The FASB on February 16, 2022, voted to reframe its project to revise the income statement, sticking with the objective of providing investors with more useful information, but signaling that companies would incur costs.
The project would require a breakout of more details on the face of the income statement about a company’s cost structure in areas such as labor, according to the discussions.
“I think it’s coming up with potentially new income statement subcategories [and] that may be costly but it may be well worth it,” FASB Vice Chair James Kroeker said. “I think having that honest dialogue about ‘we’re not talking about something simple here’ [is necessary because] the more we give the impression we are, the more people will push back on ‘do you really understand what you’re asking for,’” he said.
The board will work to disaggregate three areas of expense: Selling, General, and Administrative Expenses (SG&A); Cost of Services and Other Cost of Revenues; and Cost of Tangible Goods Sold.
Discussions will start with SG&A, then subsequently followed by the other categories as there may not be a one-size-fits-all solution, board members agreed.
“It’s good to start with SG&A because I think it will inform us on what we learn on the others – I’m supportive of looking at all three [incrementally],” FASB Chair Richard Jones said. “We have a large volume of disclosures related to the income statement already that I do think we need to be aware of and be cognizant of,” he added. “We’re not here to duplicate information, we’re here to disaggregate information on the income statement.”
Big Companies Skimp on Details
Revisions to the project come in response to investor outcry that key information about items like human capital is lacking in the income statements of non-financial companies, according to the discussions. Among the largest 100 companies in the U.S.—those with $200-$400 billion market cap—a majority do not breakout information about cost of goods sold and cost of sales.
“If you think about today, we have rising inflation costs, you have conference calls over and over again where managements are talking about rising labor costs, rise in raw material costs, or transportation costs are exploding—you have no information on this in the income statement,” FASB member Gary Buesser said. “You hear about the great resignation, turnover rates are exploding so companies have to focus on labor, labor costs – ‘what are we doing, how do we retain people?’ – [yet] you get no information on that.”
The topic might be a challenge for the board because already financial statement preparers have expressed concerns about the cost of tracking, reporting, disclosing, and auditing the additional disaggregated information. This contrasts heavily with investors who clamor granularity and detailed line items.
In light of that, when the board weighs the costs versus the benefits of any potential new rules, credence should be equally given to both investors and preparers, said Buesser, one of two analysts on the board.
“I think when we look at cost, we have to talk to both companies and investors – investor A, investor B, ‘are you willing for the companies that you own to spend some money to further disaggregate the income statement?,’” he said. “So it’s not simply talking to companies – the investors own the companies, so they should be given equal credence in terms of the cost benefit analysis than simply listening to companies. I think that’s the direction we should be on.”
The project will be renamed “disaggregation of the income statement” to focus purely on business entities – both public and private, according to the discussions. Not-for-profit organizations would be excluded.
“I think it’s great that we think about this holistically, and obviously over time we look at the application of the [Private Company Decision-Making Framework] to see that it’s relevant and works for private companies,” FASB member Susan Cosper said.
The effort started in 2017 under “disaggregation of performance reporting” under a prior board but was paused in 2019 to work on segment reporting as it has intertwining issues.
Last year, the FASB started the goundwork toward developing new five-year technical agenda, issuing Invitation-to-Comment (ITC) No. 2021-004, Agenda Consultation, to solicit public feedback about which projects to add or prioritize.
Respondents to the ITC said that more investor-focused projects should be added to the board’s technical agenda. Part of the feedback was related to the disaggregation of income statement expense captions in areas such as cost of sales and SG&A.
This article originally appeared in the February 17, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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