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Is Your Finance Team Ready for FASB’s New Public Company Expense Disclosures?

On November 4, 2024, the FASB issued Accounting Standards Update (ASU) 2024-03, Disaggregation of Income Statement Expenses. The new ASU 2024-03 will require all public business entities (PBEs) to disclose additional expense details in the notes and is applicable for reporting periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted.

The FASB has observed diversity to the extent to which public business entities provide disaggregated expense information in financial statements and disclosures. The FASB has received feedback from investors during both 2016 and 2021 Invitations to Comment, indicating that incremental disclosure of disaggregated financial reporting information will allow investors to better understand the components of an entity’s expenses, make more informed judgments about performance, and better assess an entity’s prospects for future cash flows.

Accounting Standards Codification (ASC) Topic 220, Income Statement – Reporting Comprehensive Income, does not currently mandate presentation and or disclosure of specific expense captions on the face of the income statement or prescribe any disaggregation of expense captions. To address this and be responsive to comment letter feedback received, the requirements of ASC 2024-03 prescribe the following expense categories that are subject to disaggregation:

• Purchases of Inventory
• Employee Compensation
• Depreciation
• Intangible Asset Amortization
• Depreciation, Depletion, & Amortization (DD&A) recognized as part of oil and gas producing activities (or other amounts of depletion expense)

There are four main provisions in this Update 2024-03, requiring that at each interim and annual reporting period, an entity satisfies the following requirements:

1. Disclose in a tabular format in the notes to financial statements, the amounts of “a) – e)” above included in each relevant expense caption from the income statement. A relevant expense caption is an expense caption presented on the face of the income statement within continuing operations that contains any of the expense categories listed in “a) – e)” above.
2. Include certain amounts that are already required to be disclosed in interim and annual financial statements under current GAAP in the same disclosure as other disaggregation requirements.
3. Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively; and
4. Disclose the total amount of selling expenses.
   1. In annual reporting periods, an entity will disclose its definition of selling expenses.

The amendments prescribed by the Update do not change or remove current expense disclosure requirements. Rather, the amendments in the Update require entities to present certain disclosures in the same tabular format as the disaggregation requirements, affecting where this information appears in the notes to financial statements.

The FASB has provided limited exclusions to the disaggregation Update which are as follows:

• An entity’s share of profit/(loss) in an equity method investee and summarized results of operations of equity method investees would not be subject to further disaggregation.
• Costs capitalized as an asset – other than for inventory purchases disclosed under the cost-incurred basis, an entity is not required to further disaggregate costs capitalized as an asset, even if the costs capitalized include required disaggregation expense categories.
  • An expense amount based on an estimated obligation to be settled in the future should be excluded from the disaggregation requirements of the Update, even if it falls under a relevant expense caption, provided it meets all three of the following criteria: The expense is tied to an obligation that will be settled in the future and there is uncertainty about the timing of settlement; and
  • The expense is tied to an obligation that is based on an estimate of a future expenditure.
  • The components of the expense encompass more than one required expense category.
  • Non-exhaustive examples that meet the above include
    • Asset retirement obligations
    • Claims and claims adjustment expenses (e.g., in the insurance industry)
    • Provision for losses on contracts as prescribed by ASC 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts

The FASB has acknowledged that estimates are required in financial statements for many of an entity’s ongoing and recurring activities, and therefore expense amounts related to accruals for liabilities to pay for goods or services received or supplied but not yet paid or invoiced, including amounts due to employees, are not intended to be excluded from the requirements prescribed by the Update.

As noted above, the amendments in the Update are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The amendments should be applied either:

• Prospectively to financial statements issued for reporting periods after the effective date of the Update; or
• Retrospectively to any or all periods presented in the financial statements.

Auditors will want to ensure the completeness and accuracy of the disaggregated expense information forming the enhanced disclosures prescribed by the Update, provided the company has appropriate internal controls surrounding how the disclosures are prepared, compiled, and reconciled. The source of the information will be critical. Further, the Update allows for either prospective or retrospective application. For entities that choose a retrospective adoption, these disclosures will be required to be comparative, and as such, existing internal controls that an entity may leverage for the enhanced disclosure requirements prescribed by the Update, or new internal controls to be designed and implemented for the adoption of the Update will need to ensure completeness and accuracy of comparative periods.

How Centri Can Help

Centri can assist companies with these disclosures through collaboration with the finance team, other key management members, and the company’s auditors to ensure a smooth transition and aligned and met expectations, including:

• Serving as the central point of contact for the working group, ensuring that responsibilities across the working group are clearly defined and critical deadlines are met.
• Reviewing your current system and its capabilities to identify the expenses subject to disaggregation to be reported and disclosed within the appropriate timeframe.
• Developing/enhancing internal controls over the identification and reporting of the expenses requiring disaggregation to be reported in the footnote.
• Assisting with the preparation of the expense disaggregation tabular format and the related required qualitative disclosures in the notes to the financial statements.

At Centri, our team of SEC Financial Reporting & Compliance experts has the knowledge and expertise to help your business navigate the new requirements. Contact us to learn more.

Blake Roberts

Partner | Technical Accounting Practice Leader | CPA

Blake is a Partner at Centri Business Consulting and the leader of the firm’s Technical Accounting Practice. He has more than 18 years of public accounting experience. View Blake Roberts's Full Bio

Joseph Hayes

Senior Manager | CPA

Joseph is a Senior Manager at Centri Business Consulting. He has more than 11 years of experience in public and private accounting. View Joseph Hayes's Full Bio