On November 04, 2024, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2024-03. This ASU covers income statement disclosures, more specifically, the disaggregation of income statement expenses. This ASU does not make any changes to the face of the income statement, nor change any existing disclosures. It only adds additional disclosures.
Purpose of ASU 2024-03
Currently, there are no broad requirements in accounting principles generally accepted in the United States of America (U.S. GAAP) to disaggregate expenses presented on the face of the income statement. As a result, there is diversity in the amount of disaggregated expense information.
This ASU comes from feedback received by the FASB from stakeholders requesting more detailed information about certain expenses. Having more detailed information about cost of sales and selling, general and administrative expenses (SG&A) would better serve relevant stakeholders in understanding an entity’s cost structure. This information is important to allow them to better understand the entity’s performance, better forecast future cash flows, and compare an entity’s performance over time and with that of other entities.
Requirements
ASU 2024-03 requires disclosure of disaggregated information about specific natural expense categories as described in number 1 below in a tabular format. At each interim and annual reporting period an entity must:
- Disclose the amounts of (a) purchases of inventory, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, and (e) depreciation, depletion, and amortization recognized as part of oil and gas-producing activities (DD&A) (or other amount of depletion expense) included in each relevant expense caption. 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.
- Include certain amounts that already are required to be disclosed under current U.S. GAAP in the same disclosure as the other disaggregation requirements in number 1.
- Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
- Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.
An entity may volunteer additional disclosures that may give stakeholders extra useful information however it is recommended that information be presented separately from the required expense information. This ASU provides practical expedients related to the purchases of inventory and employee compensation disclosures. The application of this guidance may vary from industry to industry. The ASU provides illustrative examples of how the expected disclosures may vary depending on the nature of the entity’s operations.
Who Does This Update Impact?
The changes in this ASU apply to all public business entities (PBEs). It does not apply to the following entities:
- Private companies (An entity other than a PBE, NFP or EBP)
- Not-for-profit entities (NFPs)
- Employee Benefit Plans (EBPs)
While the new standard only applies to PBEs, a private company considering an initial public offering, or other change that would fall under the definition of a PBE, would need to apply it when preparing its registration statement. Additionally, a private company that is acquired (in whole or in part) and, as a result, is required to file or furnish financial statements with the SEC meets the definition of a PBE and will need to apply the new standard in those financial statements. A private company that is not a PBE should consider whether it expects to meet the definition of a PBE in the future given the time and effort that may be required to comply with the new standard.
Additionally, the basis for conclusion indicated the FASB, along with Private Company Council (PPC) members may consider a project on the disaggregation of expenses. Thus, it would be prudent to understand the requirements in this ASU.
Effective Date
The changes in this ASU will be in effect for annual reporting periods that begin after December 15, 2026, and for interim reporting periods that begin after December 15, 2027. This accounting standards update does permit early adoption.
Contact Us
If you have questions about the information outlined above or for assistance, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us.
