The FASB’s Recent Accounting Standard Update: Disaggregation of Income Statement Expenses

The Financial Accounting Standards Board (FASB) has issued a significant update to its Accounting Standards Codification (ASC) under Subtopic 220-40, focusing on expense disaggregation disclosures. This update is designed to improve the utility of financial reporting by providing more detailed expense information for public companies.

As a public accounting firm, we take an advance look at all new standards before they are issued and adopted. In this article, we have outlined the key elements of the update, its implications, and strategies for implementation to help public companies better prepare for the new standard and eliminate surprises during their financial statement audit under PCAOB guidelines.

Investors, lenders, and other stakeholders have expressed concerns about the limited granularity of expense information in financial statements. Current income statements often consolidate diverse costs into broad categories such as “cost of sales” or “selling, general, and administrative expenses” (SG&A). This lack of transparency hinders stakeholders’ ability to:

This update from the FASB aims to address these gaps by requiring detailed expense breakdowns within relevant captions of the income statement.

The update applies solely to public companies and excludes private entities, nonprofits, and employee benefit plans. However, the FASB has indicated that it may revisit the applicability of these requirements to private companies based on public entities’ experiences.

While early adoption is permitted, these changes will officially take effect for public companies with fiscal years beginning after December 15, 2026, with interim period disclosures required starting in 2027. The transition will be prospective, though entities may opt for retrospective application for comparative periods​.

The FASB’s update includes five main provisions designed to enhance disclosure requirements for a public company. These include:

Public entities must break down expenses within the following categories if they are included in relevant captions (e.g., cost of sales or SG&A):

A “relevant expense caption” refers to expense line items from continuing operations that include at least one of the specified categories. Some examples include “cost of goods sold,” “cost of services,” “selling, general, and administrative expenses,” and “research and development.”

This added level of transparency allows users of public company filings to assess cost structures more clearly.

This provision takes disaggregation further by requiring public companies to provide additional detail about inventory and manufacturing expenses, including:

An entity will be required to disclose how it defines other manufacturing expenses.

Changes in inventories in the current period will equal the difference between the amount of inventory included on the balance sheet presented at the end of the prior period and the amount of inventory included on the balance sheet presented at the end of the current period.

Other reconciling items should include other amounts that are necessary to reconcile costs incurred to expenses recognized. Examples include:

Additionally, entities must qualitatively describe any other manufacturing expenses and any other reconciling items.

This update requires entities to incorporate certain GAAP-mandated disclosures into the same tabular format as other disaggregated expense information.

The update has two ways in which to incorporate already required expense disclosures, depending on the expense item and whether it is included in more than one relevant expense caption.  For example, impairment losses will always require separate disclosure for each relevant expense caption regardless of whether the total is broken out in more than one relevant expense caption, whereas the provision for expected credit losses and warranty expense will require separate disclosures only if those amounts are included entirely in one relevant expense caption.

Materiality thresholds still apply, meaning that disclosures are only necessary when deemed significant.

Within the required tabular format disclosure, an entity must disclose for each relevant expense caption an amount for other items. The amount for other items is the difference between:

The total in the tabular disclosure must agree back to the income statement.

An entity is also required to disclose qualitative descriptions (based on their natural expense classification) of these other items. These descriptions must be detailed enough to provide meaningful insight into the composition of residual expenses.

Finally, an entity must disclose their total selling expenses, and, on an annual basis, an entity must provide a clear definition of what constitutes selling expenses. For example, a company may define selling expenses as:

While these definitions can vary from company to company, they must be consistently applied and clearly explained​.

The FASB’s expense disaggregation update represents a significant shift towards greater transparency in financial reporting. By breaking down complex expense categories, the update aims to provide stakeholders with clearer insights into a public company’s financial health and performance. While the update will not alter the face of financial statements, it will significantly expand the volume and detail of disclosures in the footnotes. 

Ahead of these changes, our recommendations as a public accounting firm are that public companies prepare to:

Public companies would be well served to align their reporting processes with the new requirements, turning this regulatory challenge into an opportunity for improved communication and trust. If you’re looking for assistance in making these changes, contact the Haskell & White team to learn how we can help.

For more information on the accounting standard update and for examples, visit the FASB website.