The Financial Accounting Standards Board (FASB) on Monday issued new rules requiring public companies to disclose specific expense items in more detail in table format in the notes to financial statements. This accounting standards update marks the final formal step in the standard-setting body's multi-year project, known as Disaggregation of Income Statement Expenses (DISE). According to the FASB press release, the rule will be effective for annual reporting periods after December 15, 2026, and for interim or quarterly reporting periods after December 15, 2027.

The change follows other recent accounting standards updates based on generally accepted accounting principles (GAAP) that require companies to provide more detailed information in financial reports, includingincome taxesandbusiness segments. But FASB board member Fred Cannon said in an interview that the expense rule may be one of the biggest changes in income statement disaggregation.

"In my view, this is a key pillar in a sustained effort over the past 20 years," Cannon said. "Broadly speaking, it's about giving investors more disaggregated information to better understand income statement cash flows."

Cannon, a former analyst, noted that the FASB's recent interest in providing more detailed income statement disclosures stems from the income statement becoming increasingly important in evaluating information-age companies such as technology firms, while balance sheet data is more characteristic of industrial companies.

Before the new accounting standards update, information provided by income statement expense disclosures relied primarily on presentation requirements set by the U.S. Securities and Exchange Commission (SEC) inRegulation S-X, which specifies the form and content of financial statements. Additionally, some specific accounting rules also set targeted requirements for this.

"You might have a piece here and a piece there, but... from an investor's perspective, the problem is that it's difficult to make forward-looking projections," Cannon said.

Under the updated standard, companies will disaggregate relevant expense line items in the income statement, such asinventory purchases, employee compensation, depreciation, and amortization of intangible assets. Although the impact of the new rule on reporting varies by industry, Cannon expects that more information about cost of sales, selling, general and administrative expenses, and research and development expenses will generally appear in reports.

The accounting standards update, formally titled "Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures" (Subtopic 220-40), requires detailed disaggregation of expense information, which could pose arelatively significant burdenon public companies, CFO Dive previously reported.

Nicole Wright, an associate professor of accounting at James Madison University in Harrisonburg, Virginia, previously told CFO Dive that the new rule would "consume considerable company resources" to gather the data needed for disclosure.

Cannon acknowledged the new rule will bring costs, but costs vary "enormously" by industry. "At the board, we've always said we recognize this won't be cheap. For many companies, this will be a significant expense, but we believe investor demand is so strong that we really need to recognize that and move forward with the standard," he said.

Meanwhile, Cannon said the board took several steps to reduce compliance costs for report preparers. For example, the board simplified the two-step process related to inventory accounting that was originally proposed in the exposure draft, a FASB spokesperson said in an email.

"The board observed that eliminating the requirement to disclose and further disaggregate inventory and manufacturing expense subtotals would reduce the complexity of the disclosures, thereby reducing related costs by including manufacturing expenses (including inventory costs) and non-manufacturing expenses in a single-level disaggregation," the spokesperson said.

Additionally, the board clarified that if an expense caption on the income statement contains only one expense category (such as employee compensation), the company is not required to further disaggregate that item, the spokesperson said.

In a statement in the press release, FASB Chair Richard R. Jones noted that the project was one of the highest-priority items investors mentioned in the board's 2021 agenda consultation initiative. "We have heard time and again from investors that additional expense detail is critical to understanding an entity's performance, and we believe this standard is a practical way to provide that detail," he said.