The Financial Accounting Standards Board tentatively decided this week to allow some workarounds for certain challenges that businesses may face in complying with newly proposed accounting standards that will require companies to disclose and detail significantly more information about their expenses.
Formally known as the Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures accounting standards update (Subtopic 220-40), the new rule that the U.S. accounting-setter is developing would require public companies to disclose additional information about such expense categories as inventory, employee compensation and depreciation.
While not as hot a topic as the FASB’s recently developed new crypto accounting rules — which drew public attention well beyond the accounting sphere — the plan to require more detailed breakouts of expense information will be a relatively big ask of many businesses and their financial reporting teams.
“The changes brought by this proposed ASU are far reaching,” Valerie Boissou, KPMG Audit Partner - Department of Professional Practice, said in an email response to questions from CFO Dive, noting that companies will likely have only a couple of years to execute necessary systems, processes and controls upgrades. “The information needed to comply may not be currently available at the required level of precision or auditability. ”
In addition, Boissou said the new requirements will not just be a “data exercise.” With investors getting a good deal of new information, Boissou said that financial report preparers will need to “get ahead of investor’s questions to control the narrative” in addition to breaking out more information.
The update of Generally Accepted Accounting Principles related to expenses is a project that has been winding its way through the development process since growing out of a 2021 outreach effort spearheaded by Richard Jones, then the FASB’s new chair.
The board prioritized the project after investors said that they wanted more “granular” information about cost of sales and selling, general, and administrative expenses in order to better understand a company’s costs and forecast cash flows, according to a description of its origins outlined in the proposed rules that were published July 31.
At a Wednesday meeting, the board sought to address concerns from a number of industries that raised issues about how the new rules would affect them. Among the most significant alternatives it developed was one to ease the challenges of the new rules for manufacturing companies, related to how they account for inventory and manufacturing expenses, according to Boissou.
The Board proposed to move away from what is called two-level disaggregation of inventory and manufacturing expenses that had been particularly troubling and overly complex for manufacturing companies, she said. The two-tier approach was problematic because it would require preparers to distinguish non-inventoriable cost of goods sold broken out at the first level from inventoriable CoGs, disaggregated at the second level, she said.
Instead, she said the board has now proposed a so-called “single-level disaggregation approach,” whereby CoGs would be disaggregated into “natural expenses”: namely employee compensation, depreciation, amortization and purchases of inventory. .
The FASB’s tentative decision to go forward with the single-level approach to disaggregating inventory and manufacturing expenses should be well received by preparers, but is subject to investors’ buy-in, Boissou said. “Preparers should remain focused on further discussions about the disaggregation of cost of goods sold,” she said.
Currently, GAAP does not require cost of goods sold to be disaggregated into underlying natural expense categories.
