5.12 Disaggregation of Income Statement Expenses
ASC 210-10 currently contains limited guidance on the presentation
of expenses in the income statement. Although Regulation S-X prescribes expense
classification requirements, an entity’s income statement expense captions do not
provide much insight into the nature of such costs. Investors have consistently
asked for additional details about income statement expenses, which they believe are
important to understanding a company’s performance and forecasting future cash
flows.
Changing Lanes
In November 2024, the FASB issued ASU
2024-03, which requires PBEs to provide disaggregated
disclosures about income statement expenses. Specifically, PBEs are required
to provide, in a tabular format in the footnotes to the financial
statements, disaggregated information about specific categories underlying
certain income statement expense line items that are considered “relevant.”
The ASU does not change the expense captions an entity presents on the face
of the income statement; rather, it requires disaggregation of relevant
expense captions into specified categories in disclosures within the
footnotes to the financial statements.
Under the ASU, entities are required to disaggregate any relevant expense
caption presented on the face of the income statement that contains any of
the following expense categories: (1) purchases of inventory, (2) employee
compensation, (3) depreciation, (4) intangible asset amortization, and (5)
depletion. Other items (which may include expenses, gains, or losses) that
may need to be disclosed under existing U.S. GAAP, and that are recorded in
a relevant expense caption, may also need to be presented in the same
tabular disclosure. The ASU lists the specific items to which this
requirement applies. Public entities are required to disclose the amount,
and a qualitative description of the composition, of other items remaining
in relevant expense captions that are not separately disaggregated. In
addition, a separate total of an entity’s selling expenses must be
disclosed, along with the entity-specific definition of selling
expenses.
All disclosures must be provided on an annual and interim basis except for
those related to an entity’s definition of selling expenses, which are only
required annually. The ASU is effective for all PBEs for fiscal years
beginning after December 15, 2026, and interim periods within fiscal years
beginning after December 15, 2027. Early adoption is permitted.
For more information about the disclosure requirements related to the
disaggregation of income statement expenses, see Deloitte’s November 8, 2024
(updated January 21, 2025), Heads
Up.
Connecting the Dots
Given the ASU’s additional disaggregation and disclosure
requirements, companies considering an IPO should ensure that their
financial reporting systems are designed to facilitate such disclosures.