FASB Votes to Issue Exposure Draft on Enhancing the Disaggregation of Expenses in the Footnotes to Public Business Entities’ Income Statements
Overview
On March 29, 2023, the FASB met to continue discussions on its Disaggregation —
Income Statement Expenses (DISE) project. The Board reconfirmed its previous tentative
decisions, with certain refinements, and directed its staff to draft a proposed
Accounting Standards Update (ASU) for a vote by written ballot.
Background
There is currently limited guidance in ASC 2051 and ASC 225 on the presentation of expenses in the income statement. In
September 2017, the FASB added a project to its technical agenda that focused on
the disaggregation of performance information. On the basis of outreach to
preparers and other feedback, the staff identified challenges related to the
project, and the Board decided to pause it in December 2019. However, the
project was resumed in February 2022 with a revised objective “to improve the
decision usefulness of [public] business entities’ [PBEs’] income statements
through the disaggregation of certain expense captions.” The Board’s tentative
approach would expand the existing provisions of ASC 205 and ASC 225 by
requiring PBEs to further disaggregate expenses as discussed below.
Connecting the Dots
The FASB’s project on income statement disaggregation is a direct
response to the continued push from investors to obtain more information
about an entity’s financial performance, particularly the expenses an
entity incurs in a given period. The project has garnered increased
attention recently, as evidenced by SEC Chief Accountant Paul Munter’s
speech at the 2022 AICPA & CIMA Conference on Current SEC and PCAOB
Developments in which he discussed how standards can be improved to meet
investors’ needs. He specifically emphasized the need for greater
disaggregation of financial information related to the income
statement.
Although the extent of the proposed disaggregation is not yet clear, an
entity may need to update or modify its existing financial reporting
systems to comply with the enhanced requirements if and when they become
effective. Given the potential need for system changes and the likely
increased scrutiny on an entity’s expenses, financial statement
preparers may be inclined to provide feedback on the expected proposed
ASU that details the level of effort that may be needed to implement the
proposed requirements. At the 2022 AICPA & CIMA Conference on
Current SEC and PCAOB Developments, FASB Chairman Richard Jones
encouraged such feedback and stressed that it is important for the FASB
to receive broad and balanced feedback (e.g., from preparers and
practitioners) on proposed changes to its accounting standards. However,
Chairman Jones noted that investors “just weren’t seeing the level of
detail they needed to really understand” the operations of an entity and
cautioned constituents to “think about [the project] in that lens: if
[they] were trying to understand one of these companies, is the
information that’s on the face of the income statement sufficient, or
would [they] look at additional detail to understand the change from
period to period?”
Overview of Tentative Approach
The FASB’s tentative approach to
enhancing disaggregation requirements would amend the presentation of certain
expenses in the financial statement footnotes by requiring a PBE to separate the
presentation of specific functional costs that are expensed as incurred from the
presentation of those that are capitalized as inventory. Specifically, under the
tentative approach:
- PBEs would have to quantitatively disaggregate the
following expenses in a tabular-format footnote disclosure:
- Costs expensed as incurred — These include employee compensation; depreciation of property, plant, and equipment; amortization of intangible assets; and inventory expense and other manufacturing expenses included in each relevant expense line item on the income statement (e.g., cost of goods sold and selling, general, and administrative expenses).
- Costs capitalized to inventory and other manufacturing expenses — These include purchases of inventory; employee compensation; depreciation of property, plant, and equipment; and intangible asset amortization.
- Existing disclosures for natural expenses — These include any “natural expenses” (e.g., impairments of fixed assets and amortization of film costs) for which an entity must already disclose the amount and caption in the income statement in which the expense is recorded.
- PBEs would have to qualitatively describe the expenses remaining after any required quantitative disaggregation is complete for each relevant expense caption (e.g., “other cost of goods sold” or “other selling, general, and administrative expenses”).
- PBEs would have to disclose selling expenses and provide the accounting policy disclosure in ASC 235-10-50-1 to describe how the entity has determined what expenses are classified as selling expenses.
- All disclosures would be required for interim reporting periods.
See the appendix for an illustrative example of this proposal.
Effective Date and Transition
The Board will determine the effective date of the guidance after it considers
feedback on the proposed ASU. The proposal would require PBEs to adopt the new
guidance prospectively while also providing an optional retrospective
application.
Next Steps
The proposed ASU is expected to be released late in the second quarter of 2023 or
early in the third quarter of 2023. The comment period is expected to be 90
days.
Appendix — Illustrative Example
Contacts
For information about this publication, please
contact:
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Stephen McKinney
Managing Director
Deloitte & Touche LLP
+1 203 761 3579
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Michelle Palmerton
Senior Manager
Deloitte & Touche LLP
+1 203 708 4406
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Footnotes
1
For titles of FASB Accounting Standards Codification (ASC)
references, see Deloitte’s “Titles of Topics and Subtopics in
the FASB Accounting Standards
Codification.”
2
Note that this example was provided before the Board’s
March 29, 2023, meeting and therefore may not reflect the refinements
made at that meeting or the examples that may be provided in the
forthcoming proposed ASU.