Highlights of ASU 2024-03 on DISE

Key takeaways

• For U.S. public companies, Accounting Standard Update 2024-03 on the disaggregation of income statement expense applies for annual disclosures starting with fiscal 2027 and for subsequent quarterly disclosures

• Though the face of income statements in a 10-K or 10-Q will stay the same, public companies will need to disaggregate expenses in robust footnotes

• Companies will need to provide tabular format disclosures of certain expense categories as outlined in the accounting standard

The march to give investors more details about public companies' expenses took a major step forward with a soon-to-be-effective Accounting Standards Update.

ASU 2024-03 on the disaggregation of income statement expenses, or DISE, would go into effect starting with annual disclosures for fiscal 2027 and interim reporting periods in 2028 for public business entities.

The goal? To give investors a better idea of financial health and potential future performance, including opportunities for future cash flow.

The Financial Accounting Standards Board publication on ASU 2024-03 has more details, but here are a few highlights.

Why we are disaggregating income statement expenses

For years, investors have asked for more details about employee compensation, companies' cost of sales, and SG&A (selling, general, and administrative expenses). The argument is that the more information investors have about those expenses, the better they can understand a company's cost structure and potential future cash flows, and then compare that with a company's peers.

Opponents might say any requirement to provide more, not less, disclosure could be burdensome and even discourage companies from going public. Many footnotes historically have been focused on detailed disclosures of balance sheet line items. However, in recent years, the FASB has adopted changes to also disaggregate revenue and income tax information in disclosures. In my view, ASU 2024-03 is a continuation of an ongoing trend to provide investors with more comprehensive information to better understand the factors influencing an entity's performance.

What does ASU 2024-03 require?

Public companies should look to adopt ASU 2024-03 for fiscal 2027 annual reports but can adopt early. (The standard takes effect for annual reporting periods that begin after December 15, 2026, and for interim reporting periods starting after December 15, 2027.)

Historically, companies typically presented expenses by function-for example, cost of sales or SG&A-on their income statements. That view can limit investor insight into natural expense categories such as salaries and wages or depreciation.

With ASU 2024-03, the face of your income statement will stay the same, but disaggregation of items within a relevant expense caption (any caption on the income statement that includes any one of the five natural expense categories) must be disclosed in tabular format in the notes to the financial statement. Additionally, the tabular disclosures will need to be reconciled to the relevant expense caption on the income statement.

The five natural expense categories are:

• Purchases of inventory

• Employee compensation

• Depreciation

• Intangible asset amortization

• Depreciation, depletion, and amortization recognized as part of oil and gas producing activities (DD&A) (or other amounts of depletion expense)

Amounts that are already required to be disclosed under GAAP will be in the same tabular disclosure as other disaggregated items.

For "other" amounts in relevant expense captions that are not disaggregated quantitatively, filers should include a qualitative description of those amounts.

These disaggregated disclosures could affect your MD&A (management discussion and analysis) and risk factors. As investors gain more details from the disaggregation of income statement expenses, I'd prepare for them to potentially ask more questions about those details in earnings calls.

Next steps for SEC filers

Take time now to determine where to find the data you need for disaggregation each reporting period, the effort needed to compile the data, and the processes to implement so you can accurately disclose the information.

Gathering data on salaries and wages may be straightforward if you can easily connect to a human capital management system like Workday^®, but calculating purchases of inventory will likely be more complicated.

Talk to your internal and external auditors as you build your processes for providing the necessary disaggregated information.

How the Workiva platform helps

Since the FASB announced DISE, the window to get ready for its effective date is shrinking. Note that it may take a few tries to sort out how financial reporting teams will efficiently collect the data needed for disaggregation.

There are a few ways you could use the Workiva platform to prepare.

1. Customers who use our platform for financial statement automation typically start by mapping a chart of accounts to a rollup of financial statement line items and disclosures. Information likely will be categorized and summarized differently for DISE. You could update the mapping in our platform and use connectors to automatically bring data into financial statements.

2. Even if you have to pull some source data in manually, you could feed it into the Workiva platform to map it to financial statements and disclosures, then push it back out so you would have an audit trail and visibility into the data sources.

3. Our solution engineers note that if you wanted to test different mapping scenarios as you experiment with setups for DISE, you could use our audit trail and version control features to track versions. It might be an instance when you could use our blackline feature on a spreadsheet!

4. If you aren't already using our rounding template, consider giving it a try to make the tie-out and footing of aggregated and disaggregated numbers easier.

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