The Financial Accounting Standards Board voted to propose requiring U.S. public companies to further break down the operating expenses that appear on their income statement, for example by disclosing the amount of employee compensation, in a move to help investors better understand firms’ operations.
Companies present on their income statement how much revenue they earned over a particular period, along with the related costs and expenses and net earnings or losses. They currently have to disclose things like the cost of sales and operating expenses such as those from advertising and research and development. But companies don’t have to further break down those operating expenses.
Under a proposal Wednesday from the accounting standard-setter, public companies would have to disclose quarterly the amounts of employee compensation, depreciation of property and equipment, amortization of intangible assets such as trademarks, and inventory expenses in the footnotes further clarifying the income-statement entries. Companies would be required to further break down inventory expenses by sharing inventory purchases and other amounts. Companies’ inventory expenses would include costs as manufacturers incur them, the FASB said.
The proposal would also have businesses disclose selling expenses, which are expenses tied to distributing, marketing and selling products or services, along with their rationale for that classification.
Companies would have to put the amounts of all new expense items excluding selling expenses into a table, along with some expenses they already disclose. The footnotes to companies’ financial statements would grow under the proposal, but the face of their income statement wouldn’t change.
FASB aims to issue a formal proposal this summer and ask the public for feedback over a 90-day period, a spokeswoman said. Chairman Rich Jones said in December that FASB could vote on a final standard later this year, depending on the feedback.
The proposal, if finalized, will likely greatly enhance the ability of analysts and investors to forecast future cash flows, FASB board member Fred Cannon said. “I do believe it’s a milestone,” he said.
Investors have long sought disaggregation of financial reporting, while companies often express concern over compliance costs and oppose disclosing significant detail for fear of revealing too much to competitors.
Mr. Jones acknowledged the proposed requirements will likely pose significant costs and resources for some companies to implement. “Having worked on companies who did 200 acquisitions who had 200 different systems, pulling that information together for that company is a significant lift,” Mr. Jones said, adding the proposal’s benefits outweigh the costs.
in a 2021 letter to the FASB, said it wants to provide meaningful information to investors and other users of financial statements but it doesn’t believe that all information provides value. Investors and analysts don’t typically request a breakdown of selling, general and administrative expense or cost of sales to better grasp Cigna’s cost structure, the Bloomfield, Conn.-based company said at the time.
Cigna didn’t immediately respond to a request for comment Wednesday.
The income-statement project is unrelated to another potential new rule on expense disclosure. The FASB is reviewing public feedback on a proposal issued last October that would require U.S. public companies to start breaking out big-ticket expenses incurred by their business divisions. That information would be limited to companies that already provide segment information to a so-called chief operating decision maker.
In contrast, the income-statement proposal could require executives to disclose information that they don’t already have and would need to accumulate.
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