In a letter signed by SEC Chief Accountant James Kroeker, foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB were assured that they would not be required to submit to the Commission and post on their corporate websites Interactive Data Files until the Commission specifies a taxonomy for their use in preparing their Interactive Data Files. The SEC’s eventual posting of a taxonomy for foreign private issuers using IFRS to prepare their financial statements will allow such issuers to comply with Rule 405 of Regulation S-T, which requires issuers to prepare Interactive Data Files in accordance with the EDGAR filer manual, which in turn requires use of a taxonomy specified on the SEC's website. The letter was also signed by Meredith Cross, Director of the Division of Corporation Finance.
The SEC no-action letter, which was in response to a request from the Center for Audit Quality, is a recognition by the SEC staff that it is not possible for foreign private issuers preparing financial statements in accordance with IFRS to comply with Rule 405 until the Commission sets out an IFRS taxonomy for them. There were 970 foreign private issuers registered with the SEC at the end of 2010.
In its request letter, CAQ was concerned that IFRS Taxonomy 2011 may require further development to make it more useful to investors. Specifically, users of the IFRS Taxonomy 2011 still may need to create numerous extensions for their interactive data exhibits, which may limit the usefulness of such interactive data to users of financial statements. Such extensions may be needed because IFRS Taxonomy 2011 does not fully address common reporting practice or industry specific disclosures and, in addition, does not include standard definitions.
Moreover, absent significant development of the IFRS taxonomy for footnote disclosures, observed CAQ, the need to create a significant number of extensions may continue in year two of the phase-in period, when detailed tagging is required. Until these issues are addressed in future taxonomy enhancements, CAQ believes that the benefits achieved by requiring foreign private issuers to submit interactive data based on IFRS Taxonomy 2011 may not outweigh the cost and effort to be expended and that additional time is necessary to further develop the IFRS taxonomy.
In 2009, the SEC adopted final rules requiring companies to submit their financial statements to the Commission in interactive data format using XBRL. Commencing with fiscal periods on or after June 15, 2011, foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB were slated to comply with these rules.
In a letter to the IASB oversight foundation, written before the no-action relief was granted, the AICPA said that it remains unclear at this point whether the IFRS taxonomy will be able to meet the needs of foreign private issuers in complying with the SEC‘s rules. Citing a pilot program, the AICPA noted that participants who tagged their Form 20-F filings found that they needed to create additional taxonomy items, IFRS taxonomy extensions, to reflect common-practice concepts. Further, participants tagged their filings at Level 1 only, which entailed tagging the elements on the face of the financial statements and block tagging each note.
Echoing the concerns CAQ expressed to the SEC, the AICPA noted that the second year of tagging under the SEC rules requires detail tagging of the financial statement notes and schedules, which not only increases the amount of elements tagged in the XBRL files, but also adds more complexity. Without an expanded taxonomy, including a robust set of tags for common-practice concepts as well as footnote disclosures, foreign private issuers will need to create even more extensions for their second year submissions. In the AICPA’s view, the use of significant extensions may impact the usability of the data for consumers of these files.
The need to create extensions may be further increased for foreign private issuers because the IFRS Taxonomy does not yet fully cover industry specific elements or commonly reported concepts, and because it lacks standard definitions. Although the creation of some extensions is important in enabling companies to customize their disclosures where necessary in order to effectively communicate with investors and other stakeholders, acknowledged the AICPA, extensions should only be utilized to differentiate information rather than to communicate commonly reported items. More broadly, the AICPA fears that the overuse of extensions in the absence of standard definitions and taxonomy elements for industry-specific and commonly reported concepts will make it more difficult for investors to analyze and compare disclosures among companies, thereby limiting the usefulness of the XBRL data.