Some of the nation’s biggest companies and trade organizations told the FASB that its proposed disclosure rules to disaggregate income statement expenses would be tough and costly to adopt—recommending alternatives they say would be a better fit.
Aspects of Proposed Accounting Standards Update (ASU) No. 2023-ED500, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, would wreak havoc on systems with little benefit to investors, according to comment letters submitted to the FASB by the Oct. 30, 2023, deadline—coming from big companies, and groups like the Retail Industry Leaders Association (RILA), Financial Executives International’s (FEI) Committee on Corporate Reporting (CCR), and the U.S. Chamber of Commerce.
The push back on costs is not a surprise, as the FASB already alluded to it during discussions, stressing there was no way around that if investors are to get some of the information they have pressed for, for years. But the letters say the full benefits are not that apparent, and thus the guidance needs to be aligned.
“…a better understanding from investors is needed regarding what information they are looking for that would be relevant across all industries (e.g., compensation) and how that information will be used in making decisions,” said RILA in a letter of suggestions. Similarly, the Chamber of Commerce urged the board to reconsider the proposal “and what, if any, expense information would be meaningful for investors, while cost-effective for public companies to provide.”
Moreover, others such as FEI’s CCR said some changes would be “inoperable for many preparers without significant, time-intensive, and costly system and process redesign,” and suggested “alternatives with the goal of meeting the project objectives while allowing companies to continue with the consolidated reporting approaches a company’s management determines are most appropriate for the business.”
The FASB issued the proposal in July to address investor feedback requesting more detailed information about expenses to better understand a company’s performance, prospects for future cash flows, and make comparisons over time and to peers. The guidance would require disclosure in footnotes of items like 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. (See FASB Proposes New Disclosure Rules for Public Companies on Income Statement Expenses in the Aug. 2, 2023, edition of Accounting & Compliance Alert.)
The rules were developed after investors asked for the guidance, stressing that companies traditionally obscure certain income statement expense figures, which leaves them clueless about sums that can affect company profits.
The proposal received 69 comments by Oct. 31, including from Big four and other accounting firms, according to the board’s website. More letters will come. Some of the feedback suggest that the changes could be as impacting for financial statement preparers as some of the larger standards that were issued in the past.
The FASB plans to hold a public roundtable on the proposal on Dec. 13. (See FASB Planning Public Roundtable This Year on Proposed Income Statement Expense Rules in the Aug. 8, 2023, edition of ACA.)
Large Companies from Various Sectors Flag Concerns
In line with industry trade groups, large companies from various sectors raised their own sets of concerns, including systems challenges, the potential for misinterpretation – many urging alternatives, among other suggestions.
Specifically, Exxon Oil said that while the proposal was intended to enhance financial reporting transparency, the FASB should consider the “increased complexity, ERP systems challenges, potential for misinterpretation, and additional administrative burdens would likely outweigh the expected benefits of additional disclosures.”
Similarly, The Boeing Company said the proposal “may not provide particularly useful information to investors for certain industries such as ours,” stressing that “from a financial statement preparer perspective, the proposal would require significant and costly process and systems changes.”
Apple Inc. said it generally agrees with the changes to enhance the transparency and decision usefulness of income statement expenses, but believes “certain adjustments would improve the final amendments, such as to modify or combine certain required captions, allow for an alternative disaggregation methodology for inventory and manufacturing expenses, and clarify a number of matters.”
Starbucks Corp. suggested that the board consider a principles-based approach, stressing that the prescriptive approach within the proposal is a vast departure from revisions to segment reporting, and as a result, “may not achieve the intended outcomes, and its current requirements would be administratively difficult to implement.” The proposed guidance “may also distract from more meaningful qualitative and quantitative trends disclosed as part of management’s discussion and analysis (MD&A) section of the quarterly and annual reports per Item 303 of Regulation S-K,” the firm wrote.
Metlife, Inc. said the disclosures “do not provide additional meaningful information that would be considered necessary to evaluate the performance of a life insurance entity, period-over-period, or with other insurance entities,” and would ”introduce additional costs to the financial reporting process for limited incremental benefits.”
IBM said it supports the FASB’s efforts and attempts to provide the changes but cited “significant concerns about the operability of the proposed standard, the significant cost of compliance, and whether the resulting disclosure will provide additional decision-useful information to users of our financial statement.”
Ford Motor Company said that although it supports the proposal to disclose the details in the notes to the financial statements rather than on the face of the income statement, “we foresee significant costs in implementing the proposed updates,” and stressed that “a significant number of our systems are not presently capable of providing disaggregated functional expenses in the manner required by the Exposure Draft, which would require us to invest in modification, redesign or replacement of those applications.”
Uber Technologies, T-Mobile US Inc., Pfizer, General Motors Co., Bristol Myers Squibb Co., All State Corp., Cigna Group, and the Sherwin Williams Co. were also among the companies who wrote in with concerns and/suggestions.
This article originally appeared in the November 1, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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