The Financial Accounting Standards Board (FASB or Board) has issued a proposed Accounting Standards Update (ASU), Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40)—Disaggregation of Income Statement Expenses, which is intended to improve disclosures about a public business entity’s (PBE) expenses.
The proposal is intended to address requests from investors for more detailed information about the types of expenses (including employee compensation, depreciation, and amortization) in commonly presented income statement line items such as cost of sales, selling, general, and administrative expenses (SG&A), and research and development. The Board expects that nearly all PBEs would disclose more information under the proposed ASU about the components of these type of expenses than is disclosed in financial statements today. The Board believes the incremental information required under the proposed ASU should allow investors to better understand the components of an entity’s expenses so that they can make their own judgments about the entity’s performance, and more accurately forecast expenses. In turn, this should enable investors to better assess an entity’s prospects for future cash flows and compare its performance both over time and with that of other entities.
If finalized, the proposed ASU would require that a PBE on an annual and interim basis:
- Disclose the amounts of (a) inventory and manufacturing expense, (b) employee compensation (both direct and indirect employee labor costs to the extent that they relate to manufacturing activities), (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 is an expense caption presented on the face of the income statement within continuing operations that contains any of the above expense categories. For example, because amortization of a finance lease right-of-use asset and amortization of leasehold improvements would be considered a subset of either depreciation or intangible asset amortization, the presence of either expense would cause an expense caption presented on the face of the income statement to be considered a relevant expense caption subject to further disaggregation under the proposed ASU. In contrast, interest expense and income tax expense would not be relevant expense captions because those expense captions do not contain any of the expense categories listed in (a)‑(e) above. - Disclose a further disaggregation of inventory and manufacturing expense (from 1 above) 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 those that are either capitalized to inventory or expensed as incurred during the current period. On an annual basis, an entity would disclose its definition of other manufacturing expenses. - 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. Specifically, the proposed ASU would require certain amounts already disclosed under existing GAAP to also be disclosed in the tabular format disclosure if the amounts are recognized in a relevant expense caption. For example, the guidance in subtopic 926-20 requires that an entity disclose the amount of amortization of film costs and the caption in the income statement where the amortization is recorded. Accordingly, if the amortization of film costs is included in a relevant expense caption, it would be required to be incorporated into the proposed tabular format disclosure.
The proposed ASU would require that an entity incorporate other existing disclosures into the tabular format disclosure. These include (a) specified expenses, gains, and losses and the amount recognized in each relevant expense caption for which there is an existing requirement to disclose both the amount and caption in the income statement where they are included and (b) specified expenses, gains and losses for which there is an existing requirement to disclose the amount, but no requirement to disclose the caption in the income statement where they are included if the amount is recorded entirely in one expense caption that is also a relevant expense caption determined in accordance with the guidance in proposed paragraph 220-40-50-10.
The proposed disclosures required under item (b) above are explained in paragraph BC73 of the proposed ASU’s basis for conclusion. For example, the amounts of amortization of costs to fulfill a contract with a customer and warranty accruals are required to be disclosed under existing GAAP, but there is no existing requirement to disclose the caption in the income statement to which those expenses are recorded. Therefore, if the amortization of costs to fulfill a contract with a customer and warranty expenses were classified entirely in cost of goods sold, and cost of goods sold was determined to be a relevant expense caption, then an entity would be required to include the amortization of costs to fulfill a contract with a customer and warranty expenses in the tabular format disclosure that disaggregates cost of goods sold. The disclosure would not be required under the proposed ASU if the amortization of costs to fulfill a contract with a customer and warranty expense were not classified entirely in cost of goods sold. - Disclose a qualitative description of the amounts remaining in relevant expense captions or in inventory and manufacturing expense that are not separately disaggregated quantitatively.
The proposed ASU also would require that a PBE qualitatively describe the nature of manufacturing costs incurred that are either capitalized to inventory or expensed in the current period (including any other items needed to reconcile costs incurred to expenses recognized) if those costs do not fall within the required categories. For PBEs without manufacturing activities, the proposed ASU would require a description of other costs capitalized to inventory during the period. - Disclose the total amount of selling expenses and, on an annual basis, an entity's definition of selling expenses.
The FASB provided additional guidance and examples to illustrate application of the proposed amendments.
The proposed amendments would be applied on a prospective basis, with the option to provide the information on a retrospective basis. The FASB will determine the effective date of the proposed ASU and whether it can be adopted early after it considers stakeholders’ feedback on the proposal.
Stakeholders are encouraged to review and provide input on the proposed ASU by October 30, 2023.
