Currently, companies typically include in their income statements expense captions for selling, general and administrative expenses, cost of services and other cost of revenues, and cost of tangible goods sold. But, as reported by Bloomberg, there has been a push for disaggregation of expenses on the income statement since at least 2016. As this piece in Bloomberg explained, investors complained that “companies lump expenses into catch-all financial statement categories like ‘selling, general, and administrative,’ without explaining the biggest cost drivers inside them.” But in 2019, the FASB voted (5 to 2) “to put its once-high priority financial reporting project on pause.” It was quite a lengthy pause, but, in February 2022—hearing the call again from investors and others in response to the FASB’s 2021 Invitation to Comment—the FASB decided to restart work on the project to “improve the decision usefulness of business entities’ income statements through the disaggregation of certain expense captions.” And, in 2023, FASB published a proposed Accounting Standards Update intended to provide investors with more decision-useful information about expenses on the income statement. (See this PubCo post and this PubCo post.) As reported, businesses “bristled against the plan,” contending that it was too expensive and time-consuming, with many raising, in particular, issues regarding the difficulty of providing more detailed inventory and manufacturing expense disclosures required in each relevant expense category. Companies also asked for specific industry carve-outs or exemptions for smaller reporting companies. But the FASB rejected that that request. Last week, the FASB announced that it had adopted a new Accounting Standards Update—ASU 2024-03—that will require “public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the notes to financial statements.” According to FASB Chair Richard Jones, the “project was one of the highest priority projects cited by investors in our extensive outreach with them as part of our 2021 agenda consultation initiative….We heard time and again from investors that additional expense detail is fundamental to understanding the performance of an entity and we believe that this standard is a practical way of providing that detail.”
According to the new ASU, “[i]nvestors observed that more detailed information about expenses is critically important in understanding an entity’s performance, assessing an entity’s prospects for future cash flows, and comparing an entity’s performance over time and with that of other entities. Investors specifically indicated that more granular information about cost of sales and selling, general, and administrative expenses (SG&A) would assist them in better understanding an entity’s cost structure and forecasting future cash flows. Some investors also noted the need for greater disclosure of employee compensation costs.”
The FASB believes that the “disaggregated expense information required by the amendments in this Update will enable investors to better understand the major components of an entity’s income statement because an investor will be able to reference specific disclosures in the notes to financial statements about revenue, expenses, and income taxes.”
According to the ASU, the amendments do not change or remove the current presentation requirements nor do they change or remove current expense disclosure requirements. However, the new amendments do affect where the information appears in the financial statement notes “because entities are required to include certain current disclosures in the same tabular format disclosure as the other disaggregation requirements in the amendments.”
More specifically, the ASU requires public companies to disclose, in the notes to financial statements, specified information about certain costs and expenses. At each interim and annual reporting period, the company is required to:
- “ Disclose the amounts of (a) purchases of inventory, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, and (e) depreciation, depletion, and amortization recognized as part of oil-and gas-producing activities (DD&A) (or other amounts of depletion expense) included in each relevant expense caption. A relevant expense caption is an expense caption presented on the face of the income statement within continuing operations that contains any of the expense categories listed in (a)–(e).
- Include certain amounts that are already required to be disclosed under current generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.
- Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
- Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.”
A company is permitted to include “additional voluntary disclosures that may provide investors with additional decision-useful information.”
The amendments are “effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted.” The amendments “should be applied either (1) prospectively to financial statements issued for reporting periods after the effective date of this Update or (2) retrospectively to any or all prior periods presented in the financial statements.”
Thanks to all our veterans on this Veterans’ Day!
