FASB Issues Final Standard on Disaggregation of Income Statement Expenses (DISE) (November 8, 2024)

FASB Issues Final Standard on Disaggregation of Income Statement Expenses (DISE)

Overview

On November 4, 2024, the FASB issued ASU 2024-03,1 which requires disaggregated disclosure of income statement expenses for public business entities (PBEs). The ASU does not change the expense captions an entity presents on the face of the income statement; rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements.

Background

There is currently limited guidance in ASC 2202 on the presentation of expenses in the income statement and disaggregation of expense captions. Presentation of certain income statement expense captions may be driven by SEC presentation requirements and industry-specific guidance, or triggered when a specific event occurs. Certain other types of expenses are required to be disclosed in the footnotes to the financial statements.

The objective of ASU 2024-03 is to “address requests from investors for more detailed information about the types of expenses . . . in commonly presented expense captions (such as cost of sales, SG&A [selling, general, and administrative expenses], and research and development).” Investors advised the FASB that “disclosure of disaggregated information about expenses is critically important in understanding an entity’s performance, assessing an entity’s prospects for future cash flows, and comparing an entity’s performance over time and with that of other entities.”

ASU 2024-03 adds ASC 220-40 to require a footnote disclosure about specific expenses by requiring PBEs to disaggregate, in a tabular presentation, each relevant expense caption on the face of the income statement that includes any of the following natural expenses: (1) purchases of inventory, (2) employee compensation, (3) depreciation, (4) intangible asset amortization, and (5) depreciation, depletion, and amortization (DD&A) recognized as part of oil- and gas-producing activities or other types of depletion expenses. The tabular disclosure would also include certain other expenses, when applicable. The ASU does not change or remove existing expense disclosure requirements; however, it may affect where that information appears in the footnotes to the financial statements.

Key Changes From the Proposed ASU

Summarized below are the most significant changes made in the final guidance, as compared with the proposed ASU:3

Replaces the proposed expense category “inventory and manufacturing expense,” as well as the additional disaggregation of that category, with “purchases of inventory,” a new defined category that is presented at a single level of disaggregation.
Allows two acceptable bases for disclosing the disaggregation of relevant expense captions that contain amounts within the scope of ASC 330: a cost-incurred basis or an expense-incurred basis.
Provides clarifications regarding disclosures of:
- Certain liability-related expenses.
- Expense reimbursements related to a cost-sharing or cost-reimbursement arrangement with another entity.
Gives entities the ability to use estimates or other methods that produce a reasonable approximation of the amounts required to be disclosed.
Indicates that changes made to the manner of presentation of the DISE footnote disclosure that result from a change in the election of an alternative or a change in the definition of a disclosure are not changes in accounting principle within the scope of ASC 250.
Provides a delayed implementation timeline to give issuers additional time to prepare for the impacts of adoption (i.e., for annual periods, effective for fiscal years beginning after December 15, 2026; for interim periods, effective within fiscal years beginning after December 15, 2027).

Overview of the Main Provisions of ASU 2024-03

Scope

The amendments in ASU 2024-03 apply to all PBEs, including entities that file or furnish financial statements with the SEC, inclusive of brokers and dealers in securities and voluntary filers.

However, the amendments “do not apply to private companies, not-for-profit entities, and employee benefit plans.” The Board decided to refer its decision to exclude private companies from the scope of the guidance to the Private Company Council for future consideration.

Connecting the Dots

Private companies that are in the process of going public or whose financial statements are included in another entity’s SEC filing (e.g., under SEC Regulation S-X, Rule 3-054 or Rule 3-095) meet the definition of PBE and will be required to apply the DISE disclosures.

Disclosures

ASU 2024-03 requires PBEs to disclose disaggregated information about specific natural expense categories underlying certain income statement expense line items that are considered “relevant” (referred to as “relevant expense captions”) because they include one or more of the five natural expense categories discussed further below. Such disclosures must be made on an annual and interim basis in a tabular format in the footnotes to the financial statements. The ASU requires entities to disaggregate any relevant expense caption presented on the face of the income statement within continuing operations into the following required natural expense categories, as applicable: (1) purchases of inventory, (2) employee compensation, (3) depreciation, (4) intangible asset amortization, and (5) DD&A recognized as part of oil- and gas-producing activities or other depletion expenses. An entity’s share of earnings or losses from investments accounted for under the equity method is not a relevant expense caption that requires disaggregation.

The ASU also provides the following clarifications regarding identifying relevant expense captions:

A relevant expense caption may include an expense caption that is presented as a natural expense classification on the face of the income statement (e.g. depreciation and amortization). If that natural expense classification includes more than one of the required expense categories, further disaggregation is required. For example, an expense caption consisting of depreciation and intangible asset amortization would need to be further disaggregated to separately disclose depreciation and intangible asset amortization in the footnotes.
An expense caption that consists entirely of one of the required natural expense categories will not be subject to the new disaggregation guidance. For example, an expense caption consisting entirely of depreciation expense on the face of the income statement would not need to be further disaggregated.

Further, certain other expenses and gains or losses that must be disclosed under existing U.S. GAAP, and that are recorded in a relevant expense caption, must be presented in the same tabular disclosure on an annual and, when applicable, interim basis. These items are further described in the tables below.

In addition, ASU 2024-03 requires PBEs to disclose selling expenses on an annual and interim basis.

If interim financial statements are condensed and, therefore, the expense captions presented on the face of the income statements differ from interim to annual periods, there could be different expense captions in interim and annual reporting periods.

The tables below briefly describes required expense categories and other disclosures required under the ASU.

Summary of Disclosures

Category	Overview
Required Expense Categories
Purchases of inventory	The expenditures disclosed in this category would be (1) within the scope of ASC 330 and, as applicable, ASC subtopics that provide industry-specific guidance on inventory (e.g., ASC 908-330) and (2) presented on either a costs-incurred or an expense-incurred basis.
Employee compensation	The ASU amends the definition of an employee in the ASC master glossary. The new definition is aligned with that in ASC 718, and it refers to full-time, part-time, temporary, or seasonal employees. Employee compensation would be consistent with compensation costs in ASC 710, ASC 712, ASC 715, and ASC 718 and includes but is not limited to wages, bonuses, social security contributions, employee benefits and stock compensation. Disclosures about employee compensation should include separate presentation of one-time employee termination benefits, when applicable, within the tabular disclosure.
Depreciation	Depreciation expense should be consistent with the amounts recorded in accordance with ASC 360-10.
Intangible asset amortization	Intangible asset amortization expense should be consistent with the amounts recorded in accordance with ASC 350-30.
DD&A recognized as part of oil- and gas-producing activities or other depletion expenses	DD&A of capitalized acquisition, exploration, and development costs recognized as part of oil- and gas-producing activities should be consistent with amounts recorded in accordance with ASC 932-360 on extractive activities ( oil and gas), property, plant, and equipment, or other amounts of depletion expense.
A relevant expense caption on the face of the income statement is a caption that includes any of the required expense categories listed above.
Disclosure of Other Items
Tabular integration of other disclosures required under existing U.S. GAAP	Other items that may require disclosure under existing U.S. GAAP, and that are recorded in a relevant expense caption, should be presented in the same tabular disclosure on an annual and, when applicable, interim basis. These include: Specified expenses and gains or losses that should be presented under existing U.S. GAAP for each relevant expense category. Depending on the type of expense or gain or loss, the disclosure may be required only if the entire amount is included in one expense caption and not over multiple expense captions. The ASU provides a specific list of the items to which this applies.
Other items — not separately quantified	Amount of other items remaining in relevant expense captions that are not separately disaggregated should be provided in a tabular format disclosure along with a qualitative description of its composition.
Selling Expenses
Selling expenses	A separate total of an entity’s selling expenses should be presented in a manner similar to the presentation of research and development and advertising expenses (outside of the tabular disclosure required for the relevant expense categories listed above), along with disclosure of how the company determines them.

The application of the guidance above may vary from industry to industry; therefore, not all income statement line items within continuing operations may be identified as a relevant expense caption.

Connecting the Dots

Although the guidance in ASU 2024-03 is industry-agnostic, it provides specific examples of DISE related to an entity with manufacturing and service operations, an entity with service operations, and a bank, respectively, to illustrate how the expected disclosures may vary depending on the nature of the entity’s operations (see Appendix A for the illustrative examples that are included in the ASU).

However, the ASU does not provide prescriptive guidance on how an entity classifies certain expenses. As a result, entities may present certain expense amounts differently and there may be a lack of comparability among entities, even those in similar industries.

Additional Voluntary Quantitative Disclosures

ASU 2024-03 does not preclude entities from providing additional voluntary quantitative disclosures. However, paragraph BC92 of the ASU notes the Board’s conclusion that “although additional voluntary disclosures may provide investors with decision-useful information, it would be important for that information to be disclosed separately from the required expense information.” Therefore, the ASU permits such voluntary disclosures to be provided as long as they are not combined with the required disaggregated expense amounts.

Diving Deeper Into the Required Disclosures

Required Expense Categories

Purchases of Inventory

The expenditures disclosed in the purchases of inventory category (1) must be within the scope of ASC 330 and, as applicable, ASC subtopics that provide industry-specific guidance on inventory (e.g., ASC 908-330) and (2) may be presented on either a costs-incurred or an expense-incurred basis (see section below on Disaggregation of Relevant Expense Captions Containing Amounts Within the Scope of ASC 330). This category does not include inventory acquired through a business combination, a joint venture formation, or the initial consolidation of a variable interest entity that is not a business. However, it does include inventory acquired in an asset acquisition.

Practical Expedient

ASU 2024-03 provides a practical expedient that allows an entity that presents an expense caption in its income statement for which substantially all of the expense is related to amounts within the scope of ASC 330 to qualitatively describe the composition of that expense caption instead of disclosing disaggregated amounts for that expense caption.

Connecting the Dots

The term “substantially all” is not defined. However, the Board did state in paragraph BC80 of ASU 2024-03 that such term “should be applied consistently with how that term is used in other areas of GAAP.” The term “substantially all” is used throughout current GAAP (e.g., in ASC 810, ASC 606, and ASC 842) and is generally interpreted to mean 90 percent or more.

Further, the ASU does not require entities to supplement the disaggregation of relevant expense captions that contain amounts within the scope of ASC 330 with accounting policy disclosures other than those required by ASC 330.

Disaggregation of Relevant Expense Captions Containing Amounts Within the Scope of ASC 330

ASU 2024-03 provides two acceptable bases for presenting disaggregated disclosures of a relevant expense caption that contains amounts recorded within the scope of ASC 330: a cost-incurred basis and an expense-incurred basis.

Amounts disclosed under the cost-incurred basis include costs incurred that were capitalized to inventory and costs incurred that were directly expensed during the current period. Under this basis, changes in inventories and other adjustments and reconciling items are disclosed in order to reconcile the costs incurred to the total relevant expense caption. Changes in inventories represents the difference in inventory included on the balance sheet between the end of the prior reporting period and the current reporting period. Other adjustment and reconciling items represents other amounts needed to reconcile costs incurred to expenses recognized, for example inventory derecognized in a deconsolidation transaction within the scope of ASC 810 or impacts of foreign currency translation in accordance with ASC 830-30.

Amounts disclosed under the expense-incurred basis include expenses related to the derecognition of inventory and any costs incurred that were directly expensed during the current reporting period.

ASU 2024-03 notes that “[i]n many cases, an entity’s chosen basis will result in disclosed amounts that are different than if the entity had chosen the alternative basis.” See Appendix B for an illustrative example of each basis.

Connecting the Dots

Paragraph BC73 of ASU 2024-03 notes that “for entities applying an inventory costing methodology other than the first-in, first-out method (such as the last-in, first-out method or the average-cost method), . . . applying an expense-incurred approach may be operationally challenging or potentially impracticable.” We believe that the expense incurred approach may also be challenging for many entities. Therefore, many entities may decide to apply the cost-incurred basis.

While entities have the ability to choose the basis to use in complying with the disclosure requirements in the ASU, the basis they choose must be applied consistently to all the required expense categories, within the expense caption that includes amounts within the scope of ASC 330. Further, if an entity changes the basis of disclosure (from cost-incurred to expense-incurred, or vice versa), prior periods presented are required to be recast for comparative purposes to reflect the current-period basis unless it is impracticable to do so.

Employee Compensation

The definition of an employee in ASU 2024-03 is aligned with that in ASC 718. The ASU notes that employee compensation “is intended to broadly capture the major types of consideration granted or issued to employees in exchange for services.” Employee compensation would be consistent with compensation costs in ASC 710, ASC 712, ASC 715, and ASC 718 and includes but is not limited to wages, bonuses, social security contributions, employee benefits and stock-based compensation. Disclosures about employee compensation should include separate disclosure of one-time employee termination benefits, when applicable, within the tabular disclosure.

An entity can elect to include in employee compensation “amounts attributable to other transactions entered into for the benefit of employees (for example, the provision of subsidized goods or services).” Such an election should be applied consistently, and an entity should “disclose both that those transactions have been included and a description of those transactions.”

Practical Expedient

ASU 2024-03 includes a practical expedient for banks or other entities that present an expense caption for salaries and employee benefits on the face of the income statement in compliance with SEC Regulation S-X, Rule 9-04.6 This expedient, if elected, allows entities to continue using the amount determined in accordance with Regulation S-X, Rule 9-04, as opposed to determining the amount of employee compensation based on the definition in the ASU.

Depreciation

Depreciation expense should be consistent with the amounts recorded in accordance with ASC 360-10.

Intangible Asset Amortization

Intangible asset amortization should be consistent with the amounts recorded in accordance with ASC 350-30.

Amortization of a finance lease right-of-use asset and of leasehold improvements that are recorded under ASC 842-20 should be included in either the depreciation or the intangible asset amortization expense categories in a manner consistent with how the entity presents amortization for similar assets.

DD&A Recognized as Part of Oil- and Gas-Producing Activities or Other Depletion

DD&A of capitalized acquisition, exploration, and development costs should be recognized as part of oil- and gas-producing activities in a manner consistent with amounts recorded under ASC 932-360 related to extractive activities (oil and gas), property, plant, and equipment, or other amounts of depletion expenses.

Disclosure of Other Items

Tabular Integration of Other Disclosure Requirements Under Existing U.S. GAAP

Certain expenses and gains or losses that may require disclosure under existing U.S. GAAP, and that are recorded in a relevant expense caption, should be presented in the same tabular disclosure on an annual and, when applicable, interim basis, for each relevant expense caption in which the expense is recorded. These items are presented in the table below.

Specified Items That Require Disclosure Under GAAP	Relevant Guidance
The amount of research and development assets acquired in a transaction other than a business combination and written off	ASC 350-30-50-1(c)
Impairment loss recognized related to an intangible asset	ASC 350-30-50-3
Impairment loss of long-lived assets classified as held and used	ASC 360-10-50-2
Gain or loss recognized in accordance with paragraphs 360-10-35-37 through 35-45 and 360-10-40-5 for long-lived assets classified as held for sale or disposed of	ASC 360-10-50-3
Each major type of cost associated with an exit or disposal activity (for example, one-time employee termination benefits, contract termination costs, and other associated costs)	ASC 420-10-50-1
Components of net benefit cost recognized (other than service cost amounts included within employee compensation)	ASC 715-20-50-1(h)
Bargain purchase gain recognized in a business combination	ASC 805-30-50-1(f)
Any gain or loss recognized upon the deconsolidation of a subsidiary or the derecognition of a group of assets in accordance with paragraph 810-10-40-3A	ASC 810-10-50-1B
Gains and losses on derivative instruments and related hedged items	ASC 815-20-25-58, ASC 815-20-25-66, and ASC 815-10-50-4A
Amortization of license agreements for program material	ASC 920-350-50-2
Impairment of license agreements for program material	ASC 920-350-50-4
Amortization of film costs	ASC 926-20-50-4A
Impairment of film costs	ASC 926-20-50-4C

Certain other expenses and gains or losses require disclosure only if those amounts are included entirely in one expense caption and not over multiple expense captions. For example, if (1) cost of sales was a relevant expense caption and (2) warranty expense was recognized entirely in the cost of sales rather than in multiple expense captions presented on the face of the income statement, warranty expense would need to be included as a separate category in the tabular disclosure for cost of sales. However, in that same example, if the warranty expense was disaggregated across multiple expense captions (e.g., also included in SG&A), separate disaggregation would not be required. These items are presented in the table below.

Specified Items Requiring Disclosure Under GAAP if Included Entirely in One Expense Caption	Relevant Guidance
Provision for expected credit losses	ASC 326-20-50-13 and ASC 326-30-50-9
Losses on firm purchase commitments	ASC 330-10-50-5
Amortization expense attributable to the expiration of an insurance or reinsurance coverage provided under a contract that transfers only significant underwriting risk	ASC 340-30-50-2
Amortization of costs to fulfill a contract with a customer	ASC 340-40-50-3
Impairment of costs to fulfill a contract with a customer	ASC 340-40-50-3
Amortization of costs to obtain a contract with a customer	ASC 340-40-50-3
Impairment of costs to obtain a contract with a customer	ASC 340-40-50-3
Amortization of capitalized implementation costs of hosting arrangements that are service contracts	ASC 350-40-50-3
Asset retirement obligation accretion expense	ASC 410-20-50-1
Loss contingencies recognized	ASC 450-20-50-1
Warranty expense (the total of expenses recognized related to aggregate changes in the liability for accruals related to product warranties issued during the reporting period and the aggregate changes in the liability for accruals related to preexisting warranties, including adjustments related to changes in estimates)	ASC 460-10-50-8
Expense related to counterparty default in own-share lending arrangements issued in contemplation of convertible debt issuance	ASC 470-20-50-2C
Aggregate gain on restructuring of payables by a debtor with a troubled debt restructuring	ASC 470-60-50-1
Gains and losses upon consolidation of a variable interest entity that is not a business	ASC 810-10-50-3
Foreign currency transaction gains or losses	ASC 830-20-50-1
Operating lease cost	ASC 842-20-50-4
Short-term lease cost	ASC 842-20-50-4
Variable lease cost	ASC 842-20-50-4
Net gain or loss recognized from sale and leaseback transactions	ASC 842-20-50-4
Gains and losses from nonmonetary transactions	ASC 845-10-50-1
Amortization of capitalized acquisition costs	ASC 944-30-50-1(c)

Other Items — Not Separately Quantified

ASU 2024-03 requires entities to disclose the amount, and a qualitative description of the composition, of other items remaining in relevant expense captions that are not separately disaggregated. The ASU notes that the detail of the qualitative disclosures should “be commensurate with the significance of the amounts being described.”

Selling Expenses

ASU 2024-03 requires an entity to present a separate total of its selling expenses in a manner similar to the presentation of research and development and advertising expenses.

The ASU does not define selling expenses. Rather, entities will make their own determination of the composition of selling expenses and disclose the definition on an annual basis. Selling expenses should include only items that are presented as expenses in the income statement. If that definition changes during an interim period, disclosure of such change is required in that interim period.

Other Relevant Considerations

Using Estimates and Other Methods

ASU 2024-03 allows entities to use accounting “estimates or other methods that produce a reasonable approximation of the amounts required to be disclosed.” In paragraph BC28(j) of the ASU, the Board notes that it decided to clarify this in the final ASU because allowing such estimates should “alleviate broad concerns about potential reporting system and process limitations in preparing the disclosures and ultimately will reduce costs.” Therefore, entities are not expected to use “transaction level detail” to determine the disaggregated amounts requiring disclosure under the ASU.

Changes in Presentation

Entities are required to apply the guidance in ASU 2024-03 consistently for all periods presented. If entities change the manner of presentation of the disclosure requirements “as a result of a change in the election of an alternative or a change in a definition of a disclosure,” they are required to:

“Disclose the reason for the change in the period of the change (in the interim and annual reporting periods affected by the change).”
“Recast the prior periods presented for comparative purposes, except for the requirements in paragraphs 220-40-50-22 through 50-23, unless it is impracticable to do so. If it is impracticable to do so, the entity shall disclose that fact and explain why it is impracticable to recast prior periods.”

The ASU clarifies that the changes described above “do not represent a change in accounting principle in accordance with Topic 250 on accounting changes and error corrections.” However, paragraph BC121 of the ASU notes that “trend information is important to investors” and, therefore, the Board expects that prior-period disclosures would be updated to provide comparative information when changes occur.

If, on the basis of a change in facts and circumstances, the entity changes the presentation of an item listed in ASC 220-40-50-22 in such a way that the item is presented in one relevant expense caption in the current reporting period and in multiple relevant expense captions in a comparative reporting period, or vice versa, the entity is not required to recast the prior-period disclosures but must instead provide the disclosure under ASC 205-10-50-1 related to changes in the basis of presentation that affect comparability.

In paragraph BC124 of the ASU, the Board states that its decisions related to changes in presentation (discussed above) should not be applied by analogy to disclosure requirements outside the scope of the ASU.

Expense Reimbursements Included in Relevant Expense Captions

ASU 2024-03 requires disclosure of expense reimbursement amounts included in relevant expense captions that are related to a cost-sharing or cost-reimbursement arrangement. Such amounts should be provided in the tabular format disclosure.

An entity that includes amounts net of expense reimbursements from another entity within a relevant expense caption may elect one of the following alternatives which should be applied consistently once elected:

Disclose separately the amount of the expense reimbursement.
Disclose the amounts of the required expense categories that are included in the relevant expense caption net of any reimbursement effects.

Further, the ASU requires entities to disclose “how expense reimbursements related to a cost-sharing or cost-reimbursement arrangement are included in the tabular format disclosure.” See Appendix A for the FASB's illustrative example in ASC 220-40-55-18 of such a disclosure.

Entities that include expense reimbursement to another entity in a relevant expense caption should provide separate disclosure of the amount of expense reimbursement in the tabular format disclosure.

Liability-Related Expenses

ASU 2024-03 clarifies that certain liability-related expenses may be excluded from the disaggregation requirements. The ASU provides a principle-based framework to assess the circumstances in which entities could exclude certain liability-related expenses from the disaggregation requirements, rather than providing a discrete list of such items. Generally, the types of expenses that may be excludable are “based on an obligation that is an estimate of an uncertain amount that will be settled in the future.”

Examples of liability-related expenses that may meet the criteria to be excluded from the disaggregation requirements include amounts related to provisions for contract losses, claims and claim adjustments, and asset retirement obligations. Examples of expenses that do not meet the criteria to be excluded from the disaggregation requirements include “amounts related to accruals for liabilities to pay for goods or services that have been received or supplied but have not been paid or invoiced, including amounts due to employees (for example, amounts relating to accrued bonuses, vacation pay, or pension obligations).”

Effective Dates and Transition

Effective Dates

ASU 2024-03 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.

Transition

PBEs are required to adopt the ASU prospectively. However, PBEs are permitted to apply the amendments in the ASU retrospectively.

Connecting the Dots

Management may need to exercise judgment in applying certain aspects of ASU 2024-03, specifically with respect to the use of estimates or other methods to produce a reasonable approximation of the amounts required to be disclosed. In addition, we believe that an entity may need to modify its existing financial reporting systems and processes to compile and present the information that would be required under the new amendments. Therefore, entities may need to create or modify their internal controls. We encourage PBEs to consider these potential challenges early in the transition period so they have sufficient time to consider any changes to system or controls that may be required.

Appendix A — Examples From ASU 2024-03

The examples below have been reproduced from ASU 2024-03.

ASC 220-40

Example 1: Disaggregation of Income Statement Expenses by an Entity with Manufacturing and Service Operations

55-3 This Example illustrates one type of tabular format disclosure that an entity could use to disclose disaggregated expense amounts in accordance with paragraphs 220-40-50-1 through 50-34. This Example also illustrates the disclosure of selling expenses in accordance with paragraphs 220-40-50-35 through 50-36.

55-4 For the year ended December 31, 20X4, Entity X, which is a manufacturer with significant service operations, presents the following comparative income statement.

55-5 Entity X provides a disclosure that disaggregates the cost of products sold; cost of services; and selling, general, and administrative expense captions into the categories listed in paragraph 220-40-50-6. Those expense captions were identified as relevant expense captions because those captions contain one or more of the expense categories listed in paragraph 220-40-50-6. Even though Entity X presents other expense captions on the face of its consolidated income statement, such as interest expense and income tax expense, those expense captions do not contain any of the expense categories listed in paragraph 220-40-50-6 (including those described in paragraphs 220-40-50-10 through 50-11); therefore, those expense captions do not need to be disaggregated.

55-6 Because cost of products sold contains amounts related to inventory within the scope of Topic 330, Entity X may elect to disclose the amounts under a cost-incurred basis or expense-incurred basis. In this Example, Entity X chooses to disclose the disaggregation of cost of products sold on a cost-incurred basis (that is, the amounts disclosed include costs incurred that were capitalized to inventory during the current reporting period and costs incurred that were directly expensed during the current reporting period) in accordance with paragraph 220-40-50-31(a). Because Entity X discloses the required expense categories using a cost-incurred basis, the entity discloses the changes in inventories caption and the other adjustments and reconciling items caption in accordance with paragraphs 220-40-50-32 through 50-33. In accordance with paragraph 220-40-50-34, Entity X qualitatively describes the nature of amounts included in other adjustments and reconciling items. If Entity X had instead disclosed the required expense categories on an expense-incurred basis (that is, the amounts disclosed comprise expense amounts related to the derecognition of inventory that was previously capitalized in accordance with Topic 330 and any costs incurred that were directly expensed during the current reporting period) in accordance with paragraph 220-40-50-31(b), then the changes in inventories caption and the other adjustments and reconciling items caption would not be necessary in the disaggregation disclosure.

55-7 Entity X also recognizes impairment of property, plant, and equipment classified as held and used in selling, general, and administrative expenses and, therefore, includes that impairment as a separate category in the tabular format disclosure in accordance with paragraph 220-40-50-21(c).

55-8 Entity X recognizes expenses associated with warranty accruals entirely within cost of products sold and, therefore, includes warranty expense as a separate category in accordance with paragraph 220-40-50-22(k).

55-9 Entity X recognizes operating lease costs in both cost of services and selling, general, and administrative expenses. Therefore, in accordance with paragraph 220-40-50-22, Entity X is not required to separately disclose the amounts of cost of services and selling, general, and administrative expenses that are attributable to operating lease cost. Instead, those expenses are included in the amount for other items for each relevant expense caption in accordance with paragraph 220-40-50-30.

55-10 Entity X recognizes amounts related to the initial recognition and subsequent measurement of a liability for an environmental obligation in cost of products sold (see Subtopic 410-30 on asset retirement and environmental obligations). In accordance with paragraph 220-40-50-16, Entity X is not required to disaggregate that amount into the expense categories listed in paragraph 220-40-50-6. Instead, that expense is included in the amount for other items in accordance with paragraph 220-40-50-30.

55-11 Entity X provides the following disclosure.

55-12 In addition to the tabular format disclosure illustrated in paragraph 220-40-55-11, Entity X also must disclose its selling expenses and how it defines selling expenses in accordance with paragraphs 220-40-50-35 through 50-36.

Selling Expenses

During the years ended December 31, 20X4, 20X3, and 20X2, selling expenses were $13,425, $12,123, and $11,585, respectively. The entity’s selling expenses include those expenses related to marketing and promotional activities and client relationship management.

Example 2: Disaggregation of Income Statement Expenses by an Entity with Service Operations

55-13 This Example illustrates one type of tabular format disclosure that an entity could use to disclose disaggregated expense amounts in accordance with paragraphs 220-40-50-1 through 50-34. This Example also illustrates the disclosure of selling expenses in accordance with paragraphs 220-40-50-35 through 50-36.

55-14 For the year ended December 31, 20X4, Entity X, which is a services provider, presents the following comparative income statement.

55-15 Entity X provides a disclosure that disaggregates the cost of sales; depreciation and amortization; selling, general, and administrative expenses; and research and development expenses captions into the categories listed in paragraph 220-40-50-6. Those expense captions were identified as relevant expense captions because those captions contain one or more of the expense categories listed in paragraph 220-40-50-6. Even though Entity X presents other expense captions on the face of its consolidated income statement, such as interest expense and income tax expense, those expense captions do not contain any of the expense categories listed in paragraph 220-40-50-6 (including those described in paragraphs 220-40-50-10 through 50-11); therefore, those expense captions do not need to be disaggregated.

55-16 Entity X also recognizes one-time employee termination benefits in cost of sales; selling, general, and administrative expenses; and research and development expenses and, therefore, includes this amount as a separate category in the tabular format disclosure in accordance with paragraph 220-40-50-21. Paragraph 220-40-50-21(e) requires that an entity disclose the amount of each major type of cost associated with an exit or disposal activity (for example, one-time employee termination benefits) that is recognized in each relevant expense caption in the same tabular format in which the disclosures required by paragraph 220-40-50-6 are provided. Because one-time employee termination benefits are a form of employee compensation, Entity X discloses that its employee compensation category excludes one-time employee termination benefits because one-time employee termination benefits are disclosed as a separate category.

55-17 Entity X has a funded research and development cost-sharing arrangement with a strategic partner. Entity X recognizes an expense reimbursement from the strategic partner in research and development expenses and, in accordance with paragraph 220-40-50-26(a), elects to separately disclose the amount of that expense reimbursement. If Entity X had elected to present a relevant expense caption net of an expense reimbursement from another entity, it would have been required to disclose the amount of the expense categories that are included in each relevant expense caption. Additionally, in accordance with paragraph 220-40-50-29, Entity X qualitatively describes the expense categories to which the reimbursement relates.

55-18 Entity X provides the following disclosure.

55-19 In addition to the tabular format disclosure illustrated in paragraph 220-40-55-18, Entity X also must disclose its selling expenses and how it defines selling expenses in accordance with paragraphs 220-40-50-35 through 50-36.

Selling Expenses

During the years ended December 31, 20X4, 20X3, and 20X2, selling expenses were $224,536, $223,493, and $231,892, respectively. The entity’s selling expenses include those expenses related to advertising and certain customer acquisition-related costs.

Example 3: Disaggregation of Income Statement Expenses by a Bank

55-20 This Example illustrates one type of tabular format disclosure that an entity could use to disclose disaggregated expense amounts in accordance with paragraphs 220-40-50-1 through 50-34. This Example also illustrates the disclosure of selling expenses in accordance with paragraphs 220-40-50-35 through 50-36.

55-21 For the year ended December 31, 20X4, Entity X, which is a bank, presents the following comparative income statement.

55-22 Entity X provides a disclosure that disaggregates the occupancy and depreciation expense and other expense captions into the categories listed in paragraph 220-40-50-6. Those expense captions were identified as relevant expense captions because those captions contain one or more of the expense categories listed in paragraph 220-40-50-6. In this Example, even though Entity X also presents separate expense captions on the face of its consolidated income statement for interest expense, provision for (recapture of) credit losses, data processing, advertising and marketing, professional fees, and income tax expense, those expense captions do not contain any of the expense categories listed in paragraph 220-40-50-6 (including those described in paragraphs 220-40-50-10 through 50-11); therefore, those expense captions do not need to be further disaggregated. Entity X applies the practical expedient for employee compensation described in paragraph 220-40-50-20 and elects to not repeat the amount presented on the face of the income statement in the notes to financial statements.

55-23 Entity X recognizes operating lease cost entirely within occupancy and depreciation expense and, therefore, includes operating lease cost as a separate category in accordance with paragraph 220-40-50-22(p).

55-24 Entity X provides the following disclosure.

55-25 In addition to the tabular format disclosure illustrated in paragraph 220-40-55-24, Entity X also must disclose its selling expenses and how it defines selling expenses in accordance with paragraphs 220-40-50-35 through 50-36.

Selling Expenses

During the years ended December 31, 20X4, 20X3, and 20X2, the entity defined selling expenses to be the same as its advertising and marketing expenses, which are presented on the face of its consolidated income statement. The entity’s advertising and marketing expenses include costs incurred for advertising, market research, and business development.

Appendix B — Example of the Application of the Cost-Incurred and Expense-Incurred Bases for a Manufacturing Company

The example below illustrates the application of both the cost-incurred and expense-incurred bases in a manufacturer’s determination of the disclosure of the disaggregation of relevant expense captions that contain amounts within the scope of ASC 330 after the adoption of ASU 2024-03. Only the information relevant to the cost of goods sold expense caption is provided below; entities should note that the other relevant expense captions on the face of the income statement would also need to be disaggregated and disclosed in the footnote in accordance with the ASU.

As described in Purchases of Inventory, the ASU establishes the cost-incurred and expense-incurred bases but does not provide explicit guidance on the categorization of all possible expenses within the scope of ASC 330. Therefore, judgment is required to determine the appropriate categories for certain activities, such as inventory cost adjustments. This example illustrates one method of presentation; however, there may be other acceptable methods.

Example

Background

Company A, a U.S. company that manufactures and sells cheese, has a cheese manufacturing facility in Canada. It purchases its raw materials, including milk, enzymes, and packaging materials, from a third party. Company A uses a two-day manufacturing process to make the cheese from milk received from its vendors. Thereafter, the cheese is aged for 6 months before further processing and packaging. Company A sells its cheese within 30 days of packaging.

Company A applies standard costing to estimate the inventory cost. Purchase price variances and manufacturing variances are recognized directly in its income statement. Management estimates the amount of variance that should be capitalized to inventory at the end of each reporting period.

Overhead costs include the following:

Utilities of the production area.
Rents related to the production area.
Indirect labor related to employee compensation for quality control, inspection, and supervisory activities.
Distribution and warehousing costs.
Costs to transport goods between company-owned facilities.
Depreciation of production-related capital assets.
Repairs and maintenance on production equipment.
Administrative costs for the manufacturing facility.
Taxes allowable as a deduction under Internal Revenue Code Section 164 (excluding state, local, and foreign income taxes)

Company A provides a disclosure that disaggregates cost of goods sold, as a relevant expense caption, into the categories listed in ASC 220-40-50-6. Cost of goods sold was identified as a relevant expense caption because that caption contains one or more of the expense categories listed in ASC 220-40-50-6. Even though A presents other expense captions on the face of its consolidated income statement, those expense captions are not included in this example.

Company A may elect to disclose the disaggregation of cost of goods sold that includes amounts related to inventory within the scope of ASC 330 under either a cost-incurred basis or an expense-incurred basis. In many cases, the amounts disclosed by required expense category may be different under these two bases. The tables below illustrate the results of the application of each basis to the amounts disclosed in this example. In applying both bases, A uses estimates to determine a reasonable approximation of the amounts required to be disclosed, as permitted by the standard.

The numbers in red represent the following expense categories:

Facts

Changes in the inventory balance were as follows for the year ended December 31, 20X0:

Cost of goods sold is calculated as follows:

Disclosure of Disaggregated Cost of Goods Sold as a Relevant Expense Caption

Cost-Incurred Basis

If A elects to disclose the required expense categories on a cost-incurred basis in accordance with ASC 220-40-50-31(a), it would disclose the “change in inventory” caption and the “other adjustments and reconciling items” caption in accordance with ASC 220-40-50-32 through 50-33. In addition, under ASC 220-40-50-30 and ASC 220-40-50-34, A would qualitatively describe the nature of the amounts included in other cost of goods sold and other adjustments and reconciling items; these descriptions are not included in the illustration below.

Expense-Incurred Basis

If A instead elects to disclose the required expense categories on an expense-incurred basis in accordance with ASC 220-40-50-31(b) (i.e., the “amounts disclosed comprise expense amounts related to the derecognition of inventory that was previously capitalized in accordance with Topic 330 and any costs incurred that were directly expensed during the current reporting period”), neither the change in the inventory caption nor the other adjustments and reconciling items caption would be required in the disaggregation disclosure. Under ASC 220-40-50-30, A would qualitatively describe the nature of the amounts included in other cost of goods sold; that description is not included in the illustration below.

As illustrated above, in many cases there will be differences in the amounts disclosed by required expense category between the cost-incurred and expense-incurred bases. Below is a comparison of the cost-incurred and expense-incurred bases for several common transactions.

Purchases and Relief of Inventory

Under the cost-incurred basis, the purchases of inventory expense category consists of purchases made during the period at actual cost (i.e., raw materials purchases at standard cost and current-period purchase price variance incurred, which is initially directly expensed by Company A in the example above).

By contrast, under the expense-incurred basis, the purchases of inventory expense category consists of the costs associated with inventory sold in the current period. In the example above, it includes the portion of inventory relieved due to sale at standard cost related to raw materials and the purchase price variance related to inventory sold, with the purchase price variance calculated as the sum of current-period purchase price variance and relief of variance capitalized in the prior period sold in the current period, less variance associated with inventory purchased in the current period and not sold (i.e., capitalized in the current period). This same concept applies to the other relevant expense categories (i.e., employee compensation, depreciation, and other cost of goods sold) and other variances (e.g., labor and overhead manufacturing variance).

Change in Excess and Obsolescence Reserve

Under the cost-incurred basis, the change in the excess and obsolescence reserve is included in change in inventory in the example above. As noted above, the ASU does not include specific guidance on the presentation of all expenses within the scope of ASC 330. Therefore, judgment is required to determine the location of such items within the tabular presentation required by the ASU and there may be alternative presentations that are acceptable.

By contrast, under the expense-incurred basis, the amount associated with the change in the excess and obsolescence reserve recorded in cost of goods sold is disaggregated and included in the required expense categories on the basis of the natural expense category of the costs incurred. Similar considerations may apply to other transaction types such as inventory count adjustments and manufacturing spoilage expense.

Outbound Shipping and Handling

Unreimbursed outbound shipping and handling expenses consist of costs incurred during the period to deliver product to customers and directly expensed since they are not capitalizable under ASC 330. Therefore, under both approaches, outbound shipping and handling is included in other costs of goods sold.

Contacts

	Kristin Bauer Audit & Assurance Partner Deloitte & Touche LLP +1 312 486 3877 kbauer@deloitte.com		Christine Mazor Audit & Assurance Partner Deloitte & Touche LLP +1 212 436 6462 cmazor@deloitte.com
	Kathleen Malone Audit & Assurance Managing Director Deloitte & Touche LLP +1 203 761 3770 kamalone@deloitte.com		Sean May Audit & Assurance Partner Deloitte & Touche LLP +1 415 783 6930 semay@deloitte.com
	Blair McCauley Audit & Assurance Managing Director Deloitte & Touche LLP +1 415 783 4030 bmccauley@deloitte.com		Ignacio Perez Audit & Assurance Managing Director Deloitte & Touche LLP +1 203 761 3379 igperez@deloitte.com
	Disha Buch Audit & Assurance Senior Manager Deloitte & Touche LLP +1 312 486 3221 dbuch@deloitte.com		Noemi Coronado Audit & Assurance Senior Manager Deloitte & Touche LLP +1 212 436 7438 nocoronado@deloitte.com
	Lauren Horner Audit & Assurance Manager Deloitte & Touche LLP +1 415 783 7567 lahorner@deloitte.com

Footnotes

FASB Accounting Standards Update (ASU) No. 2024-03, Disaggregation of Income Statement Expenses.

For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

FASB Proposed Accounting Standards Update, Income Statement — Reporting Comprehensive Income — Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.

SEC Regulation S-X, Rule 3-05, “Financial Statements of Businesses Acquired or to Be Acquired.”

SEC Regulation S-X, Rule 3-09, “Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”

SEC Regulation S-X, Rule 9-04, “Statements of Comprehensive Income.”

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