The Financial Accounting Standards Board released an
The standard comes in response to demand from investors for more detailed, disaggregated information about expenses.
"This has been an effort that we've been working on for quite some time, certainly prior to my tenure, but it's been a high priority by investors for a long period of time," FASB board member Fred Cannon told Accounting Today. "It was something we heard both in 2016 and 2021 in our agenda outreach, that it was their highest priority during this time period, and we had to work with all stakeholders to come up with what I believe is a practical solution that provides critical information to investors. From my standpoint, it's exciting to get this moving forward and find something that is both workable but provides critical information."
During the agenda consultation and other outreach, investors told FASB that expense information is critically important in understanding a company's performance, assessing its prospects for future cash flows, and comparing its performance over time and with that of other companies. They indicated that more granular expense information would help them better understand an entity's cost structure and forecasting future cash flows.
"This project was one of the highest priority projects cited by investors in our extensive outreach with them as part of our 2021 agenda consultation initiative," said FASB chair Richard Jones in a statement. "We heard time and again from investors that additional expense detail is fundamental to understanding the performance of an entity and we believe that this standard is a practical way of providing that detail."
The ASU addresses this feedback by requiring public companies to disclose, in the notes to financial statements, specified information about certain costs and expenses at each interim and annual reporting period. Specifically, they will be required to:
1. Disclose the amounts of (a) purchases of inventory; (b) employee compensation; (c) depreciation; (d) intangible asset amortization; and (e) depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities (or other amounts of depletion expense) included in each relevant expense caption.
2. Include certain amounts that are already required to be disclosed under current GAAP in the same disclosure as the other disaggregation requirements.
3. Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
4. Disclose the total amount of selling expenses and, in annual reporting periods, an entity's definition of selling expenses.
"Essentially, what the standard will do is it will require firms to break out in a footnote certain components of the income statement line items including compensation, purchase of inventory, depreciation, depletion and amortization, to the extent that those are included in that line item on the income statement," said Cannon. "We expect things like cost of sales, cost of goods sold, SG&A [selling, general and administrative expenses], research and development to be broken out in tabular format on a quarterly basis with these key key components. The reason this is so important to investors is to be able to put this into their urban models, and have better sense and better ability to forecast future cash flows with the trends they see in these disparate items that are currently aggregated. We have heard consistently from investors how critical this information is."
The extra reporting may be hard work for financial statement preparers as well. "We've also heard, to be honest, from preparers, that it can be difficult to prepare, and so we really spent a long period of time making sure that this is operational to preparers, as well as providing critical information to users," said Cannon.
The degree of difficulty will probably differ, depending on the company, but it may be hardest for manufacturing companies that do business around the world.
"We heard throughout this process that this first it will vary significantly across different preparers," said Cannon. "Some preparers told us this is relatively straightforward. Others, on the other hand, especially manufacturers of global operations that perhaps have been acquiring companies throughout the globe, this could be very difficult and costly. The board went into this with our eyes wide open that this wasn't going to be a cost-free exercise for preparers. But the decision we came up with was that this information is so critical to users that we would move ahead with the standard. At the same time, since the exposure draft, we underwent a number of changes in order to address the cost concerns from preparers."
One of the biggest changes involved the cost of goods sold. "Perhaps the most significant was on the inventory issue,: said Cannon. "Cost of goods sold would have had a two-step disaggregation in the exposure draft, and we simplified that to one step that would just break out purchases of inventory as well as compensation, depreciation and amortization. We heard from preparers that that would be much more straightforward than our initial proposal, especially manufacturers. And we heard from users that in some ways, it would be more intuitive information that they would be getting."
FASB also decided to give more time for implementing the new standard and didn't require a retrospective approach to look back for information.
The amendments in the ASU are effective for annual reporting periods starting after Dec. 15, 2026, and interim reporting periods beginning after Dec. 15, 2027, although early adoption is permitted. It will be effective for the 2027 annual 10-K for calendar year reporters and then it will be required for each interim period following going forward.
For users of financial statements such as investors and financial analysts, the adjustment shouldn't be difficult for forecasting future cash flow. "I think the way we structured this for users, it's going to be fairly straightforward," said Cannon, who was formerly a sell-side analyst and research director. Many analysts already have a model in Excel for items like cost of goods sold. "They're going to have to insert three or four more lines into their Excel spreadsheet, and these breakouts will aggregate to that number," said Cannon. "It's something that investors have been saying for a significant amount of time that would be useful"
Eventually their forecasting abilities may improve as a result of the standard. "Their accuracy in terms of improving their forecasts of, say, cost of sales will take time to improve, because they won't initially see the trends in compensation and in these other line items," said Cannon. "But over time, as those trends develop, they'll improve their ability to better forecast those line items on the income statement."
In addition to the
While FASB is no longer trying to converge its U.S. GAAP standards with the International Accounting Standards Board's International Financial Reporting Standards, the two boards are following some similar aspects in terms of disaggregation and the update to IAS 18 (which has been superseded by IFRS 15) is scheduled for implementation in the same timeframe that FASB's new standard is implemented.
"Theirs is a little bit different," said Cannon. "It does not include purchase of inventory, so that doesn't have to be broken out. In addition, they have a different kind of format for the information to be disclosed, but it does include breakouts in compensation, amortization and depreciation, so there are some similarities and the timeframe is similar."
The IASB standard also goes a bit further by changing the income statement presentation, while FASB's is a disclosure-only project.
The new standard may help investors analyze the impact of inflation and other factors, such as increased tariffs, by disaggregating items like purchases of inventory.
"Inflation is tricky to forecast, but it certainly will give investors a better ability to deal with inflationary aspects of the income statement and how they impact the overall earnings of the company," said Cannon.
