The Financial Accounting Standards Board (FASB) is introducing a significant change to how public companies report income statement expenses, with new disclosure requirements becoming effective for fiscal years beginning after December 15, 2026. These changes, outlined in Accounting Standards Update (ASU) 2024-03 and clarified by ASU 2025-01, aim to provide investors and other stakeholders with a clearer, more detailed understanding of the components behind key expense categories in financial statements. Preparing for and complying with these new requirements is crucial for companies to maintain transparency and meet regulatory expectations.
At its core, the new guidance requires public business entities (PBEs) to disaggregate certain income statement expenses in their financial statement notes. This means companies must break down broad expense categories—like cost of goods sold, employee compensation, depreciation, and selling expenses—into more specific components. For example, instead of reporting a single line for employee compensation, a company might need to separately disclose wages, bonuses, benefits, and payroll taxes. This enhanced level of detail can help users of financial statements better assess the company’s cost structure and profitability drivers.
Understanding the scope and timeline is the first step. The standard applies to all PBEs, including calendar-year companies whose annual reporting periods start after December 15, 2026, with interim period disclosures required for periods after December 15, 2027. Early adoption is allowed, so companies eager to lead on transparency can implement the changes sooner. Non-calendar-year entities have slightly different interim effective dates but must still comply with annual requirements by the same time frame.
Getting ready for this change involves several practical steps:
Inventory Current Reporting Practices: Companies should begin by reviewing their current income statement expense disclosures and the supporting data systems. This review will reveal gaps between what is currently disclosed and what the new standard demands. For example, does the accounting system track employee compensation in enough detail to separate out various components? Are cost categories consistent across business units or geographies?
Engage Cross-Functional Teams Early: Compliance is not just an accounting exercise. It requires collaboration between finance, payroll, procurement, IT, and operational departments to gather, validate, and report granular expense data. Early engagement helps identify data sources, assign responsibilities, and address potential system or process changes.
Revise Internal Controls and Reporting Processes: With more detailed disclosures, companies must enhance their internal controls to ensure accuracy and completeness. This may involve updating accounting policies, refining data collection procedures, and increasing oversight on expense reporting.
Educate Stakeholders and Train Staff: Ensuring everyone involved understands the new requirements, the rationale behind them, and their roles in compliance is critical. Training sessions and clear documentation help reduce errors and improve efficiency.
Consider Technology Enhancements: Companies might need to upgrade or customize financial reporting systems to handle the increased level of detail and enable smooth data extraction and presentation. Automation can reduce manual work and minimize the risk of errors in large data sets.
One practical example could be a manufacturing company that previously disclosed a lump sum for cost of goods sold (COGS). Under the new requirements, it might need to disclose separately raw material costs, direct labor, and manufacturing overhead. This disaggregation can provide investors with deeper insights into the cost drivers and operational efficiencies or challenges. Similarly, a service company will need to break down selling expenses into categories such as advertising, commissions, and travel costs, allowing for more nuanced financial analysis.
The benefits of preparing early extend beyond compliance. Transparent and detailed expense disclosures can improve investor confidence and potentially lower the cost of capital. They also enhance internal decision-making by giving management a clearer picture of expense composition and trends.
Some companies may worry about the increased workload and costs associated with these disclosures. While it is true that gathering and reporting more detailed information requires effort, the changes are manageable with proper planning. Many companies that have begun early preparations report that involving cross-functional teams and leveraging technology have streamlined the process. Moreover, the FASB guidance does not mandate a specific format beyond requiring a tabular presentation of disaggregated expenses in the notes, allowing companies some flexibility to tailor disclosures to their circumstances.
It’s also worth noting that these requirements reflect a broader trend in financial reporting toward greater transparency and detail, driven by investor demands and regulatory initiatives. Companies that embrace this shift proactively will be better positioned to meet future disclosure demands and stakeholder expectations.
In summary, the key to successful preparation for FASB’s 2025 disaggregated income statement expense disclosures lies in early assessment, cross-departmental collaboration, process and control enhancements, and leveraging technology. By starting now, public companies can smooth the transition and turn compliance into a strategic advantage, providing clearer insights into their financial performance for investors and other users of financial statements.