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FASB Proposes New Disclosure Rules for Public Companies on Income Statement Expenses

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

The FASB on July 31, 2023, issued a proposal that will require public companies to disclose additional information about significant expense categories in the notes to financial statements—information like employee compensation that is generally not presented in financial statements today.

The board published Proposed Accounting Standards Update (ASU) No. 2023-ED500Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) Disaggregation of Income Statement Expenses, to solicit public input about whether public companies should be required to disclose more expense details in footnotes in areas that investors have been clamoring for years to understand.

The comment period ends on Oct. 30.

The rules were developed because currently there are no broad requirements in U.S. GAAP to disaggregate expenses presented on the face of the income statement, resulting in diversity in practice which makes it tough for investors to compare company reports, according to the “Basis for Conclusions” section of the proposal. But the guidance could prove costly to prepare as companies will need to modify systems to capture such specific required data.

In general, the issues being addressed top the list of items investors told the FASB they want fixed so that they can understand a company’s performance and future cash flows.

“Feedback from investors on our 2021 Agenda Consultation provided us with a fresh approach to providing more detailed information about a company’s expenses, which investors have said is critically important to understanding a company’s performance, assessing its prospects for future cash flows, and comparing its performance over time and with that of other companies,” FASB Chair Richard Jones said in a statement. “As a result, less than 18 months after revising the scope of the project, we’ve issued this proposed standard that would require companies to provide more information about specific expenses in the notes to financial statements.”

Proposal in a Nutshell

If finalized, the proposal will require public companies to disclose the following amounts within each relevant expense line presented on the income statement: inventory and manufacturing expense; employee compensation; depreciation; and intangible asset amortization.

For companies with inventory and manufacturing expense, the proposal would require a more detailed breakdown of purchases of materials, labor, and other costs related to inventory and manufacturing activities. This information would be based on the costs incurred in the current reporting period, regardless of whether those costs are recorded as inventory or expensed immediately.

In addition to the breakdown of relevant expense lines into the specific categories, a company would: disclose the amount of selling expenses; describe the composition of expenses that are not required to be separately disclosed for each relevant expense line; and include other expense disclosures that are already required in the same tabular format disclosure.

Private companies, employee benefit plans and not-for-profit organizations are excluded from the rules.

Investors Pressing for the Information

The guidance could stem complaints the board heard from investors surrounding, for example, the naming and classification conventions for expense captions which vary by industry and entity. The lack of consistency in that information leaves investors without a solid understanding about “what is included in cost of sales and SG&A to assist them in understanding an entity’s cost structure,” text in the “Basis” section of the proposal explain.

Investors also have asked for items such as selling expenses to be provided separately from general and administrative expenses; and for disclosure of the amounts of employee compensation, depreciation, and amortization included in commonly presented expense captions such as cost of sales, including cost of goods sold and cost of services and SG&A.

Moreover, investors have noted that often there are few expense lines presented on the face of the income statement and that expense items providing differentiated information about a company’s prospects for future cash flows are not presented or disclosed separately, which they assert “limits their ability to predict an entity’s future performance and cash flows.”


This article originally appeared in the August 2, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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