Breaking it down
Background
While the FASB has maintained a longstanding project on its technical agenda related to reporting and disclosure of financial performance, the board recently revised the scope of the project to focus on the disaggregation of an entity’s income statement expenses. The objective of this proposal is to require a greater level of detail about expenses summarized on the face of the income statement, allowing users better insight into an entity’s operations.
Crowe observation: While the proposal establishes a new minimum level of detail for income statement presentation, regulatory bodies historically have encouraged entities to provide additional details in their financial reports on a discretionary basis if such details would help an investor better understand the entity’s financial results. Echoing this sentiment, the proposal indicates that an entity is not precluded from providing further disaggregation of relevant expense captions.
New disclosures required under the proposal
Under the proposal, a PBE would be required to disaggregate certain expense captions in a tabular format in the notes to the financial statements for all annual and interim reporting periods.
Relevant expense items
For relevant expense items, which are defined as any income statement caption containing at least one of the following categories, the entity would be required to disclose the underlying amounts of:
- Inventory and manufacturing expense
- Employee compensation
- Depreciation
- Intangible asset amortization
- Depreciation, depletion, and amortization recognized as a part of oil- and gas- producing activities
Crowe observation: In an effort to reduce the complexity and need for judgment to be used by entities in disclosing employee compensation expenses, the proposal introduces a definition of employee compensation and allows entities to use a practical expedient to meet the disclosure requirement. An entity that elects the practical expedient may use amounts classified as salaries and employee benefits on the face of its income statement (to comply with Securities and Exchange Commission’s [SEC’s] Regulation S-X Rule 9-04) to satisfy this disclosure requirement rather than using the definition of employee compensation included in the proposal.
Inventory and manufacturing expense
The entity would be required to further disaggregate the first category, inventory and manufacturing expense, into inventory purchases, employee compensation, depreciation, and intangible asset amortization, as well as depreciation, depletion, and amortization recognized as a part of oil- and gas-producing activities, as applicable.
The required disclosure would include both costs capitalized to inventory in the period and manufacturing costs expensed as incurred in the period. As such, additional disclosures of changes in inventories and other adjustments and reconciling items likely will be needed to reconcile costs incurred to the expense reported in the current period income statement. Entities would be required to disclose their definition of other manufacturing costs on an annual basis.
Selling expenses
The proposal would also require entities to separately disclose selling expenses, along with the entity’s accounting policy indicating how the entity designates selling expenses.
Other items remaining in relevant expense captions
The proposal would require entities to qualitatively disclose the composition of any residual “other” expenses within relevant expense captions that are not further disaggregated. For example, an entity would need to disclose a summary of the expenses falling under “other selling, general, and administrative expenses.”
Integration of other disclosure requirements
Finally, natural expenses that are separately disclosed elsewhere in the financial statements (for example, impairment losses) would be required to be included in these tabular disaggregation disclosures.
Crowe observation: Entities should consider whether changes to their information systems and disclosure preparation procedures will be needed to comply with the updated disclosure requirements. Examples of necessary changes might include changes to the chart of accounts, account groupings, and other disclosure outputs. Entities should evaluate their existing financial reporting controls as well as key reports used in the preparation of the financials.
In addition, entities should consider whether the additional level of detail disclosed in notes to the financial statements will require further audit procedures or evidence to determine that presentation is appropriate and disaggregated expenses are accurately stated. Preparers might also need to apply and document any judgment used in grouping expenses, such as those grouped and disclosed as other manufacturing expenses.
The proposed amendments include illustrative examples outlining how entities in three different industries might comply with the disclosure requirements. Preparers and investors alike might find these examples helpful in understanding the form and content of disclosures that an entity might provide. The FASB In Focus summary of the proposal includes a reproduction of the example for a manufacturing company.
Transition and effective date
The proposal requires PBEs to apply the amendments prospectively, with an option to use retrospective application. An effective date will be determined after the board reviews feedback on the proposal.
Next steps
Comments on the proposal are due on Oct. 30, 2023. PBEs should evaluate how the proposed amendments might affect their financial reporting and business processes and decide whether to comment.
