ASU 2024-03: Enhancing Expense Disaggregation in Financial Reporting

In November 2024, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2024-03, titled "Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses."

This update introduces new disclosure requirements aimed at enhancing the transparency of expense information in financial statements.

Background and Purpose

Investors and other stakeholders have long sought more detailed insights into the components of expenses reported in income statements. Traditional financial statements often present expenses by function (e.g., cost of sales, selling, general, and administrative expenses) without detailing the nature of these expenses. ASU 2024-03 addresses this need by mandating the disaggregation of specific natural expense categories within functional expense captions, thereby providing a clearer picture of an entity's cost structure.

Key Provisions

The ASU requires public business entities to disclose, in a tabular format, the amounts of certain natural expenses included within relevant expense captions presented on the face of the income statement. The specified natural expense categories include:

• Purchases of Inventory: Costs associated with acquiring raw materials and other externally purchased inputs.
• Employee Compensation: Expenses related to wages, bonuses, benefits, and stock compensation.
• Depreciation: Charges for the allocation of the cost of tangible assets over their useful lives.
• Intangible Asset Amortization: Allocation of the cost of intangible assets over their useful lives.
• Depreciation, Depletion, and Amortization (DD&A): Specific to oil-and-gas producing activities.

Entities are also required to provide qualitative descriptions for any remaining amounts within relevant expense captions that are not separately quantified. Additionally, the total amount of selling expenses must be disclosed, along with a narrative description of what constitutes selling expenses for the entity.

Effective Dates and Transition

For public business entities, the new disclosure requirements are effective for annual reporting periods beginning after December 15, 2026, and for interim periods within those fiscal years beginning after December 15, 2027. Early adoption is permitted. Entities have the option to apply the requirements prospectively or retrospectively.

Implications for Stakeholders

The enhanced disclosures mandated by ASU 2024-03 are expected to provide investors and other financial statement users with more granular information about an entity's expenses, facilitating better analysis and comparability across entities. However, implementing these requirements may necessitate significant changes to existing financial reporting systems and processes to capture and report the required data accurately.

Conclusion

ASU 2024-03 represents a significant step toward greater transparency in financial reporting by requiring the disaggregation of income statement expenses. Public business entities should begin assessing their current reporting capabilities and consider the necessary steps to comply with the new disclosure requirements by the effective dates.

Source: FASB ASU 2024-03