On June 26, the Financial Accounting Standards Board voted to require public companies (and other SEC filers) to disaggregate certain income statement expense line items by disclosing their component expense categories, such as inventory purchases, employee compensation, and depreciation. While the face of the income statement will not change, this additional information will be required in financial statement footnotes. Investors have long sought this type of expense breakdown. However, the new disclosures may be costly for companies and may require accounting systems changes.
FASB published the exposure draft of the income statement disaggregation proposal on July 31, 2023. The exposure draft states that investors have 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 both over time and with that of other entities” and have specifically asked for more granular information about cost of sales and selling, general, and administrative expenses. The proposed Accounting Standards Update (ASU) in the exposure draft responded to this request.
The proposed ASU would require detailed disclosure, in the notes to financial statements, of specified categories of expenses underlying certain expense captions in the income statement. These expense categories, as modified during the Board’s deliberations on June 26, are:
Purchase of inventory.
Employee compensation.
Depreciation.
Intangible asset amortization.
Depletion (depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities).
Any expense caption on the face of the income statement that contains any of the five expense categories on this list would have to be disaggregated. The breakdown would be in tabular format and presented in the footnotes to annual and interim financial statements.
At the June 26 meeting, FASB instructed its staff to prepare a final ASU implementing the decision to require disaggregation. FASB’s website indicates that the Board is expected to approve the final ASU in the fourth quarter of 2024. Disaggregation will be effective for fiscal years beginning after December 15, 2026, and for interim periods within fiscal years beginning after December 15, 2027. Early adoption will be permitted. See Project Summary, Disaggregation—Income Statement Expenses on FASB’s website.
Audit committees may want to discuss with financial reporting management what changes in the company’s accounting systems and processes will be necessary to implement the ASU, the cost of making those changes, and the timeline. Management and audit committees should of course also consider the impact of this new requirement on the company’s internal control over financial reporting. For a more detailed discussion of FASB’s June 26 deliberations on this issue, see Deloitte’s Heads Up publication, FASB Directs Staff to Draft Final Standard on Disaggregation of Income Statement Expenses (DISE).
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