The SEC has released its 143-page proposed rule regarding data tagging of financial statements, including over 100 questions designed to prompt comments on or before August 1, 2008. Data tagging of financial statements using eXtensible Business Reporting Language (XBRL) is expected to dramatically simplify how analysts, investors, and others compare the financial statements of publicly-traded companies.

The release explains that just as HTML allows Web browsers to present a website’s embedded text in a predicable format, XBRL will allow software applications, such as databases, financial reporting systems, and spreadsheets, to recognize and process tagged financial information.

Software is used to apply data tags from a standard list (developed over the past several years) to specific information in a company’s financial statements. Where a needed data tag does not exist in the standard list due to flexible U.S. financial reporting standards, a company can create a company-specific tag called an extension.

Under the proposed rules, beginning with fiscal periods ending on or after December 15, 2008, large accelerated filers that use U.S. GAAP and have a public float above $5 billion must provide their financial statements and applicable schedules as a new exhibit (to registration statements and annual reports) in interactive data format. Other large accelerated filers and smaller reporting companies must follow suit for fiscal periods ending on or after December 15, 2009 and 2010, respectively.

Regarding liability, the release distinguishes between liability for “interactive data” – data that is read by a computer – and liability for “human-readable interactive data” – data that is read by a human via a viewer that the SEC provides. Interactive data will be deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act and Section 18 of the Exchange Act. Human-readable interactive data will be deemed furnished or filed under these sections depending on the usual liability provisions for the corresponding data that is currently filed in a traditional format. For example, a Form 10-K’s human-readable interactive data is deemed “filed” and subject to Section 18 of the Exchange Act, “consistent with the liability applicable to the corresponding part of the traditional format Form 10-K.” (See page 62 of the release).

This explanation appears to be a somewhat confusing way of saying that inaccurate financial data that is read by a machine will have little liability, but interactive data that can be read by a human will have the same liability that applies to current financial information.

Look for data tags to someday stretch into the realm of executive compensation and beyond. The proposed rule solicits comments on whether it would be useful to require interactive data for executive compensation disclosures, the MD&A, and other financial, statistical, or narrative disclosures.