Proposed Accounting Standards Update
Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses
This document represents the view of the FASB staff. The views herein do not necessarily reflect the views of the FASB. Official positions of the FASB are determined only after extensive due process and deliberation.
On July 31 2023, the Financial Accounting Standards Board (FASB) issued proposed Accounting Standards Update (ASU), Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. Stakeholders are asked to review and provide comment on the proposed ASU by October 30, 2023.
Why Is the FASB Issuing This Proposed ASU?
Feedback from investors on the FASB’s 2021 agenda consultation project indicated that disclosure of disaggregated information about expenses is critically important to understand a company’s performance, assess a company's prospects for future cash flows, and compare a company’s performance both over time and with that of other companies.
Currently, there are no broad requirements in the FASB Accounting Standards Codification® to disaggregate expenses presented on the face of the income statement. Investors noted that, as a result, there is diversity in the amount of disaggregated expense information that is provided by companies. Investors specifically indicated that more granular information about cost of sales and selling, general, and administrative expenses (SG&A) would assist them in better understanding a company’s cost structure and forecasting future cash flows.
The Board is issuing this proposed ASU to improve the disclosures about a public company’s expenses and to address requests from investors for more detailed information about the types of expenses (including employee compensation, depreciation, amortization, and costs incurred related to inventory and manufacturing activities) in commonly presented expense captions (such as cost of sales, SG&A, and research and development). The Board expects that nearly all public companies would disclose more information under this proposal about the components of those expense captions than is disclosed in financial statements today. That incremental information should allow investors to better understand the components of a company’s expenses, make their own judgments about the company’s performance, and more accurately forecast expenses, which in turn should enable investors to better assess a company’s prospects for future cash flows. It also should provide contextual information for a company’s preparation and an investor’s consideration of management’s discussion and analysis of financial position and results of operations (MD&A).
What Would the Proposed ASU Do?
The proposed ASU would require detailed disclosure, in the notes to financial statements, of specified categories underlying certain expense captions. The proposed amendments would require that a public company, on an annual and interim basis:
- Disclose the amounts of (a) inventory and manufacturing expense, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, and (e) depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities (DD&A) included in each relevant expense caption. A relevant expense caption would be an expense caption presented on the face of the income statement within continuing operations that contains any of those expense categories.
- Disclose a further disaggregation of inventory and manufacturing expense into the following categories of costs incurred: (a) purchases of inventory, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, and (e) DD&A. Costs incurred would include amounts that are either capitalized to inventory or, if not capitalized to inventory, directly expensed (expensed as incurred) during the current period. On an annual basis, a company would disclose its definition of other manufacturing expenses for the purpose of disaggregating inventory and manufacturing expense.
- Include certain amounts that are already required to be disclosed under existing generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.
- Disclose a qualitative description of the amounts remaining in relevant expense captions or in inventory and manufacturing expense that are not separately disaggregated quantitatively.
- Disclose the total amount of selling expenses and, on an annual basis, a company's definition of selling expenses.
How Would the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Would They Be an Improvement?
The amendments in this proposed ASU would improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The key proposed amendments in the ASU would:
The amendments in this proposed ASU would improve financial reporting by requiring that public companies disclose additional information about specific expense categories on an annual and interim basis in the notes to financial statements. This information is generally not presented in the financial statements today.
The amendments in this proposed ASU would not change or remove existing disclosure requirements. However, the proposed amendments would affect where information arising from certain existing disclosure requirements appears in the notes to financial statements because public companies would be required to include that information in the same tabular format disclosure as the other disaggregation requirements in this proposed ASU.
Who Would Be Affected by the Proposed ASU?
The amendments in this proposed ASU would apply to all public business entities.
When Would the Amendments in the Proposed ASU Be Effective?
The disclosures in this proposed ASU would be provided on a prospective basis, with an option for companies to apply the guidance retrospectively. The Board will determine the effective date and whether early application should be permitted after it considers stakeholders’ feedback on the proposed amendments.
The following example illustrates new disclosures for a manufacturing company that presents cost of products sold, cost of services, and SG&A on the face of its income statement. Additional detail on this illustrative example and other illustrative examples can be found in the proposed ASU.