Key Points

  • The Financial Accounting Standards Board (FASB) voted 7-0 on Wednesday to finalize new rules requiring public companies to separately disclose "relevant" expense items on the income statement and to disclose expenses such as inventory purchases, employee compensation, depreciation, and amortization of intangible assets in the notes to the financial statements. According to a FASB spokesperson, the amendments to GAAP will be issued by the end of the year and will be effective for fiscal years beginning after December 15, 2026, and for interim periods within fiscal years beginning after December 15, 2027.
  • The expense disaggregation project has been in the works for some time, most recently restarted as a priority project in 2021; during that time, accountants and report preparers expressed concerns about compliance costs. Subsequently, the board made some adjustments to ease the compliance burden, such as allowing companies to use accounting estimates to determine disclosure amounts.
  • FASB member Christine Botosan emphasized the importance of the new requirements at the meeting and expressed hope that the board's move to allow the use of estimates would help with a smooth transition. Botosan said, "This is a significant change for entities," and noted that some "nervousness" among preparers is understandable. "To find the last time there was a new requirement for companies to do comprehensive disaggregation on the income statement, I think you have to go back over 100 years, when selling, general, and administrative (SG&A) expenses and cost of sales were first required to be presented separately on the income statement."

In-Depth Analysis

In recent years, requiring companies to disclose more detailed information in financial statements has become a key theme for U.S. accounting standard-setters.

For example, last year the board issued a final accounting standards update that improved the requirements for public companies to reportmain segment expenses, which must be itemized by business group or segment.

The accounting standards update, formally titled "Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures" (Subtopic 220-40), requires companies to disclose detailed expense information, which could be a relatively significant undertaking for public companies.

Nicole Wright, an associate professor of accounting at James Madison University in Harrisonburg, Virginia, said the change being advanced is a "sleeping" accounting topic that many companies may not yet have focused on.

She noted that although companies typically have all the data they now need to report, finance departments may need to gather information from multiple departments. For example, human resources would be involved in the employee compensation component.

Wright said in an interview, "I know what CFOs are thinking, and they'll say 'we can handle it.' But this will consume significant company resources, and it's not just the accounting department... Once you try to aggregate all the data, it's a lot of work, and there's not good guidance." She also said companies will need to weigh how to disclose enough information to meet the new standard while avoiding revealing content that could give competitors insight into their business strategies.

At the meeting, FASB Vice Chairman James Kroeker said he believes the board's accounting update strikes the right balance in providing guidance that is beneficial to stakeholders and not too costly to implement. Kroeker said, "What we really want to do is disaggregate in the way entities naturally keep their books." His term ends on June 30.