On November 4, 2024, the Financial Accounting Standards Board (FASB) published updated guidance that will require public companies to disclose additional information about certain expenses in the financial statement footnotes. FASB Chair Richard R. Jones said expense disaggregation was 鈥渙ne of the highest priority projects cited by investors in our extensive outreach with them as part of our 2021 agenda consultation initiative.鈥 Here鈥檚 an overview of the new disclosure rules.
Breaking down expense captions
Accounting Standards Update (ASU) No. 2024-03, Income Statement 鈥 Reporting Comprehensive Income 鈥 Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, requires all public companies to provide more detailed disclosures of expenses reported on their income statements. Specifically, they鈥檒l be required to disclose the amounts of the following items:
- Inventory purchases,
- Employee compensation,
- Depreciation,
- Intangible asset amortization, and
- Depreciation, depletion and amortization recognized as part of oil- and gas-producing activities (and other amounts of depletion expense).
On the income statement, these expenses are usually lumped together with other expenses in catch-all captions, such as cost of sales; selling, general and administrative (SG&A) expenses; and research and development (R&D) expenses. Companies also will be required to provide qualitative descriptions of remaining amounts in relevant expense captions that aren鈥檛 separately disaggregated. In addition, selling expenses must be separately disclosed and defined in annual reporting periods.
The amendments in ASU 2024-03 won鈥檛 affect income statement presentation. They also won鈥檛 change or remove any existing income statement disclosure requirements. Instead, they鈥檒l require all existing and new disaggregated data to be presented in one user-friendly tabular format. That way, investors won鈥檛 need to search multiple footnotes for disaggregated information.
The changes go into effect for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption will be permitted. ASU 2024-03 doesn鈥檛 apply to privately held entities. The guidance encourages companies to voluntarily disclose any additional expense information that would help investors better understand the entity鈥檚 operations.
Addressing investors鈥 needs
The disaggregated expense disclosure guidance is part of a larger FASB project to help investors better understand the components of a company鈥檚 income statement. Together with the recent standards that require disaggregation of revenue and income tax information, ASU 2024-03 will help investors evaluate historical financial results and, in turn, forecast future cash flows. The changes also will provide context when reviewing management鈥檚 discussion and analysis of financial position and results of operations (MD&A).
The income statement project started in 2017 under the name 鈥渄isaggregation of performance reporting.鈥 The effort was paused in 2019 to allow the FASB to work on segment reporting, which had intertwining issues. The FASB received feedback during its 2021 agenda consultation and other outreach that investors wanted more granular information about expense captions reported on companies鈥 income statements. The FASB resurrected the income statement project in 2022 and renamed it 鈥渄isaggregation of the income statement.鈥
The updated guidance marks the completion of this project. FASB Chair Jones called the standard 鈥渁 practical way鈥 to provide investors with insights into companies鈥 cost structures and help them benchmark performance in today鈥檚 volatile markets.
Transparency is key
As your company prepares its 2024 financial statements, consider what you鈥檙e currently disclosing about the components of cost of sales, SG&A and R&D. Even if your company won鈥檛 be required to comply with the updated guidance, you might want to voluntarily disclose disaggregated cost data in your financial statement footnotes to engender trust with stakeholders. Contact your CPA to determine the appropriate level of disclosure for your company and, if you鈥檙e publicly traded, to implement the new standard before its effective date.
漏 2024