Summary of ASU 2024-03: Disaggregation of Income Statement Expenses (DISE)

(effective for annual periods beginning after December 15, 2026 and interim periods in the following year, or early adoption)

Summary of ASU 2024-03: Disaggregation of Income Statement Expenses (DISE)

Changes to Current Company Financial Statement Disclosures

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2024-03, "Disaggregation of Income Statement Expenses" (DISE), on November 4, 2024, to enhance transparency for investors by requiring more detailed disclosures about expenses in the income statement. The standard is effective for annual periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption and retrospective application permitted. This standard applies exclusively to public business entities (PBEs), including those whose financial statements are included in SEC filings (e.g., IPOs or acquisitions under Regulation S-X). It does not change the presentation on the face of the income statement but introduces new footnote disclosures for both annual and interim periods.

Key changes include:

• Tabular Disaggregation of Expenses: PBEs must disaggregate relevant expense captions (those within continuing operations containing prescribed natural expense categories) into specific categories in a tabular format in the notes. The prescribed categories are:

  • Purchases of inventory (costs of acquiring raw materials, excluding certain items like business combinations).

  • Employee compensation (e.g., wages, bonuses, benefits, stock-based compensation; aligns with ASC 718 definitions).

  • Depreciation (for long-lived assets under Topic 360).

  • Intangible asset amortization (under Topic 350, excluding certain capitalized assets).

  • Depreciation, depletion, and amortization (DD&A) for oil-and-gas producing activities.

  • Depletion (for other industries).

  • Expense reimbursements (amounts received and paid, with qualitative descriptions).

  • Specific expenses, gains, and losses required by other U.S. GAAP (e.g., asset impairments, warranty expenses).

  • "Other" items (residual amounts, with qualitative descriptions of significant components).

  • Reconciling items (e.g., changes in inventories, other adjustments like foreign exchange, if using a cost-incurred basis).

• Narrative Disclosure for Selling Expenses: PBEs must disclose the total amount of selling expenses (entity-defined) and provide an annual description of its composition (e.g., marketing, promotional activities). If the definition changes, prior periods must be recast unless impracticable.

• Basis for Disaggregation: For captions involving inventory, entities choose between a cost-incurred basis (e.g., purchases during the period) or expense-incurred basis (e.g., amounts recognized in the period), applied consistently. Estimates and approximations are permitted for determining amounts.

• Scope and Exclusions: Disclosures focus on expenses from continuing operations; certain liability-related expenses (e.g., interest, restructuring) can be excluded under a principles-based approach. Practical expedients include qualitative descriptions if inventory purchases make up substantially all (typically ~90%) of a caption, or using SEC Regulation S-X Rule 9-04 amounts for employee compensation in banks.

• Effective Dates and Transition: Prospective application is required for annual periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption and retrospective application are permitted.

These changes aim to provide investors with better insights into expense composition without requiring functional-line presentation on the income statement itself.

Amount of Work Needed for Implementation

Implementing ASU 2024-03 will require moderate to significant effort, depending on the complexity of a company's operations, systems, and global footprint. Key factors include:

• System and Process Upgrades: Companies may need to enhance financial reporting systems to capture and track expenses at a more granular level (e.g., distinguishing employee compensation components or inventory purchases). This could involve software modifications or new data aggregation tools, particularly for entities with decentralized or international operations where data coordination is challenging.

• Cross-Departmental Collaboration: Involvement from finance, HR, operations, and IT teams is essential to map expenses to the new categories, choose disaggregation bases (cost-incurred vs. expense-incurred), and ensure consistency.

• Internal Controls and Training: Refreshing controls over financial reporting, documenting judgments (e.g., for "other" categories or exclusions), and training staff on the new requirements.

• Readiness Assessment and Planning: Conducting an initial assessment of current data capabilities, developing an implementation roadmap, and testing disclosures. For companies with inventory-heavy operations, selecting and justifying the disaggregation basis adds complexity.

• Time and Resource Estimates: Effort is mitigated by practical expedients (e.g., estimates allowed, qualitative disclosures for dominant categories) and the prospective transition method. However, retrospective adoption (if chosen) increases work due to recasting prior periods. Global companies may face additional hurdles in aligning data across jurisdictions. Overall, preparation could take several months to a year, with higher effort for those lacking automated tracking.

• Communication and MD&A Impacts: Updating investor communications and potentially expanding Management's Discussion and Analysis (MD&A) for material changes in expense trends.

Practical expedients and the ability to use estimates reduce the burden, but companies planning IPOs or acquisitions should prioritize early adoption to comply with PBE status.

Expected Comparative Change in Income Statement Disclosure

Currently, income statement disclosures often present aggregated expense captions (e.g., "Cost of Goods Sold" or "Selling, General, and Administrative Expenses") with limited or no required breakdown in the notes, relying on entity-specific voluntary disclosures. Under ASU 2024-03, these will be supplemented with a new tabular footnote providing disaggregated details, increasing transparency and comparability for investors. The face of the income statement remains unchanged, but the notes will include a reconciliation-like table for each relevant caption, showing breakdowns by category and reconciling to the reported total.

Illustrative Example (Based on a Manufacturer's Cost of Products Sold on a Cost-Incurred Basis):

Before ASU 2024-03 (Typical Current Disclosure):

• Income Statement Excerpt:

Line Item | Year 3 | Year 2 | Year 1

Cost of Products Sold | $63 | $61 | $57

• Note: Limited qualitative description, e.g., "Includes materials, labor, and overhead costs."

After ASU 2024-03 (New Tabular Footnote Disclosure):

• Income Statement Excerpt (Unchanged):

Line Item | Year 3 | Year 2 | Year 1

Cost of Products Sold | $63 | $61 | $57

• New Footnote Table (Disaggregation of Cost of Products Sold):

Category | Year 3 | Year 2 | Year 1

Purchases of inventory | $20 | $19 | $16

Employee compensation | $18 | $17 | $14

Depreciation | $10 | $10 | $9

Intangible asset amortization| $3 | $3 | $3

Warranty expense | $4 | $4 | $4

Other cost of products sold | $18 | $8 | $8

Changes in inventories | $1 | ($1) | $2

Other adjustments | $2 | ($1) | $1

Total | $63 | $61 | $57

• Additional Notes: "Other cost of products sold includes freight services and environmental obligations. Other adjustments include impacts from foreign exchange rates."

• Selling Expenses Narrative: "Selling expenses totaled $13, $12, and $12 for Years 3, 2, and 1, respectively, and consist of expenses related to marketing, promotional activities, and client relationship management."

This comparative shift provides investors with quantifiable insights into expense drivers (e.g., labor vs. materials), enabling better forecasting and analysis, while the "other" category ensures flexibility with qualitative explanations.