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FASB to simplify rule firms balked at most for proposed income statement expense disclosures

The FASB on May 8, 2024, decided to simplify an issue companies balked at most for proposed income statement expense disclosure rules, agreeing to a better approach for showing expenses that come from selling products.

The board tentatively voted to remove inventory and manufacturing expense as a required expense category as was proposed, and instead require a single-level disaggregation that would include purchases of inventory as a required category.

This approach would combine all amounts related to the required expense categories into the single-level disclosure, according to the discussions. As a result, this would improve the operability of the disclosure requirement by alleviating potential issues that could arise related to variances or other inventoriable costs that were not capitalized to inventory, among other reasons.

The revision would be more operable than what was originally proposed, while ensuring that investors won't lose any of the information they would have received, the discussions signaled.

"I don't think we're talking about how to minimize cost. I think we were hearing that what we proposed was not operable," FASB member Marsha Hunt said. "That it didn't track with systems as they existed. It didn't track with the way organizations think about it, the definitions we'd have to prescribe to get comparability," she said. "And most organizations said we can do a single level disaggregation approach."

The "single-disaggregation approach" assumes a cost-incurred presentation basis for the required expense categories, the discussions indicated. This approach would "alleviate the concerns expressed by some comment letter respondents about the proposed requirement to identify and separately disclose manufacturing and non-manufacturing expenses, as well as inventory costs, because those amounts would be combined into a single-level disaggregation of the required categories," according to discussions.

Additionally, the single-level disaggregation conforms "the format of the disclosure for cost of goods sold or a similar line item with the disclosures of other income statement expense captions and accordingly might ease the consumption of the information by financial statement users."

The decisions were part of broader and ongoing redeliberations of feedback to Proposed Accounting Standards Update (ASU) No. 2023-ED500 , Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which was issued last year for public comment. The rules are being drawn for both annual and interim financial statements for public companies.

The board also decided:

  • for joint ventures and other cost-sharing and cost-reimbursement arrangements: to allow an entity to (1) disclose an aggregate reimbursement amount that is either received or paid as a separate line item in the tabular format disclosure or (2) map the reimbursement amount to the required expense categories. An entity would disclose a qualitative description of the natural expense categories to which the reimbursement relates. The codification will clarify that an entity is not required to disaggregate either of the following into required expense categories: its share of profit or loss in an equity method investee (or similar caption on the income statement); its disclosure of summarized information of results of operations of equity method investees.
  • against providing practical expedients that: would allow entities to combine cost of product sold and cost of services for purposes of applying the disaggregation requirements; allow entities to disclose amounts for each required expense category in each relevant expense caption on a percentage basis; allow entities in the aerospace and defense industry to disclose indirect costs in total for each relevant expense caption.
  • against performing any further research about industry specific guidance for this project.

Next steps

At a future meeting, the board will address: inventory manufacturing expense, interim reporting, transition, effective date, analysis of benefits and costs, and the feedback received from the Investor Advisory Committee IAC) on May 16 and other advisory bodies over the next few weeks.

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© 2024 Baker Tilly US, LLP

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