The Financial Accounting Standards Board (FASB) this week preliminarily decided to allow certain transitional relief measures in response to several compliance challenges that a proposed new accounting standard could pose to companies. The new rule would require companies to disclose and itemize far more expense information than currently required.

The accounting standards update proposal, formally titled "Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40)," is being developed by the U.S. standard-setting body FASB. The new rule would require public companies to disclose additional information on expense categories such as inventory, employee compensation, and depreciation.

Although this topic has not attracted as much attention as FASB's recently developednew accounting rules for crypto assets—which drew broad public interest beyond the accounting field—the plan to require more detailed disaggregation of expense information remains a relatively significant burden for many companies and their financial reporting teams.

"The changes brought by the proposed ASU are far-reaching," said Valerie Boissou, audit partner and member of the professional practice department at KPMG, in an email responding to CFO Dive. She noted that companies may only have a few years to complete the necessary system, process, and control upgrades. "The required information may not be available at the level of precision or auditability required."

Additionally, Boissou said the new requirements are not just a "data exercise." Since investors will receive a large amount of new information, financial report preparers, in addition to disaggregating more information, will need to "proactively address investor questions to control the narrative."

The expense-related Generally Accepted Accounting Principles (GAAP) update project has been progressing in development since 2021, when it was initiated by then-new FASB Chair Richard Jones as part of an outreach campaign.

According to the description of the project's origins in the proposed rule issued on July 31, investors expressed a desire for more "granular" information about cost of sales and selling, general, and administrative expenses to better understand company costs and forecast cash flows, prompting the board to prioritize the topic.

At Wednesday's meeting, the board sought to address concerns raised by multiple industries that had questions about the potential impact of the new rule. According to Boissou, one of the most significant alternatives developed by the board was to ease the challenges the new rule poses for manufacturing companies in accounting for inventory and manufacturing overhead.

She said the board proposed abandoning the previously proposed "two-tier disaggregation approach" for breaking down inventory and manufacturing overhead, which had been particularly troublesome and overly complex for manufacturing companies. The two-tier approach was problematic because it required preparers to distinguish between non-inventoried cost of sales from the first tier and inventoried cost of sales (CoGS) from the second tier.

Instead, she noted, the board has now proposed a so-called "single-tier disaggregation approach," under which cost of sales (CoGS) would be disaggregated into "natural expense" categories, specifically including: employee compensation, depreciation, amortization, and inventory purchases.

FASB'spreliminary decisionto adopt the single-tier approach for disaggregating inventory and manufacturing overhead is expected to be welcomed by preparers, but still awaits investor acceptance. Boissou said: "Preparers should continue to monitor further discussions on the disaggregation of cost of sales."

Currently, GAAP does not require cost of sales to be disaggregated into underlying natural expense categories.