December 2, 2021
The Financial Accounting Standards Advisory Council (FASAC) held its quarterly meeting on Thursday, December 2, 2021. The FASB chair provided highlights on FASB activities that were not otherwise on the agenda for the Council meeting, and SEC and PCAOB staff members commented on current issues and activities. Council members discussed the following topics:
Financial Performance Reporting – Disaggregation of Performance Information: Council members discussed the feedback on disaggregation received from the FASB’s 2021 Invitation to Comment, Agenda Consultation (2021 Agenda Consultation), and provided input about expense captions for which there is the greatest need for disaggregation as well as disaggregation approaches for those expense captions.
Investors and other financial statement users stressed that cost of goods sold and selling, general, and administrative expenses would be the best expense caption candidates for further disaggregation. For financial institutions, some investors and other financial statement users suggested further disaggregation of existing labor and occupancy expenses. Investors and other financial statement users also commented on the types of information that they would want to have disaggregated from these expense captions, such as labor costs, technology costs, and recurring/nonrecurring expenses. Investors and other financial statement users explained that greater disaggregation would assist them in analyzing a company’s margins, forecasting future results, and understanding the extent to which costs are fixed or variable.
Most Council members, including nearly all preparers and some investors and other financial statement users, supported the FASB pursuing greater disaggregation of the income statement through a principles-based approach when compared to a prescriptive approach. Specifically, Council members expressed interest in a principles-based approach that leverages quantitative thresholds to determine how (and to what extent) existing captions should be disaggregated. Some Council members stated that a principles-based approach could be applied across companies with different business models and would be less costly for preparers to implement than a prescriptive approach. Some preparers commented that a prescriptive approach would be more costly to apply, particularly when considering that the current expense captions include allocations of natural costs, such as labor. Preparers also expressed concern about competitive harm, although investors and other financial statement users stated that they did not anticipate competitive harm at the level of disaggregation that they are requesting. Practitioners indicated that a principles-based approach could result in greater audit costs given the additional judgment that would be required when compared to a prescriptive approach.
Investors and other financial statement users generally indicated that comparable and consistent information among companies is important and that additional disclosure about disaggregation would be helpful.
Other disaggregation approaches that some Council members suggested the Board pursue include:
- Exploring a phased approach focusing on one aspect of disaggregation at a time (for example, selling, general, and administrative expenses or cost of goods sold).
- Developing standard definitions that could bridge the gap between a prescriptive and principles-based approach while maintaining some level of comparability.
- Creating a principle that requires disaggregation of the existing line items through additional disclosure.
FASAC Meeting Recaps are provided for those interested in following the activities of the FASAC. Official positions of the FASB are reached only after extensive due process & deliberations. More details on the FASAC’s input on the FASB’s projects can be found within the meeting minutes, which will be published on the FASB website in the coming weeks.