Alert

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.

The amended guidance requires public business entities (PBEs) to disclose specified information about certain costs and expenses in the notes to financial statements at each interim and annual reporting period.

Scope

The amended guidance applies to all PBEs.

The amendments don’t apply to private companies, not-for-profit entities, or employee benefit plans.

Key Provisions

The amended guidance addresses investor requests for further disaggregation of expenses in commonly presented income statement expense line items such as cost of sales; selling, general, and administrative expenses (SG&A); and R&D.

While companies may be subject to certain industry specific requirements, such as income statement presentation requirements for commercial and industrial companies in accordance with Regulation S-X, under current US generally accepted accounting principles (GAAP), there isn’t a broad—or industry neutral—requirement to disaggregate income statement expenses. This leads to diversity in the amount of disaggregated expense information provided by companies.

The amendments don’t change or remove existing expense disclosure requirements but rather expand expense disclosures by requiring PBEs to identify which expense captions presented on the face of the income statement are relevant expense captions and then disaggregate the relevant expense captions.

A relevant expense caption is an income statement expense line item within continuing operations that contains any of expense categories listed below. A relevant expense caption that consists entirely of one required expense category isn’t subject to the below disaggregation requirements.

Tabular Format Disclosure

Relevant expense captions are required to be disaggregated into the following expense categories in a tabular format in the notes to the financial statements on an annual and interim basis:

• Purchases of inventory
• Employee compensation
• Depreciation
• Intangible asset amortization
• Depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities or other depletion expense amounts

The amendments clarify that an income statement expense line item including the amortization of a finance lease right-of-use asset or the amortization of leasehold improvements is a relevant expense caption and is subject to further disaggregation as these amounts are considered a subset of either depreciation or intangible asset amortization.

The amendments also clarify that an entity’s share of earnings or losses from an equity method investment isn’t a relevant expense caption and therefore, isn’t subject to further disaggregation.

With the exception of inventory disclosed under the cost-incurred basis, as described below, costs capitalized as an asset don’t require further disaggregation.

In addition, liability-related expenses that are based on an obligation that’s an estimate of an uncertain amount that will be settled in the future should be excluded from the disaggregation requirements.  

Purchases of Inventory

Purchases of inventory should only include amounts within the scope of Topic 330, Inventory.

Purchases of inventory shouldn’t include the amounts recognized from any of the following:

• A business combination within the scope of Subtopic 805-10, Business Combinations—Overall.
• A joint venture formation within the scope of Subtopic 805-60, Business Combinations—Joint Venture Formations.
• The initial consolidation of a variable interest entity within the scope of Subtopic 810-10, Consolidation—Overall.

As a practical expedient, further disaggregation of an expense caption isn’t required when substantially all of the expense caption comprises purchases of inventory in the scope of Topic 330. When the practical expedient is elected, PBEs are required to qualitatively describe the composition of that expense caption, in both interim and annual reporting periods.

Employee Compensation

Employee compensation expense includes all forms of cash consideration—including deferred cash compensation—and noncash consideration, such as share-based payment awards, medical care benefits, pension benefits, post-retirement benefits, and nonretirement post-employment benefits given by an entity in exchange for service rendered by employees or for the termination of employment.

As a practical expedient for determining amounts classified as employee compensation in accordance with the above definition of employee compensation, an entity may use the amount classified as salaries and employee benefits if such amount is presented on the face of the income statement in accordance with the requirements in Regulation S-X.

Tabular Integration of Other Disclosure Requirements

Consistent with existing GAAP disclosure requirements, the tabular format disclosure should also include the amount recognized in each relevant expense caption for the following expenses, gains, and losses:

• The amount of research and development assets acquired in a transaction other than a business combination and written off.
• Impairment loss recognized related to an intangible asset.
• Impairment loss of long-lived assets classified as held and used.
• Gain or loss recognized for long-lived assets classified as held for sale or disposed of.
• Each major type of cost associated with an exit or disposal activity, for example, one-time employee termination benefits, contract termination costs, and other associated costs.
• Components of net benefit cost recognized, other than service cost amounts included within employee compensation.
• Bargain purchase gain recognized in a business combination.
• Any gain or loss recognized upon the deconsolidation of a subsidiary or the derecognition of a group of assets.
• Gains and losses on derivative instruments, nonderivative instruments that are designated and qualify as hedging instruments, and related hedged items.
• Amortization of license agreements for program material.
• Impairment of license agreements for program material.
• Amortization of film costs.
• Impairment of film costs.

Each of the following amounts should also be included in the tabular format disclosure if the amount is included entirely in one expense caption that is also a relevant expense caption:

• Provision for expected credit losses.
• Losses on firm purchase commitments.
• Amortization expense attributable to the expiration of an insurance or reinsurance coverage provided under a contract that transfers only significant underwriting risk.
• Amortization of costs to fulfill a contract with a customer.
• Impairment of costs to fulfill a contract with a customer.
• Amortization of costs to obtain a contract with a customer.
• Impairment of costs to obtain a contract with a customer.
• Amortization of capitalized implementation costs of hosting arrangements that are service contracts.
• Asset retirement obligation accretion expense.
• Loss contingencies recognized.
• Warranty expense.
• Expense related to counterparty default in own-share lending arrangements issued in contemplation of convertible debt issuance.
• Aggregate gain on restructuring of payables by a debtor with a troubled debt restructuring.
• Gains and losses upon consolidation of a variable interest entity that isn’t a business.
• Foreign currency transaction gains or losses.
• Operating lease costs.
• Short-term lease costs.
• Variable lease costs.
• Net gain or loss recognized from sale and leaseback transactions.
• Gains and losses from nonmonetary transactions.
• Amortization of capitalized acquisition costs.

For example, if cost of sales was a relevant expense caption and if amortization of costs to fulfill a contract with a customer was recognized entirely in cost of sales and not in multiple expense captions presented on the face of the income statement, then the amortization of costs to fulfill a contract with a customer would be required to be included as a separate category in the tabular format disclosure in addition to the categories listed above.

The presence of the expenses, gains, and losses listed above wouldn’t cause an expense caption to be a relevant expense caption. A PBE is only required to include the applicable expenses listed above in the tabular format disclosure if an expense caption is a relevant expense caption, as defined above.

Inventory Expenses

Relevant expense captions may contain amounts within the scope of Topic 330. In those instances, the required expense categories will comprise of costs related to inventory and all other expenses included in the relevant expense caption. The amended guidance permits PBEs to disclose required expense categories that contain amounts with the scope of Topic 330 on either a cost-incurred basis or an expense-incurred basis.

Under the cost-incurred basis, the required expense categories should include costs incurred that were capitalized to inventory during the reporting period and any costs incurred that were directly expensed during the reporting period. Under this basis, PBEs are required to disclose an amount for changes in inventories and an amount for other adjustments and reconciling items to reconcile the costs incurred to the total relevant expense caption.

Under the expense-incurred basis, the required expense categories should include expenses incurred on the derecognition of inventory in accordance with Topic 330 and any costs incurred that were directly expensed during the reporting period. Under this basis, PBEs are required to disclose the expense amounts related to the derecognition of inventory based on the natural expense category of the costs when they were initially incurred.

Changes in Inventories

When the cost-incurred basis is applied, the disclosed amount includes costs incurred that were capitalized to inventory during the reporting period. This amount generally doesn’t equal the amount expensed as incurred during the reporting period. The changes in inventories category is required to reconcile these amounts.

The amount disclosed for changes in inventories in the current period should equal the difference between the amount of inventory included on the balance sheet at the end of the prior period and the amount of inventory included on the balance sheet at the end of the current period.

Other Adjustments and Reconciling Items

When the cost-incurred basis is applied, PBEs are also required to disclose other adjustments and reconciling items. Other adjustments and reconciling items should consist of the amounts necessary to reconcile costs incurred to expenses recognized that aren’t already disclosed. This could include the following:

• Inventory derecognized during the period that is not recognized as an expense
• Amounts attributable to foreign currency translation

Cost-Sharing and Cost-Reimbursement

If a relevant expense caption includes amounts that are recorded net of an expense reimbursement related to a cost-sharing or cost-reimbursement arrangement from another entity, the amended guidance allows PBEs to either disclose the required expense categories net of reimbursement amounts or disclose the aggregate reimbursement amount as a separate line item in the tabular format disclosure.

Other Items

In the tabular format disclosure, PBEs are required to disclose an amount for other items for each relevant expense caption. The amount for other items is the difference between the amount of the relevant expense caption presented on the income statement and the aggregate amount of expense categories separately disclosed per the above requirements that are included in the relevant expense caption.

PBEs are also required to disclose qualitative descriptions of the composition of other items.

In addition, PBEs aren’t precluded from further disaggregating relevant expense captions before applying this requirement to the remaining other items. Voluntary disclosures may be provided inside or outside the tabular disclosure, provided those disclosures aren’t combined with the above requirements.

Selling Expenses

On an annual and interim basis, the amendments require a PBE to disclose the total selling expenses recognized in continuing operations.

The amended guidance allows a PBE to tailor the definition of the term selling expenses to its specific facts and circumstances. However, selling expenses should only include expenses presented in the income statement. In addition, a PBE is required to disclose how it defines selling expenses annually.

Effective Dates

The FASB issued ASU 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date, to clarify the effective date of ASU 2024-03.

The amendments are effective for PBEs for annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. 

Early adoption is permitted.

Transition Method

The amendments should be applied either prospectively to financial statements issued for reporting periods after the effective date or retrospectively to any or all prior periods presented in the financial statements.

Illustrative Example

The ASU includes various examples to demonstrate how the new disclosures may look. As replicated below, one example included is for a manufacturing company with significant service operations. The example includes the following consolidated statement of operations for Entity X for the years ended December 31, 20X4, 20X3, and 20X2, where the entity presents cost of products sold, cost of services, and SG&A on the face of its income statement.

In accordance with the amended guidance, Entity X is required to provide a disclosure that disaggregates the cost of products sold, cost of service, and SG&A into specified expense captions, as follows:

In addition, the example in the ASU includes a footnote disclosure that is required to define selling expenses, which reads, “During the years ended December 31, 20X4, 20X3, and 20X2, selling expenses were $13,425, $12,123, and $11,585, respectively. The entity’s selling expenses include those expenses related to marketing and promotional activities and client relationship management.”

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