FASB unveils new guidelines to boost transparency in corporate expense reporting

The Financial Accounting Standards Board (FASB) on Nov. 4, 2024, issued new guidelines aimed at enhancing the transparency and clarity of corporate expense reporting, in a move that could significantly impact how public companies disclose financial information.

The board issued Accounting Standards Update (ASU) No. 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires public companies to provide more detailed and organized disclosures of their expenses in their income statements. This means breaking down expenses into specific categories, such as purchases of inventory, employee compensation, and costs related to depreciation and amortization, and presenting them in a clear, tabular format.

The goal of the guidelines is to give investors a better understanding of a company's financial health and help them predict future financial performance more accurately, the FASB said. The changes are focused solely on disclosure, meaning companies won't have to alter their income statement preparation, just how they report the details.

"We heard time and again from investors that additional expense detail is fundamental to understanding the performance of an entity and we believe that this standard is a practical way of providing that detail," FASB Chair Richard Jones said in a statement.

Effective for 2027 annual reports

The requirements will take effect for annual reports in 2027 and for interim reports in 2028. The new guidelines don't apply to privately held companies. The move is part of a broader effort to provide investors with timely and useful information about public companies, especially as different expense categories can react differently to changes in the economy.

The FASB believes that the new disclosure standard complements other standards like segment reporting and revenue breakdown, stressing that while the new standard may not meet all investor desires, it's a significant step forward in providing critical information.

"I personally think we've come up with a solution that will provide significant incremental information to investors and at the same time is operable by companies," FASB member and analyst Frederick Cannon said. "I'm convinced that once this information is available on a quarterly basis, analysts will be using it in their earnings models."

Industry impact

The guidelines are expected to have a significant impact on public companies, particularly in the manufacturing and consumer products sectors, which typically have complex cost structures with natural expense categories that need to be broken down. Large multinational companies with a mix of IT systems will also face significant challenges in capturing, tracking, and reporting this information.

"This standard is going to impact pretty much every single company...it's because the nature of the expenses that they've identified for further disaggregation almost every company has at least one of those expenses," Bob Michaels, a partner at CrossCountry Consulting's Accounting Advisory practice, said on Nov. 4.

Michaels highlighted that aligning the new disclosure requirements will also require collaboration across departments, such as human resources for employee compensation data, which adds another challenge. "I would say that this seems like it's far away...but I would encourage everyone to start the process now, be proactive do not be reactive," he said. "The impact of this is going to be felt outside of the accounting [department] so get a good understanding of what this new standard requires and start to perform a GAAP analysis."

Impracticalities addressed

Others said that many of the impracticalities of the standard were addressed by the FASB, including aspects such as complex inventory costing systems requiring significant reconfiguration efforts.

"The FASB addressed this by streamlining requirements for practical implementation," said Allison Henry, VP of Professional and Technical Standards at the Pennsylvania Institute of Certified Public Accountants (PICPA), who expressed relief that private companies won't have to adopt the changes. "The FASB added flexibility in presenting inventory costs and allowed qualitative information instead of detailed amounts for inventory, along with clarification on using estimates," she said. "These changes significantly reduced the original proposal's complexity."

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