Introduction
In March 2024, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2024-03 Income Statement—Reporting Comprehensive Income: Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (ASU 2024-03), targeting the longstanding investor demand for more detailed, decision-useful information about the composition of operating expenses.
Historically, financial statement users had limited insight into what comprised broad expense line items like “cost of sales” or “selling, general, and administrative expenses.” Recognizing the increasing need for transparency, the FASB’s new disclosure requirements mark a pivotal shift, promising to improve comparability across companies and industries.
This article provides an overview of the new disclosure rules, their rationale, key requirements, and practical considerations for public companies as they prepare for implementation.
Background: Why Change Was Needed
Before ASU 2024-03, U.S. GAAP required little specific disaggregation of expenses below the revenue line. Companies had considerable flexibility in how they aggregated different costs, resulting in:
- Inconsistent disclosures across entities.
- Reduced comparability and financial transparency.
- Limited visibility into cost structures for investors and analysts.
The FASB’s project, initiated after years of stakeholder feedback and public roundtables, aimed to fill this information gap by requiring structured, comparable disclosure of key natural expense categories.
Overview of the Final Disclosure Requirements
The standard introduces significant new disclosure obligations for public business entities (PBEs):
1. Tabular Disclosure of Disaggregated Expenses
Companies must present a tabular reconciliation of the amounts of certain specified natural expenses included in each relevant expense caption on the face of the income statement.
Specified Expense Categories Include:
- Employee compensation
- Depreciation
- Intangible asset amortization
- Inventory purchases (cost of goods sold)
- Depreciation, depletion, and amortization (DD&A) associated with oil and gas production or mineral extraction
2. Disclosure of Selling Expenses
- Companies must disclose the total amount of selling expenses included in the income statement.
- They must also define what they consider “selling expenses” annually.
3. Disclose a Qualitative Description of Remaining Expense Captions
- Companies must disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively
Compliance Timeline
| Entity Type | Annual Reporting Periods | Interim Reporting Periods | Early Adoption? |
| Public Companies | Fiscal years beginning after December 15, 2026 | Interim periods beginning after December 15, 2027 | Yes |
Practical Implications for Companies
The new requirements represent a substantial expansion of disclosure obligations and will impact financial reporting processes.
Key Actions to Consider:
- Data Collection and Systems:
- Companies must ensure systems can capture and aggregate expenses by natural category across multiple business units.
- Inventory costing systems, in particular, may require updates to separately track depreciation, labor, and materials.
- Judgment Calls on Captions:
- Significant judgment will be needed to determine which captions require disaggregation.
- Companies must document the basis for these decisions to support audit scrutiny.
- Investor Relations Strategy:
- Firms should prepare for potential investor questions around margin dynamics once more detailed expense breakdowns become available.
- Internal Training:
- Finance, accounting, and FP&A teams should be educated on the new requirements.
Benefits and Potential Challenges
Benefits
- Greater Transparency: Investors gain deeper insight into a company’s cost structure.
- Enhanced Comparability: Standardized categories improve peer analysis.
- Informed Decision-Making: Stakeholders can better assess operational efficiency.
Challenges
- Implementation Burden: Especially high for complex multinational companies.
- Judgment and Estimation: Determining relevant captions and proper allocations will require careful thought.
- Audit Readiness: Disclosures will be subject to external audit, increasing documentation needs.
Conclusion: A New Era for Expense Disclosures
The FASB’s disaggregation standard represents a fundamental evolution in how U.S. public companies report their business expenses. While implementation will require significant effort, the long-term payoff in terms of transparency, investor confidence, and comparability will be substantial.
Companies that invest early in aligning systems, enhancing internal controls, and engaging stakeholders will be better positioned to meet the new expectations and turn compliance into a strategic advantage.
As the 2026 annual reporting effective date approaches, now is the time to start preparing for a new era in financial statement transparency.
