FASB is moving ahead with new requirements for more information about public company expenses, approaching the issue from two perspectives: disaggregation of income statement expenses and segment reporting. More specifically, this week FASB published a proposed Accounting Standards Update intended to provide investors with more decision-useful information about expenses on the income statement. According to the press release announcing the proposed ASU, investors have said that more detailed information about a company’s expenses “is critically important to understanding a company’s performance, assessing its prospects for future cash flows, and comparing its performance over time and with that of other companies.” In addition, last week, FASB made a tentative decision to go forward with new requirements for enhanced disclosure about segment expenses and other segment items, and directed the staff to draft a final ASU for vote by written ballot. FASB had previously explained that investors find segment information to be critically important to understanding a company’s different business activities, as well as its overall performance and potential future cash flows. Although financial statements do provide information about segment revenue and a measure of profit or loss, not much information is disclosed about segment expenses.
Disaggregation of Income Statement Expenses. Currently, companies typically include in their income statements expense captions for selling, general and administrative (SG&A) expenses, cost of services and other cost of revenues, and cost of tangible goods sold. In February last year, FASB considered several potential approaches to addressing the topic through various disaggregation principles and quantitative thresholds, and determined to conduct outreach. At a FASB meeting in 2022 (see the Board meeting handout, beginning p. 6), the Board discussed the feedback received through its outreach efforts, as well as potential approaches to disaggregation. A loose consensus appeared to form around a two-pronged hybrid approach: a prescriptive component that would require disaggregation of some specific costs, including labor, depreciation and amortization and, in some cases, materials or purchases; and a principles-based component for disaggregation of other costs, which might involve management judgment or a quantitative threshold or backstop. (See this PubCo post.) At a subsequent meeting in October, FASB continued its deliberations by discussing the disaggregation approach for income statement expenses, settling on an expense disaggregation approach that would require an entity to “reconcile any disaggregated information to the relevant expense caption presented in the income statement. The Board decided not to require disclosure in total for any additional specific expenses or costs incurred.” Additionally, FASB directed the staff to perform additional research on a separate presentation of selling expenses. (See these tentative decisions.)
The new proposed ASU would “require public companies to provide detailed disclosure of specified categories underlying certain expense captions in interim and annual periods. It would provide investors with more detailed information about the types of expenses, including employee compensation, depreciation, amortization, and costs incurred related to inventory and manufacturing activities in income statement expense captions such as cost of sales; selling, general and administrative; and research and development.”
More specifically, the amendments in the proposed ASU would require companies to disclose in the notes to financial statements on an annual and interim basis:
“1. Disclose the amounts of (a) inventory and manufacturing expense, (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) included in each relevant expense caption. A relevant expense caption would be 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).
2. Disclose a further disaggregation of inventory and manufacturing expense (from 1 above) into the following categories of costs incurred: (a) purchases of inventory, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, and (e) DD&A. Costs incurred would include those that are either capitalized to inventory or, if not capitalized to inventory, directly expensed (expensed as incurred) during the current period. On an annual basis, an entity would disclose its definition of other manufacturing expenses.
3. Include certain amounts that are already required to be disclosed under existing generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.
4. Disclose a qualitative description of the amounts remaining in relevant expense captions or in inventory and manufacturing expense that are not separately disaggregated quantitatively.
5. Disclose the total amount of selling expenses and, on an annual basis, an entity’s definition of selling expenses.”
According to the FASB press release, the amendments in the proposed ASU “do not change or remove existing expense disclosure requirements and do not change requirements for presentation of expenses on the face of the income statement. They would require public companies to include certain existing disclosures in the same tabular format disclosure as the other disaggregation requirements set forth in the proposed ASU.”
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. Currently, a public company is required to disclose certain information about its reportable segments, such as “a measure of segment profit or loss that the CODM [chief operating decision-maker] uses to assess segment performance and make decisions about allocating resources,” and, under certain circumstances, other specified segment items, such as depreciation and amortization. Those requirements would not change under the ASU, nor would the ASU change how the entity “identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments.” Rather, the amendments would “improve financial reporting by requiring incremental segment information on an annual and interim basis for all public entities to enable investors to perform more decision-useful financial analyses.”
This FASB in Focus regarding the proposed ASU summarizes the key aspects, and the tentative FASB decisions are reflected here.
- “Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss.” At the meeting last week, FASB affirmed the decisions to base the principle on the segment information regularly provided to the CODM (as opposed to “regularly reviewed” as suggested in some comments) and to include the significance threshold as part of the principle, including a requirement that quantitative and qualitative factors be considered when assessing significance. In addition, companies will need to disclose the title and position of their CODMs. FASB also confirmed that the “principle applies to allocated overhead expenses by segment,” and that segment interest expense may be disclosable “when that item represents a significant expense in accordance with the principle.”
- “Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed under the significant expense principle and each reported measure of segment profit or loss.” At the recent meeting, FASB “affirmed the decision to require that a public entity disclose the nature of the segment expense information that the CODM uses to manage operations if the entity does not disclose expenses under the principle for one or more of its reportable segments.”
- “Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods.” At the recent meeting, FASB indicated that, other than providing a reconciliation of segment profit or loss to the consolidated income statement on an interim basis, “no additional reconciliations would be required on an interim basis.”
- “Clarify that multiple measures of segment profit or loss may be disclosed and that if the CODM uses more than one measure of a segment’s profit or loss, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements. In other words, in addition to the measure that is most consistent with the measurement principles under generally accepted accounting principles, a public entity is not precluded from reporting additional measures of a segment’s profit or loss that are used by the CODM.” At the recent meeting, FASB affirmed a decisions to require that the “existing and proposed segment disclosures apply to each reported measure of a segment’s profit or loss.” In addition, “when a public entity discloses additional measures of a segment’s profit or loss,” FASB affirmed, “it should disclose those measures for the prior periods in which those measures were regularly provided to the CODM.” A company “may not disclose a measure of a segment’s profit or loss that is not utilized by the CODM for purposes of allocating resources and assessing performance.” The company should also “disclose an explanation of how the CODM uses each reported measure of a segment’s profit or loss to allocate resources and assess performance.”
- “Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this proposed ASU and all existing segment disclosures in Topic 280.” At the recent meeting, FASB confirmed that the segment disclosure requirements also apply to public entities that have a single reportable segment.
Companies will also be required to recast prior-period segment information to conform to current-period segment information in certain circumstances. Further, companies will be required to “explain the nature of significant changes from prior periods in the expense allocation methods and expense measurement methods used to determine segment profit or loss.”
The amendments would be applied “on a retrospective basis, unless impracticable.” The amendments “will be effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.” Early adoption will be permitted.
