The Financial Accounting Standards Board (FASB) last week made some significant decisions to provide investors more insight into corporations’ income statement expenses.
This is part of the board’s ongoing disaggregation standard-setting project, and the decisions made during a meeting held on Jan. 11, 2023, while unanimous, are tentative at this juncture. A proposal is expected sometime in the first half of this year.
Under the board’s tentative plans, companies must disclose costs incurred that are expensed as incurred. And they must disclose costs incurred that are capitalized as inventory.
For costs expensed as incurred, companies will have to provide specific income statement expense line items of labor costs; depreciation of property, plant and equipment; amortization of intangible assets; and inventory expense.
In addition, depending on how discussions go in the future, companies might have to provide even more disaggregated information.
“The Board indicated that it will discuss at a future meeting whether other types of depreciation, amortization, or depletion other than depreciation of property, plant, and equipment and amortization of intangible assets should be disclosed,” according to a summary of the meeting provided by the FASB.
As for costs capitalized to inventory, the U.S. accounting standard-setter decided that the required categories for greater disaggregation should be: purchases of inventory, including all classes of inventory; employee compensation; depreciation of property, plant and equipment; and intangible asset amortization.
More details about the decisions made last week can be found here, including the definition of employee compensation, disaggregation of residual expenses and costs incurred and selling expenses.
The board also decided the additional disaggregated information can be provided in notes to financial statements.
The FASB’s summary of the meeting provides an example expense disaggregation for better illustration of what could be required if the decisions were finalized.
Questions about Cost-Benefits
In the meantime, the FASB’s latest decisions come amid intense push by some investors who have been especially vocal in recent years that they want more information provided to them about a company’s operation and financial performance. They have also been telling SEC Chair Gary Gensler that in the past several years, the accounting rulemaker had been ignoring investor views while taking on more projects that simplify accounting for the benefit of companies.
The SEC oversees the FASB. And Gensler has been more receptive to investor demand than his predecessor, Jay Clayton, who put a greater emphasis on capital formation and business-friendly rules.
If the FASB ends up proposing and adopting the rules on disaggregated income statement expenses, some investors will likely be happy. By contrast, companies will face more burden in preparing their financial statements. And at least to a former chairman of the FASB, this would be an unfortunate outcome.
“Users of financial statements have been asking for more details such as in the FASB’s added segments disclosures now out for comment,” Dennis Beresford, who chaired the FASB from 1987 to 1997, said in reference to an October 2022 proposal that would finally require more detailed information about a reportable segment’s expenses, which investors have been asking for for a very long time. This one, Beresford welcomed it. “It’s a proposed amendment of Statement 131, [Disclosures about Segments of an Enterprise and Related Information], which was the last one issued while I was there—now over 25 years ago.”
By contrast, “this other project asks for even more breakdowns of companies’ income statements,” Beresford explained. “Frankly, I’m not sure how analysts and investors would use this added information, and I suspect companies will say it’s difficult and costly to produce.”
This article originally appeared in the January 17, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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