A House committee bill that would require the US Securities and Exchange Commission (SEC) to exempt public companies with annual revenues under $250 million from filing their financial statements in eXtensible Business Reporting Language (XBRL) format for five years is receiving pushback from, among others, the national consortium for XBRL business information reporting.
Introduced by representatives Robert Hurt (R-VA) and Terri Sewell (D-AL), the legislation, HR 4164, also known as the Small Company Disclosure Simplification Act, was passed by the House Financial Services Committee on March 14 by a vote of 51 to 5.
“The Small Company Disclosure Simplification Act provides a much-needed exemption from these burdensome regulations for smaller public companies and requires the SEC to perform a cost-benefit analysis on the rule’s impact on these companies,” Hurt said in a written statement last Friday.
However, XBRL US, the not-for-profit consortium that developed taxonomies for US Generally Accepted Accounting Principles (GAAP), believes the bill will result in small companies losing equal access to the capital markets because their corporate data will be less accessible and less transparent than large company data.
“Data aggregators and investors will have no incentive to collect and rekey small company data which will be significantly more expensive to use,” XBRL US said in a written statement. “Small companies have been filing in XBRL format for at least two years now which means they are well up the learning curve. Removing the XBRL requirement means a loss of valuable knowledge that they will need to relearn when the exemption is lifted. Investors will be harmed because they will lose access to small company data that they have been enjoying for the past several years since the XBRL requirement was put in place.”
Pranav Ghai, co-founder of corporate data provider Calcbench, said small data aggregators that provide inexpensive access to critical, timely data for corporations and investors are able to compete because of XBRL data.
“Taking that away for most public companies would hurt our customers who have already seen benefits that they simply could not have seen without XBRL,” Ghai said in a written statement.
In 2009, the SEC started phasing in XBRL, requiring public companies to provide financial information in an interactive data format. In 2010, the Financial Accounting Foundation (FAF), the parent organization of the Financial Accounting Standards Board (FASB), assumed maintenance responsibilities of an annual US GAAP taxonomy, which was developed by XBRL US under contract to the SEC.
The taxonomy – which is updated each year by the FASB and approved by the SEC – is a list of computer-readable tags in XBRL that allows companies to tag the thousands of pieces of financial data that are included in typical long-form financial statements and related footnote disclosures, according to the FASB.
The tags allow computers to automatically search for, assemble, and process data so it can be readily accessed and analyzed by investors, analysts, journalists, and regulators.
The SEC declined to comment on the proposed legislation.
Hurt: Costs of XBRL Outweigh Benefits
Hurt said the XBRL requirement has proven to be an example of a regulation where the costs currently outweigh potential benefits for small, innovative companies. He noted that in order to comply with XBRL regulations, small companies must expend tens of thousands of dollars on average; however, evidence suggests that less than 10 percent of investors actually use XBRL, Hurt added.
XBRL US countered that even thought the cost of XBRL filing ranges from as low as $2,000 per year to as high as $25,000 per year, these costs are beginning to decline as many companies transition to financial management programs that incorporate the XBRL process.
Chad Sandstedt, co-founder of corporate data provider TagniFi, noted that before XBRL, investors and app developers could not afford access to quality data – which would cost them between $20,000 to more than $100,000 per year – from traditional sources.
“XBRL is critical to delivering a low-cost, high-quality product to all investors, not just institutions,” he said in a written statement.
Hurt also noted that, in line with the Jumpstart Our Business Startups (JOBS) Act, the legislation removes duplicative regulations for small companies from submitting interactive data filings with XBRL. Public companies are still required to file mandatory information with the SEC.
“Our bill offers a practical step forward to ensure that our regulatory structure is not disproportionately burdening smaller companies and dis-incentivizing innovative startups from accessing the public markets,” he said. “Instead, these companies can focus on utilizing capital for innovative research, expansion, and job creation.”
Hurt’s bill did receive support from the Biotechnology Industry Organization (BIO), which said by exempting emerging growth companies from XBRL compliance, the legislation removes an “expensive bureaucratic roadblock from the path of emerging biotech issuers.”
“BIO supports this legislation because it takes a commonsense approach to the regulatory regime for public companies,” BIO President and CEO Jim Greenwood said in a written statement. “By requiring the SEC to study the effects of XBRL compliance on the market while giving emerging innovators a break from this costly regulatory burden, the bill provides important regulatory relief for small issuers. More than 70 biotech companies have gone public using provisions in the JOBS Act, and this legislation will support their growth.”