US GAAP and foreign private companies reporting under IFRS and International Accounting Standards Board (IASB) and US GAAP to file their statements for the fiscal year ending June 15, 2011.
However, the new rule will not alter the reporting provision of financial statements in the old format but will require tagging of footnotes and disclosures. In addition, the company will be required to post the financial statements in interactive data format to its website on the same calendar date of submission to the commission such as financial statements or on the calendar date required to submit registration statements to the commission, whichever is earlier.
Companies may opt to file their statements in interactive format voluntarily in the meantime before the date they are required by the new rule to do so, and may as well cease such submission at any time until the rule requires them to submit their financial statements in an interactive format. With the technological advancement in the world of software, SEC has recommended electronic filing system interactive data format to be done using XBRL.
Definition of XBRL
According to PWC Assurance Services (2009), XBRL is a standard machine-readable language that facilitates the conveyance of business information making it more accessible by the users. The software is more flexible and allows an investor to customize his search of information, downloading spreadsheets analyze it, and make comparisons across other firms, reporting periods, and the industry. This flexibility eliminates the complexities of copy-pasting data that is synonymous with other formats thus reducing the time the investor can make a decision based on financial analysis. in addition, XBRL is more compatible with most application software and therefore eliminates the need for a third party in reformatting data.
Phase-in schedule, covered companies, and documents
The phase-in period will begin with domestic and large foreign accelerated companies with global equity of $5 billion as at the end of the second quarter of the latest fiscal year. These firms will be required to submit tagged financial statements in interactive format together with tagged footnotes and any accompanying financial schedules. First-year tagging will be applied on the individual amounts on the face of the financial statements, footnotes, and disclosures as a block and financial schedules. The subsequent year will require tagging of each accounting policy, each table, and each quantitative amount within a footnote as separate blocks of text.
The second phase will involve all remaining foreign large accelerated filers and domestic companies using US GAAP who should submit financial statements in an interactive format for the fiscal year ending 15 June 2010. The final submission will be from all foreign private companies reporting using IFRS as issued by IASB who should submit their financial statements in an interactive format for the fiscal year ending June 15, 2011.
The distribution of the phase-in period is aimed at ensuring a smooth transition with informed monitoring of implementation and adjustments where necessary. In addition, compliance with the new rules will help in costs adjustments whereby subsequent year filing costs will reduce, as most of the information will be tagged in the first year of submitting statements in interactive data format.
The new rule also provides that the amounts in statements filed in interactive format be the same as those filed in a traditional format and should also contain comparative financial information for the previous periods. During the first phase-in filing, all companies required to submit financial statements in interactive format should tag their statements, footnotes, and financial schedules using the established US GAAP and IFRS list of tags. However, the tagging of footnotes as a whole block has been criticized as covering too much information that will not be friendly to the user, but this has been adjusted to include four levels of tagging in the subsequent year with accounting policies, tables, and amounts in footnotes being tagged separately.
Reports covered under this rule include periodic reports which may include periodic financial statements or revised statements, annual reports, and transition reports. Also covered in the new rule is the registration statement under the Securities Act and the registration statement under Exchange Act.
Expected Challenged
One of the challenges expected is to address the issue of costs as it is expected that additional costs will be incurred to make submissions, acquire the software and subscribe for the software, and train staff on the use of the software and/or outsourcing costs
Not all filers are likely to comply from the onset of the new rule becoming effective given that many companies are reluctant to change. In this regard, SEC has the challenge to enforce compliance through set rules. In addition, SEC has to address the case for small filers who may not have the capacity to comply immediately.
The establishment of tags that will ensure uniformity across all the filers will be a challenge especially given that the proposal gives filers discretion to choose and add tags to their disclosures which may vary among various filers.
Benefits of the new rule
The new rule, through its interactive nature, will afford various benefits to both the filling company and the investors. Companies may use this interactive data to make comparisons across operation units with different accounting systems more quickly and reliably. In addition, companies may use interactive data tagging to detect and correct errors in their registration statements and the corresponding financial statements in traditional format. Automation of filing through interactive data will therefore increase the company’s information generation with speed, less cost, and accuracy (SEC Final Rule 2009).
The investors will have a wide range of interactive financial data due to the possibility of increased smaller reporting companies who will receive a wider coverage by commercially available products. The smaller issuers will thus be readily exposed to investors who will in turn provide an opportunity for low-cost capital.
Interactive data tagging on all disclosures will ensure more data of higher quality is available and the possibility of increased filers will present investors with a wide range of choices to make informed investment decisions. This will also enhance competition and more reliable data.
Interactive data formatting will significantly reduce the cost incurred in the collection of data by the investors. This is because data submitted in interactive format will be readily available in a machine-readable form that can be downloaded directly to other software for analysis thus eliminating costs associated with seeking assistance from financial services providers for aggregation of data.
The availability of interactive data will provide time-saving to the investor because the information will be available in a machine-readable format and the investor will be able to search data required easily without having to read a lot of text and downloading it to a spreadsheet directly for analysis. Therefore there will be no need for manual entry of data for analysis and also time lost in seeking reformatting of data from financial service providers.
There will be a reduced error rate in the information filed in interactive data format due to the automation of business information processing and the ability of the filers to detect and correct errors in registration statements. There will be a reduced need to repeat entry of data for a filer who has used interactive data format reporting earlier on thus minimizing cases for errors and therefore providing more accurate data to investors.
Comparison of data across filers and periods as well as interpretation of information will be made convenient due to the use of standard financial tags. The interactive data format is flexible and enables the end-user to make comparisons with ease.
Recommendations
The shift from the traditional formatting system to the new interactive data formatting will result in investors making reliable investment decisions with ease and at a low cost. However, companies will have an additional cost factor associated with the formatting of data to interactive format.
Compliance with the new rule is likely to be easier for the large companies because they have adequate resources but small companies may experience some problems in resource allocation. Therefore, consideration and clarification are needed to ensure the small filers are not strained in complying, putting in mind that they have limited resources.
The grace period offered after first filing is of help to the filers to adjust to the new rule. However, small filers may be overburdened with so much filing taking place after the report and thus there would be a need for an extended grace period to enable the small filers to comply without having to strain. In addition, an exemption or partial compliance may be allowed for these small filers subject to the effect this will have on the main goal of providing uniform interactive data to investors.
Since all filers will be required to submit their statements in an interactive format and also post the same on their corporate website, they should strive to acquire and learn the use of software used in interactive data formatting, and/or seek the services of consultants or filing agents.
The transition from the use of current formats of ASCII and HTML may need some time due to the adjustments required. In this view, and considering interactive data filing is an official filing, the new rule should consider enhancing changeover without inconveniencing the filers’ operations, and possibly may seek ways of integrating ASCII and HTML with new format XBRL.
Although the submission of statements in interactive data format will provide investors with adequate information, there should be tools available for independent verification of tagged disclosures to establish their reliability and accuracy before they are made available to the investors.
Although compliance with the new rule will involve additional costs and changes in reporting criteria, the long-term effect is expected to be cost-saving as subsequent submissions are likely to be less costly and there is a possibility of integrating these changes into the corporate financial reporting process. Therefore, all filers should accommodate these new rules.
The phase-in timetable is aimed at ensuring smooth adoption and giving smaller filers sufficient time to prepare for compliance with the new rule. However, with the accruing benefits of providing interactive data, the large filers who are also endowed with immense resources are bound to benefit more since their interactive data will be available to investors early enough. In this regard, the initial phase-in of 500 filers should be expanded to have more filers who are ready to comply and therefore form a more reliable representation.
Preparation of financial statements reports is a process requiring a lot of resources and effort and therefore creation of the same statements in interactive format plus detailed tagging of disclosures will require more resources and effort. Therefore, the phase-in may not provide sufficient time for some filers and thus should be relaxed to enable filers to comply conveniently with low costs and burdens.
The detailed tagging of footnotes provides the investor with a wide range of data for analysis. Although this tagging seems burdensome to issuers, SEC should allow for tagging to be done only on the most important and useful data in a footnote rather than the whole data in a footnote which requires a lot of tags to be used. Moreover, sufficient time should be accorded to the issuers to acquaint them with tagging.
Corporate website posting of interactive data will provide the investor with the ease of accessing information that is ready for analysis and will offer an alternative of data access in case of technical problems or congestion in the commission’s website. In this view, the posting should be enforced, which in turn will provide the issuers with the opportunity to enhance their websites as a way of attaining a competitive advantage through investors’ access.
Work Cited
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McGladrey & Pullen. SEC Requires Use of Interactive Data for Reporting of Financial Information. 2009. Web.
PricewaterhouseCoopers. XBRL. 2009. Web.
Securities and Exchange Commission. Final Rule: Interactive Data to Improve Financial Reporting. 2009. Web.
.Securities and Exchange Commission. Comments on Interactive Data to Improve Financial Reporting. Release No. 33. 2009. Web.
Securities and Exchange Commission. The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation. 2008. Web.
Securities and Exchange Commission. The Office of Interactive Disclosure. 2008. Web.
Watson, Liv. “Can SEC Mandate XBRL.” Can SEC Mandate XBRL. 2008. Web.