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Coming FASB Proposal on Disclosures for Annual and Quarterly Expenses Will be Costly to Apply

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

The FASB on March 29, 2023, unanimously voted to issue a proposal that will add new disclosure requirements for reporting income statement expenses, despite feedback suggesting it will impose substantial costs on companies.

Among expected costs include one-time implementation costs and ongoing costs to prepare and audit the information, but the benefits would justify those costs, according to the discussions.

“I think this is something where we will get significant benefits to investors,” Vice Chair James Kroeker said. “There could be significant costs for some entities and I don’t think that that’s because the data isn’t available, I think it’s because of the way entities map their transaction level activity into full consolidation and that will require for some entities work to remap that,” he said. “We are talking about data that’s available and I think it’s a much better starting point than aggregated line items. And I don’t think that we should forget the fact that financial reporting works in parallel for public companies with MD&A, so that certainly there will be a better starting point in MD&A to have the discussion about why certain line items move.” MD&A is the acronym for management discussion and analysis, a narrative explanation of financial information in the front in annual and quarterly reports.

The disclosures will be required for public companies for both annual and interim periods, the board agreed. Companies will get 90 days to comment on a proposal, which could be issued in July.

The guidance will address any expense line items presented on the income statement that contain expenses in specific required categories. Required categories would include employee compensation, depreciation, amortization, and inventory expense (which would need to be further disaggregated using costs capitalized in the current period), the discussions revealed. Therefore, expense lines subject to the disaggregation requirements include cost of sales; selling, general, and administrative expenses (SG&A); and research and development (R&D). This also includes disclosure of selling expenses and other disclosure enhancements.

A majority of the board said the resulting information would provide investors and lenders a better understanding of the expenses that impact profits and future cash flows of a company in a reporting period. Currently, the information is aggregated into lump sums under specific captions on the income statement, obscuring insight into critical figures.

The changes would make financial statements more comparable to users of financial statements when making investment decisions or loans, some board members said.

“I do believe that the benefits well exceed the costs in this; I do believe it’s a milestone,” FASB member Frederick Cannon, an analyst said. “When I look at this information or I present investors with the tables that we’re going to be offering, I believe it will greatly the ability of analysts and users to forecast future cash flows, enhancing the efficiency of the capital markets,” he said. “I believe the benefits are very significant.”

Others such as Marsha Hunt were hesitant about touting the benefits, but said concessions can be made after the board gets feedback on the proposal, holds roundtables, or other outreach to vet the table of disclosures that would be required.

An outright “no” about the benefits came from FASB member Gary Buesser, also an analyst, who generally disagreed with the approach of the entire project. “In my opinion we settled on a compromise solution that serves neither the interest of corporate preparers or investors – this proposal will add significant costs for preparers while providing investors I think with minimal benefits,” he said. “I talked to a couple of people, one who has 30-plus years experience, direct quote ‘I have no idea how I’d model this information.’ I agree [with them].”

The discussions wrap up initial deliberations on a project that started in 2017 and revised in 2022 to focus on disaggregating income statement information, a topic that users of financial information said the board should strive to complete near term.

 

This article originally appeared in the March 31, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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