ASU Addresses Disaggregation of Income Statement Expenses

• On Nov. 4, 2024, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2024-03, “Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses” (DISE).
• The ASU requires public business entities (PBEs) to disclose details about specific expenses (such as inventory purchases, employee compensation, depreciation, amortization, and depletion) included within commonly presented income statement expense captions.
• The amendments are intended to address investor calls for greater insight into entities’ financial performance – specifically, their expenses. Because current U.S. GAAP imposes few requirements on an entity’s income statement presentation, there is diversity in the level of detail that PBEs choose to provide beyond broad expense captions such as cost of goods sold or selling, general, and administrative (SG&A) expenses.
• While the ASU requires new disclosures in the notes to the financial statements, it does not affect the presentation of expense captions on the face of the income statement.
• PBEs must comply with the requirements in financial statements issued for fiscal years beginning after Dec. 15, 2026, and interim periods within fiscal years beginning after Dec. 15, 2027.¹ PBEs must apply the amendments prospectively, with an option for retrospective application. Early adoption is permitted.

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Breaking it down

Background

The objective of the DISE ASU is to provide greater detail about certain expenses, enabling users to better understand an entity’s operations and cost structure. Investors have long called for greater transparency in this area, since the broad captions typically found on the face of a PBE’s income statement can include a range of expense categories of dissimilar natures. In developing the final ASU, the board ultimately prioritized disclosures of certain expenses likely to be material across industries as opposed to requiring entities to perform a full disaggregation of natural expenses.

DISE is only one of several recent FASB projects that address financial statement users’ feedback to improve the decision-usefulness of financial statements – for example, by allowing users to better understand an entity’s financial performance – and to enhance users’ ability to perform financial analysis and modeling of amounts reported in the financial statements and related disclosures. In 2023, the FASB finished a project on reporting that requires PBEs to provide additional information on significant segment expenses included in a reportable segment’s measure of segment profit or loss. Additionally, the FASB recently finished a project on income that requires entities to provide additional details on their effective tax rate reconciliation, among other requirements.

Scope

The new expense disaggregation requirements apply only to PBEs. The ASU does not provide any scope exceptions, nor does it include industry-specific guidance.

Relevant expense captions

For relevant expense captions, which are defined as any income statement caption within continuing operations containing one or more of the following categories, the PBE is required to disclose the amounts of:

• Purchases of inventory
• Employee compensation
• Depreciation
• Intangible asset amortization
• Depreciation, depletion, and amortization (DD&A) recognized as a part of oil- and gas-producing activities or other amounts of depletion expense (for example, mining)

These disaggregated expense captions must be disclosed in a tabular format in the notes to the financial statements for all annual and interim reporting periods (see below for an example).

An entity also is required to incorporate within the tabular disclosure the amount of certain other expenses, gains, or losses subject to existing disclosure requirements in U.S. GAAP (refer to the section “Integration of other disclosure requirements”). In addition, certain qualitative disclosures might be necessary for certain relevant expense captions (refer to the section “Other items remaining in relevant expense captions”).

Crowe observation: Entities should review the composition of all income statement captions to determine which captions include one or more of the previously mentioned expense categories and ensure that all relevant expense items are completely identified. While income statement captions vary by industry and even among industry peers, some examples of common income statement captions that are likely to be relevant include cost of goods sold, cost of services, research and development, and SG&A expenses.

If an entity presents an expense caption on its income statement that is composed entirely of one of the categories previously listed, the entity is not required to provide a duplicate disclosure in the notes to the financial statements. For example, an entity that presents depreciation on a separate line in the income statement does not need to duplicate disclosure of that specific caption. However, if an entity presents a combined amount of depreciation and intangible asset amortization as an income statement caption, separate disclosure of the amounts of depreciation and intangible asset amortization is necessary.

Crowe observation: The final standard explains that entities with equity method investments need not “look through” the investment to disclose, on a disaggregated basis, the investee’s expenses. Likewise, a reporting entity is not required to disaggregate the disclosure of an equity method investee’s summarized results of operations. The required disaggregation disclosures apply only to expenses incurred by the reporting entity on a consolidated basis.

Purchases of inventory

In a departure from the proposal, the ASU designates purchases of inventory as a required category, replacing the multilevel disaggregation approach that would have required entities to disclose inventory and manufacturing expense and then disaggregate this category into further subcategories, including purchases of inventory.

Purchases of inventory represent amounts recognized in accordance with Topic 330 and related industry-specific subsections.

Entities can present the disclosure for a relevant expense caption that includes purchases of inventory on either a cost-incurred basis or an expense-incurred basis:

• Cost-incurred basis. An entity will disclose costs incurred that were either capitalized to inventory or directly expensed in the current reporting period. Entities that use a cost-incurred basis must reconcile the cost-incurred amounts to the amounts expensed and reported in the income statement by disclosing the change in beginning and ending inventory and other adjustments and reconciling items.
• Expense-incurred basis. An entity will disclose expenses recognized related to the derecognition of inventory and costs incurred that were directly expensed in the current reporting period.

Because the two bases likely will result in different disclosed amounts, an entity must consistently apply its chosen basis to all required expense categories within the expense caption that includes purchases of inventory.

In addition, some entities might present an expense caption for which purchases of inventory make up substantially all of the expense. In that circumstance, an entity may use a practical expedient to qualitatively describe the contents of that line item rather than provide a quantitative disaggregation.

Crowe observation: The board noted its intent that entities apply the term “substantially all” consistently with how the term is used throughout other areas of GAAP. While not defined, the “substantially all” threshold typically is interpreted as 90%.

The following, reproduced from Example 1 in paragraphs 220-40-55-3 through 55-12, illustrates how an entity with inventory could present the disaggregation of its cost of products sold caption, notably, on a cost-incurred basis:

Employee compensation

Entities are required to separately disclose employee compensation expenses. The ASU uses the Master Glossary definition of employee currently used in Topic 718, with minor conforming amendments to allow for use of the term outside the context of stock compensation. It also introduces a definition of employee compensation, which covers many types of consideration, including salaries and wages, deferred compensation, share-based compensation, medical benefits, Social Security contributions, and various retirement, postretirement, and other postemployment benefits (such as special or contractual termination benefits) for all full-time, part-time, temporary, and seasonal employees.

In addition, in accordance with the ASU’s requirement to integrate other required disclosures into the tabular disclosure, any expenses incurred related to one-time employee termination benefits must be separately disclosed. Refer to the section “Integration of other disclosure requirements.”

The definition of employee compensation is intended to provide a minimum requirement. Thus, entities are permitted, but not required, to include other transactions entered into for the benefit of employees, such as subsidized goods or services, which are typically insignificant. If an entity chooses to include such transactions, it also must disclose their inclusion and describe the nature of the transactions.

Crowe observation: As a practical expedient, a bank or bank holding company that presents an expense caption for salaries and employee benefits on the face of its income statement to comply with Securities and Exchange Commission (SEC) Regulation S-X Rule 9-04 may use that amount to satisfy this employee compensation disclosure requirement rather than applying the definition of employee compensation included in the ASU. Accordingly, this should substantially reduce the complexity and judgment needed by banks or bank holding companies in determining employee compensation expense.

Depreciation

Entities must separately disclose depreciation of property, plant, and equipment consistent with amounts recognized under Topic 360.

Intangible asset amortization

Entities must separately disclose intangible asset amortization consistent with amounts recognized under Subtopic 350-30. Amortization of other capitalized assets, such as customer contract acquisition costs, should not be included in intangible asset amortization.

Amortization of finance lease right-of-use assets and leasehold improvements recognized in accordance with Topic 842 would be included in either depreciation or amortization.

DD&A for oil- and gas-producing activities and other depletion expense

Although DD&A is industry specific, the board chose to incorporate DD&A as a separate required category because it is a potentially significant noncash expense that is recognized systematically and to clarify requirements for entities engaging in extractive activities. While the requirement refers to oil- and gas-producing activities, this category also includes other amounts for depletion expenses that are not recognized in accordance with Subtopic 932-360 – for example, depletion expenses recognized by mining entities within the scope of Topic 930.

Integration of other disclosure requirements

Certain expenses, gains, and losses that are already required to be disclosed under existing GAAP (for example, impairment losses) also must be included in these tabular disaggregation disclosures. In this regard, the board addressed financial statement user feedback to reduce the need for users to consult multiple areas of the financial statements and related notes to collect key information, thereby enhancing the efficiency of financial statement analysis. Additionally, incorporating these disclosures into the tabular format disclosure reduces the “other” category, described in the section “Other items remaining in relevant expense captions.”

The ASU provides two lists of certain expense, gain, or loss items subject to existing disclosure requirements and explains when those items are to be included in the tabular disclosure.

If an item in list 2 is recognized in multiple expense captions, such as operating lease cost reported within cost of services and SG&A, separate disaggregation in the tabular disclosure is not required. The integration of the existing disclosure requirements was intended as a geography change, not as a creation of new disclosure requirements.

Other items remaining in relevant expense captions

Entities must qualitatively disclose the composition of any residual expenses within relevant expense captions that are not further disaggregated. For example, an entity that disaggregates its SG&A expenses caption would quantitatively disclose any required expenses such as employee compensation, depreciation, amortization, and certain disclosures required under other existing GAAP (as already described) and then would summarize, in narrative form, the expenses making up the remainder of that expense caption. The level of detail of qualitative disclosures should generally reflect the significance of the items disclosed. For example, entities need not be exhaustive in listing every expense constituting a residual balance if some of those expenses are clearly insignificant in relation to the total residual.

Selling expenses

Entities are required to separately disclose the total amount of selling expenses along with the annual disclosure of the entity’s accounting policy indicating how it defines selling expenses.

Finer points

Following are a few additional considerations that entities should be mindful of when preparing their DISE disclosures.

• Asset-related expenses. The ASU specifies that an entity is not required to further disaggregate costs that are capitalized as an asset (except for costs capitalized to inventory, when an entity elects to disclose on a cost-incurred basis). Furthermore, when an expense is recorded upon derecognition of an asset (also with the exception of inventory), the entity is not required to disaggregate the expense based on the nature of the initially capitalized costs. Rather, it will apply the guidance based on the nature of the recognized expense. For example, an entity that capitalizes software development costs would not be required to disaggregate the incurred costs that were initially capitalized (for example, employee compensation); instead, the expense resulting from derecognition of the asset would be reflected in the entity’s disclosure of either depreciation or amortization, depending on its policy.
• Liability-related expenses. The ASU indicates that certain liability-related expenses do not require disaggregation into the required expense categories if all of the following criteria are met:
  • The expense relates to an obligation with a future settlement, the timing of which is uncertain.
  • The amount of the obligation is based on an estimate of a future expenditure.
  • The expense is not composed entirely of one required expense category.

  Examples of expenses that might meet these criteria include amounts relating to estimates of onerous contract losses on construction-type and production-type contracts in the scope of Subtopic 605-35, claims and claims adjustment accruals, and asset retirement obligations.

• Cost reimbursement arrangements. The ASU instructs entities to disclose, within the tabular disclosure, amounts relating to cost reimbursement arrangements as follows:
  • Expense reimbursements received. Entities may elect one of the following methods, along with disclosure of the chosen method:
    • Separately disclose the amount of the expense reimbursement along with a qualitative description of the natural expense categories to which the reimbursement relates.
    • Map the reimbursement amount to the required expense categories to which it relates.
  • Expense reimbursements paid. Entities should separately disclose the amount of the expense reimbursement along with a qualitative description of the related natural expense categories to which the reimbursement relates.
• Reclassifications. Entities might encounter some complexity in the event of subsequent reclassifications that affect comparability of reporting periods, such as when expenses that would be disclosed under the ASU are reclassified from one relevant expense caption to another or from one relevant expense caption to several relevant expense captions (or vice versa). An entity will need to evaluate these changes and make the necessary disclosures under paragraph 205-10-50-1.

Implementation considerations

Throughout the development of the ASU, preparers expressed concerns about the significant time and effort that could be required to comply with new disaggregation requirements. Recognizing these concerns, the board pared back certain requirements from the original proposal – such as the elimination of the multilevel disaggregation approach for inventory and manufacturing expense – in an effort to reduce the burden to preparers while retaining usefulness to financial statement users.

Nonetheless, while an entity’s information system capabilities and financial reporting controls might be sufficient to meet current financial reporting requirements, some entities might have difficulty tracking and extracting the expense data necessary to prepare the new tabular, disaggregated disclosures. Even if an entity is using estimates to comply with the requirements, some level of additional data might still be necessary to develop these estimates in a reasonable and supportable manner. This could represent a particular challenge for entities with certain system complexities, such as acquisitive entities with multiple disparate systems or system instances, entities with significant intercompany cost allocations, entities with complex consolidation eliminations, or entities that undergo a system conversion leading up to or in periods affected by the new disclosure requirements.

Transition and effective date

The ASU requires PBEs to apply the amendments prospectively, with an option to use retrospective application. PBEs will need to comply with the requirements beginning with financial statements for fiscal years beginning after Dec. 15, 2026, and interim periods within fiscal years beginning after Dec. 15, 2027.² Early adoption is permitted.