For public business entities, the stakes just got a little higher with the roll-out of the FASB’s new expense disaggregation standard, ASU 2024-03—also known as "DISE." Just as a roll of the dice reveals its individual numbers, this new standard aims to do the same with income statement expenses.
The Why: Enhancing Financial Transparency
The push for ASU 2024-03 came from investors’ growing needs for transparency to assess companies' financial performance, cash flows, and cost structures. The new standard addresses this by disaggregating expenses across specific natural classifications to create a clearer financial picture.
The What: Key Provisions of the New Standard Requires
Under ASU 2024-03, companies will need to disclose, in a new tabular footnote disclosure, several natural expense categories within each relevant expense caption on the income statement at each interim and annual reporting period. A relevant expense caption is an expense caption presented on the face of the income statement within continuing operations that contains any of the below natural expense categories. Where a reporting entity prepares a condensed income statement in interim periods, the relevant expense captions could differ between the interim and annual reporting periods.
Expense category |
Requirements |
|
Purchases of inventory |
Purchases of inventory include amounts in the scope of ASC 330, except for inventory amounts recognized from a:
Purchases typically include the cost of raw materials and finished goods from third parties either held for sale in the ordinary course of business or consumed in the production of goods or services to be sold. |
|
Employee compensation |
The ASU introduces a revised definition of employee compensation and modifies the existing master glossary definition of "employee" to align with ASC 718. Employee compensation includes all forms of cash consideration (including deferred cash compensation), share-based payment arrangements and various other benefits (e.g., medical care, pension, postretirement, nonretirement postemployment) given by an entity in exchange for service rendered by employees or for the termination of employment. One-time termination benefits for employees outlined in ASC 420 must be disclosed separately from other employee compensation. |
|
Depreciation |
The amounts reported separately for depreciation and intangible asset amortization align with the requirements outlined in ASC 360 and ASC 350. The amortization of ROU assets for finance leases and the amortization of leasehold improvements, as recognized under ASC 842, should be included within either the depreciation expense or intangible asset amortization expense category. |
|
Intangible asset amortization |
|
|
Depreciation, depletion, and amortization (DD&A) for oil & gas producing activities |
DD&A for oil- and gas-producing activities should be consistent with amounts recorded in accordance with ASC 932-360. Depletion expense recognized by entities for other activities such as mining is required to be separately disclosed. |
Not stopping there, companies will need to consider additional disclosures for:
Additional Disclosure Considerations |
|
|
Expense reimbursements |
Entities presenting a relevant expense caption that includes amounts that are reimbursements related to a cost-sharing or cost-reimbursement arrangement from or to another entity are required to provide incremental quantitative and qualitative details in the expense disaggregation disclosures. |
|
Specified expenses, gains, and losses required by other US GAAP |
The ASU requires that an entity include in the tabular disclosure certain expenses, gains, and losses that may or may not be subject to existing disclosure requirements in other US GAAP. The guidance specifically identifies the disclosure requirements to be included in the tabular disclosure, providing two lists of these requirements. Even if an entity discloses an amount from these lists elsewhere in their financial statements, they are still required to integrate the amounts into the new tabular disclosure. |
|
Other expenses |
The new standard requires entities to disclose an "other" category for remaining items within each expense caption after disclosing the required expense categories. This category is calculated as the difference between the total expense caption amount on the income statement and the sum of the separately disclosed expense categories. Entities must also provide a qualitative description of the expenses included in the "other" category based on their natural expense classification. The level of detail in the description should align with the significance of the amount being explained. |
|
Selling expenses |
The guidance requires disclosure of the total amount of selling expenses recognized in continuing operations on an annual and interim basis and disclosure of an entity’s definition of selling expenses on an annual basis. The ASU does not define what a selling expense is. Entities will make their own determination of the composition of selling expenses and disclose the definition on an annual basis. Any changes to that definition during an interim period would require disclosure of the change in that interim period. |
Practical expedients—Limited help to ease adoption
The ASU provides two limited, practical expedients for applicable reporting entities:
Expedient |
Description |
|
Purchases of inventory |
When substantially all of an income statement expense caption comprises purchases of inventory, further disaggregation of that expense caption is not required. Instead, entities are required to qualitatively describe the composition of the expense caption in interim and annual reporting periods. While substantially all is not defined in the ASU, a threshold of 90% is typically applied in practice. |
|
Employee compensation |
Banks or other entities that present an expense caption for salaries and employee benefits on the face of the income statement in accordance with SEC Reg. S-X 9-04 may use that amount instead of determining an amount for employee compensation in accordance with the new standard. |
The Who: Impacted reporting entities
The new standard applies to public business entities (PBEs) but does not extend to private companies, not-for-profit organizations, or employee benefit plans. The ASC Master Glossary definition of a PBE includes certain entities that are not SEC registrants, such as those whose financial statements must be included in another SEC registrant's filing or those with securities traded on an over-the-counter market. Entities should evaluate whether they currently meet the PBE criteria or might meet it in the future, which would necessitate compliance with the new standard.
For example, there are instances where a private reporting entity may need to prepare to comply with the new ASU, including:
- Private companies planning an initial public offering (e.g., Form S-1) must apply the standard when preparing their registration statement.
- Private companies acquired in whole or part, requiring SEC-filed or furnished financial statements, will meet the PBE definition and must comply with the standard (e.g., Regulation S-X 3-05 or 3-09).
The When: Adoption & compliance timeline
|
Annual periods |
The new standard is effective for annual reporting periods beginning after December 15, 2026. Early adoption is permitted. |
|
Interim periods |
The new standard is effective for interim reporting periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. |
While the standard requires comparative disclosures for all periods presented, entities can choose to apply the guidance prospectively, meaning comparative disclosures of disaggregated expenses are not mandatory for reporting periods prior to the effective date. Alternatively, entities may elect to apply the standard retrospectively to some or all prior periods presented. This flexibility gives entities some control over how they implement the new requirements, allowing them to manage the transition effectively.
Get ready: Implementation insights and practical guidance
The new ASU introduces several considerations for companies working toward compliance. Here’s what accounting & finance teams need to consider:
Selecting the basis for inventory Disaggregation
Companies must decide between the cost-incurred or expense-incurred basis for reporting inventory purchases.
|
Cost-incurred method |
Captures costs incurred that were capitalized to inventory in accordance with ASC 330 during the current period and costs that were directly expensed during the current period. |
|
Expense-incurred method |
Capture expense amounts related to the derecognition of inventory that was previously capitalized in accordance with ASC 330 and costs incurred that were directly expensed during the current period. |
While the cost-incurred basis aligns more closely with traditional reporting for manufacturing businesses, each company should assess which method best aligns with their existing processes. Companies that use the cost-incurred method should also be prepared to disclose the effects of inventory changes, adjustments, and other reconciling items on their total costs to reconcile back to the total amount of expenses recognized in the income statement.
Addressing system and process changes
Implementing the ASU will likely necessitate system upgrades to track disaggregated expenses more precisely. Cross-department collaboration—particularly among finance, HR, and operations—will be essential to ensure consistent data across reporting segments.
Companies should assess their current financial systems to determine if they can capture the required data effectively or if new software solutions are needed. This assessment will help identify any gaps in expense tracking that may need to be addressed through additional controls and system capabilities.
Using estimates for certain disaggregations
For cases where precise tracking is challenging, DISE permits the use of reasonable estimates to approximate disaggregated expenses. For example, estimating depreciation or employee compensation allocations in complex cost structures could be more efficient and reduce administrative burdens. Companies should document their estimation methodologies and maintain transparency in their approach, as this will be a key focus during audits.
Leveraging materiality thresholds and practical expedients
As detailed above, the FASB offered practical expedients for companies where disaggregation of expenses might be burdensome. For instance, if a single expense category—such as “purchases of inventory”—constitutes “substantially all” of a line item, companies can rely on a qualitative description instead of full disaggregation.
Entities should also assess the materiality of disaggregated expense items to determine whether full disclosure is necessary. If a category, such as employee compensation, is quantitatively and qualitatively immaterial within a line item, it may be grouped into a general “other” category, provided the description remains accurate and complete.
Addressing cross-border and segment-specific differences
Companies with multiple segments or international operations may face unique challenges in disaggregating expenses. Coordinating data across geographies and segments will be critical, as different regions may track expenses in varying formats or under local accounting standards.
Companies should implement standardized reporting protocols across locations to ensure consistent, comparable data for consolidated financial statements.
What’s next? Preparing for compliance
With the new standard’s requirements taking effect in fiscal year 2027 (and early adoption permitted), companies should start preparing by:
|
1. Conduct a readiness assessment |
Evaluate the current state of your financial systems, data capture capabilities, and reporting processes. Identify any areas that require enhancements to enable detailed expense tracking. If you plan to adopt the standard retrospectively, begin gathering comparative data for prior periods starting as early as fiscal year 2025 to streamline historical reporting. |
|
2. Develop a detailed implementation plan |
Create a project roadmap outlining key milestones for transitioning to the new ASU. Assign ownership across departments to ensure accountability and timely completion. Consider engaging with external advisors to support you with the project management and implementation efforts. |
|
3. Refresh internal controls and documentation |
New processes will often require changes to internal controls. Review and update documentation on expense classification and disclosure practices to reflect the new requirements. |
|
4. Train key staff and stakeholders |
Financial reporting teams along with other key stakeholders, such as finance, HR, and operations, will need training on the new requirements. Workshops or training sessions can help teams better understand how the new ASU impacts their role. |
|
5. Establish a communication strategy |
As companies begin to disclose more detailed information, investor relations teams should prepare to communicate the impact of disaggregated expenses on financial performance. Consider including explanations of significant changes in your MD&A, especially when material changes occur period-over-period. |
Key takeaways
This new ASU is a vital step toward enhanced financial reporting, providing stakeholders with the detailed expense breakdowns they need to make informed decisions. Implementing these changes will require significant effort from PBEs, including updates to data systems, interdepartmental coordination, and comprehensive training. However, the long-term benefits—improved transparency, investor confidence, and better comparability across companies—underscore the importance of embracing this standard early and thoroughly.
For companies aiming to get ahead of the curve, now is the time to prepare, educate, and transform financial reporting processes to comply with DISE. The transition will require thoughtful planning and proactive engagement across teams, but these efforts will pave the way for a more transparent and robust financial reporting framework in the years to come.
Navigating ASU 2024-03 may seem daunting, but Embark is here to help. From planning to execution, our technical accounting professionals can guide you every step of the way. Reach out today, and let’s ensure your financial reporting is ready for the road ahead.
