Merrill Corporation - Dimensions eNewsletter - June 2012
While it is well known that XBRL tagging of financial statements is required for Forms 10-Q and 10-K, filers may not realize that 1933 Act registration filings can also require XBRL exhibits. This was the focus of a special webinar sponsored recently by Merrill Corporation, which featured three experts on XBRL: Mark Green, Senior Special Counsel, SEC Division of Corporation Finance; Mike Schlanger, Vice President, Strategy and Business Development, Merrill Corporation, and member of the Board of Directors at XBRL US; and Lou Rohman, Vice President, XBRL Strategy and Development, Merrill Corporation. After reviewing the need for a best practices timeline, the complexities of Level 4 detailed footnote tagging, and the continued occurrence of filers making errors in tagging, the experts used hypothetical case studies to illustrate the application of the rules. The full webinar is available at https://us.reg.meeting-stream.com/merrillcommunications_040412/Default.aspx
Initial Analysis: When Is XBRL Required For 1933 Act Filings? [at 20:21 of the webinar]
When XBRL Tagging Requirements Apply To 1933 Act Registration Statements
The 1933 Act forms that can require an XBRL exhibit are Forms S-1, S-3, S-4, F-9, F-10, S-11, F-1, F-3, F-4; plus annuity contracts filed on Forms S-1 and S-3. The first step in the analysis is to ask whether the financials in the registration statement are physically present in the filing, rather than being incorporated by reference to another SEC filing. Only when the financials are physically contained is XBRL tagging required, according to Mr. Green.
The second step is to ask whether the issuer has ever been required to file Form 10-Q or an annual report on Form 10-K, 20-F, or 40-F. If the answer is no (i.e., this is a true IPO), then XBRL exhibits are not needed. Instead, the new public company will begin filing interactive data with its first quarterly report (or, if a foreign issuer, its first 20-F or 40-F). The SEC does not require a domestic filer to begin filing XBRL exhibits until the company files its Form 10-Q, Mr. Green explains.
If you answer yes to both of these questions, then you will be required to include an XBRL exhibit with your 1933 Act registration statement filing. When must you add XBRL to the registration statement? When you submit a price or price range to the registration statement, or at any later time when the financial statements are changed, the XBRL exhibit must be filed. At that point, observes Mr. Green, the financial statements have “settled down” to be tagged.
Case Study: IPO Issuer With No Previous 1934 Act Requirements [26:29]
Facts: On March 24, 2012, the company files its Form S-1, which includes its audited financial statements of December 31, 2011. It files four amendments to the S-1 and goes public on July 15, 2012, when its registration statement is declared effective. Prior to that, the company includes its unaudited financial results of March 31, 2012, along with the audited statements of December 31, 2011, in an S-1/a filing.
Since the company has not filed a Form 10-Q, 10-K, 20-F, or 40-F, the XBRL requirements do not begin with the S-1 registration statement. However, the company will need to file a 10-Q with an XBRL exhibit for the quarter ending June 30, 2012 (due 45 days later). Because this filing falls after the period ending June 15, 2012, the company will be required to include all levels of XBRL tagging to its footnotes (i.e., three levels of block-text tagging and detail tagging all the values in the footnotes).
For its initial XBRL exhibit filing, the company is accorded a 30-day grace period to furnish its XBRL exhibit after filing its 10-Q. Since the exhibit containing the XBRL data is filed as an amendment to the original 10-Q filing, the proper form type is the 10-Q/A, according to Mr. Schlanger.
Mr. Rohman suggests that as soon as the filer begins the S-1 process, it should start on the XBRL mapping process. Once the financials are solidified, much of the tagging, particularly for the detailed footnote work, can be done in advance.
The initial phase-in process for the XBRL system, with various tiers of filers and levels of detailed XBRL tagging, no longer applies. Instead, Mr. Green reminds, every company, no matter how big it is or when it became a public company, must use detailed tagging starting with financial statements for the period ending on or after June 15, 2012.
Case Study: Private Company With Public Debt; Up-To-Date On 1934 Act Filings [32:56]
Facts: The company files for its IPO in May 2012, with a registration statement that includes audited financial statements of December 31, 2011, and unaudited financial statements of March 31, 2012. The company amends its S-1 several times, including on August 21, 2012, with its audited financial statements of December 31, 2011, and the unaudited quarterly results of June 30, 2012 (and note that the price range for the IPO appears in this amendment).
Nothing in the S-1 affects the XBRL exhibits that the company is already making to submit 1934 Act periodic filings for its public debt. Since it has already been filing XBRL exhibits in its 10-Q, once it files its amended S-1 registration statement with its IPO price range, it must submit its financials in XBRL. This includes detailed tagging for all the financial statements of the issuer in the filing, not just those made after June 15, 2012, Mr. Green explains. Given that the company likely will have filed its June 30th 10-Q with the footnotes tagged in detail, it can effectively lift the XBRL exhibit from that filing and use it for the S-1 filing. However, the company will also need to go back and tag its year-end financials in full.
The mapping of the prior year's audited financial statements will require significant work. This task-combined with the requirement to marry them with the company's unaudited quarterly financial statements-will take time and advanced planning, Mr. Rohman stresses. He also emphasizes that the annual and quarterly information must both be in the same version of the US-XBRL taxonomy. Merrill's XBRL consultants can assist companies in taking the necessary steps to meet the SEC deadlines.
Case Study: Follow-On Offering After Less Than A Year Of SEC Reporting [40:30]
Facts: The company files its Form 10-Q of September 30, 2012, on November 4th. The 10-Q exhibit includes four levels of footnote tagging. The company registers additional shares with a Form S-1 filed on November 10, 2012. It includes the audited financials of December 31, 2011, and the unaudited financials of September 30, 2012. After one amendment to the company's S-1, the registration is declared effective on December 10, 2012.
The Form S-1 must include an XBRL exhibit because the company has already made an XBRL filing for its 10-Q. As in the prior case study, both the audited and unaudited financial statements will need to be detail tagged. Moreover, the registration statement needs to have an XBRL exhibit when it contains a price or price range. The question of when the XBRL exhibit is required seems relatively easy to determine for some companies, Mr. Green indicates, but the answer is less clear where the entity has a 1934 Act reporting history. For a secondary offering (as well as exchange, shelf, or at-the-market offerings), the SEC takes the position that the XBRL exhibit is necessary when a description of the price is added to the registration statement. However, if the financials are incorporated by reference, rather than being physically included, then no XBRL exhibit is needed. All financial statements must incorporate detailed tagging once the XBRL requirement applies to this registration statement.
Penalties For Noncompliance With XBRL Requirements [49:31]
In general, if a company ignores the XBRL requirements, it loses its eligibility to file SEC short forms (e.g., it cannot submit an off-the-shelf registration on Form S-3), and it is considered out of compliance with public information requirements for resales under Rule 144. However, these lapses are remedied as soon as the company meets the XBRL requirement. In addition, when the SEC accelerates the effectiveness of a registration statement, it must make a public-interest finding that looks at XBRL compliance, according to Mr. Green. With any failure to comply with the XBRL requirement, “there are ways the staff and Commission can address it,” he adds.
Other SEC Registration Statements: S-11 And S-4 [45:50]
This article focuses on the S-1 registration statement, but the same principles apply to S-11 filers, such as REITs. The Form S-4 is another variation on the same theme, Mr. Schlanger notes. Suppose a company issues 144A debt and then files an S-4 to exchange its private debt for public debt. If the company has no prior 1934 Act filings, then it will be required to include an XBRL exhibit to its first 10-Q filed after going effective. In any filing for a period ending after June 15, 2012, the footnotes must be tagged in detail. If the company is already a 1934 Act filer, then that registration statement will require an XBRL exhibit. For a business combination using Form S-4, if the financials are physically included, XBRL is required with respect to the issuer/acquirer (the target's financials are not tagged in XBRL). As always, Mr. Green reminds, if the financials are incorporated by reference, XBRL is not needed. However, a company out of compliance with 1934 Act rules cannot incorporate by reference into the S-4, and thus the XBRL requirement for the financials is triggered. Pro forma financials of the combined companies are also not subject to the XBRL filing requirements.
Given the complexity of the rules, readers are welcome to contact Mr. Schlanger with questions or for further assistance:
Mike Schlanger, Vice President, Business Development and XBRL Strategy
225 Varick Street
New York, NY 10014