Accounting
FASB issues standard on income statement expenses sought by investors
The Financial Accounting Standards Board released an
The standard comes in response to demand from investors for more detailed, disaggregated information about expenses.
“This has been an effort that we’ve been working on for quite some time, certainly prior to my tenure, but it’s been a high priority by investors for a long period of time,” FASB board member Fred Cannon told Accounting Today. “It was something we heard both in 2016 and 2021 in our agenda outreach, that it was their highest priority during this time period, and we had to work with all stakeholders to come up with what I believe is a practical solution that provides critical information to investors. From my standpoint, it’s exciting to get this moving forward and find something that is both workable but provides critical information.”
During the agenda consultation and other outreach, investors told FASB that expense information is critically important in understanding a company’s performance, assessing its prospects for future cash flows, and comparing its performance over time and with that of other companies. They indicated that more granular expense information would help them better understand an entity’s cost structure and forecasting future cash flows.
Patrick Dorsman/Financial Accounting Foundation
“This project was one of the highest priority projects cited by investors in our extensive outreach with them as part of our 2021 agenda consultation initiative,” said FASB chair Richard Jones in a statement. “We heard time and again from investors that additional expense detail is fundamental to understanding the performance of an entity and we believe that this standard is a practical way of providing that detail.”
The ASU addresses this feedback by requiring public companies to disclose, in the notes to financial statements, specified information about certain costs and expenses at each interim and annual reporting period. Specifically, they will be required to:
1. Disclose the amounts of (a) purchases of inventory; (b) employee compensation; (c) depreciation; (d) intangible asset amortization; and (e) depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities (or other amounts of depletion expense) included in each relevant expense caption.
2. Include certain amounts that are already required to be disclosed under current GAAP in the same disclosure as the other disaggregation requirements.
3. Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
4. Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.
“Essentially, what the standard will do is it will require firms to break out in a footnote certain components of the income statement line items including compensation, purchase of inventory, depreciation, depletion and amortization, to the extent that those are included in that line item on the income statement,” said Cannon. “We expect things like cost of sales, cost of goods sold, SG&A [selling, general and administrative expenses], research and development to be broken out in tabular format on a quarterly basis with these key key components. The reason this is so important to investors is to be able to put this into their urban models, and have better sense and better ability to forecast future cash flows with the trends they see in these disparate items that are currently aggregated. We have heard consistently from investors how critical this information is.”
The extra reporting may be hard work for financial statement preparers as well. “We’ve also heard, to be honest, from preparers, that it can be difficult to prepare, and so we really spent a long period of time making sure that this is operational to preparers, as well as providing critical information to users,” said Cannon.
The degree of difficulty will probably differ, depending on the company, but it may be hardest for manufacturing companies that do business around the world.
“We heard throughout this process that this first it will vary significantly across different preparers,” said Cannon. “Some preparers told us this is relatively straightforward. Others, on the other hand, especially manufacturers of global operations that perhaps have been acquiring companies throughout the globe, this could be very difficult and costly. The board went into this with our eyes wide open that this wasn’t going to be a cost-free exercise for preparers. But the decision we came up with was that this information is so critical to users that we would move ahead with the standard. At the same time, since the exposure draft, we underwent a number of changes in order to address the cost concerns from preparers.”
One of the biggest changes involved the cost of goods sold. “Perhaps the most significant was on the inventory issue,: said Cannon. “Cost of goods sold would have had a two-step disaggregation in the exposure draft, and we simplified that to one step that would just break out purchases of inventory as well as compensation, depreciation and amortization. We heard from preparers that that would be much more straightforward than our initial proposal, especially manufacturers. And we heard from users that in some ways, it would be more intuitive information that they would be getting.”
FASB also decided to give more time for implementing the new standard and didn’t require a retrospective approach to look back for information.
The amendments in the ASU are effective for annual reporting periods starting after Dec. 15, 2026, and interim reporting periods beginning after Dec. 15, 2027, although early adoption is permitted. It will be effective for the 2027 annual 10-K for calendar year reporters and then it will be required for each interim period following going forward.
For users of financial statements such as investors and financial analysts, the adjustment shouldn’t be difficult for forecasting future cash flow. “I think the way we structured this for users, it’s going to be fairly straightforward,” said Cannon, who was formerly a sell-side analyst and research director. Many analysts already have a model in Excel for items like cost of goods sold. “They’re going to have to insert three or four more lines into their Excel spreadsheet, and these breakouts will aggregate to that number,” said Cannon. “It’s something that investors have been saying for a significant amount of time that would be useful”
Eventually their forecasting abilities may improve as a result of the standard. “Their accuracy in terms of improving their forecasts of, say, cost of sales will take time to improve, because they won’t initially see the trends in compensation and in these other line items,” said Cannon. “But over time, as those trends develop, they’ll improve their ability to better forecast those line items on the income statement.”
In addition to the
While FASB is no longer trying to converge its U.S. GAAP standards with the International Accounting Standards Board’s International Financial Reporting Standards, the two boards are following some similar aspects in terms of disaggregation and the update to IAS 18 (which has been superseded by IFRS 15) is scheduled for implementation in the same timeframe that FASB’s new standard is implemented.
“Theirs is a little bit different,” said Cannon. “It does not include purchase of inventory, so that doesn’t have to be broken out. In addition, they have a different kind of format for the information to be disclosed, but it does include breakouts in compensation, amortization and depreciation, so there are some similarities and the timeframe is similar.”
The IASB standard also goes a bit further by changing the income statement presentation, while FASB’s is a disclosure-only project.
The new standard may help investors analyze the impact of inflation and other factors, such as increased tariffs, by disaggregating items like purchases of inventory.
“Inflation is tricky to forecast, but it certainly will give investors a better ability to deal with inflationary aspects of the income statement and how they impact the overall earnings of the company,” said Cannon.
Captive audience; some disagreement; game of 21; and other highlights of recent tax cases.
Barrington, Illinois: Tax preparer Gary Sandiego has been sentenced to 16 months in prison for preparing and filing false returns for clients.
He owned and operated the tax prep business G. Sandiego and Associates and for 2014 through 2017 prepared and filed false income tax returns for clients. Instead of relying on information provided by the clients, Sandiego either inflated or entirely fabricated expenses to falsely claim residential energy credits and employment-related expense deductions.
Sandiego, who
He was also ordered to serve a year of supervised release and pay $2,910,442 in restitution to the IRS.
Ft. Worth, Texas: A federal district court has entered permanent injunctions against CPA Charles Dombek and The Optimal Financial Group LLC, barring them from promoting any tax plan that involves creating or using sham management companies, deducting personal non-deductible expenses as business expenses or assisting in the creation of “captive” insurance companies.
The injunctions also prohibit Dombek from preparing any federal returns for anyone other than himself and Optimal from preparing certain federal returns reflecting such tax plans. Dombek and Optimal consented to entry of the injunctions.
According to the complaint, Dombek is a licensed CPA and served as Optimal’s manager and president. Allegedly, Dombek and Optimal promoted a scheme throughout the U.S. to illegally reduce clients’ income tax liabilities by using sham management companies to improperly shift income to be taxed at lower tax rates, improperly defer taxable income or improperly claim personal expenses as business deductions. As alleged by the government, Dombek also promoted himself as the “premier dental CPA” in America.
The complaint further alleges that in promoting the schemes, Dombek and Optimal made false statements about the tax benefits of the scheme that they knew or had reason to know were false, then prepared and signed clients’ returns reflecting the sham transactions, expenses and deductions.
The government contended that the total harm to the Treasury could be $10 million or more.
Kansas City, Missouri: Former IRS employee Sandra D. Mondaine, of Grandview, Missouri, has pleaded guilty to preparing returns that illegally claimed more than $200,000 in refunds for clients.
Mondaine previously worked for the IRS as a contact representative before retiring. She admitted that she prepared federal income tax returns for clients that contained false and fraudulent claims; the indictment charged her with helping at least 11 individuals file at least 39 false and fraudulent income tax returns for 2019 through 2021. Mondaine was able to manufacture substantial refunds for her clients that they would not have been entitled to if the returns had been accurately prepared. She charged clients either a fixed dollar amount or a percentage of the refund or both.
The tax loss associated with those false returns is some $237,329, though the parties disagree on the total.
Mondaine must pay restitution to the IRS and consents to a permanent injunction in a separate civil action, under which she will be permanently enjoined from preparing, assisting in, directing or supervising the preparation or filing of federal returns for any person or entity other than herself. She is also subject to up to three years in prison.
Los Angeles: Long-time lawyer Milton C. Grimes has pleaded guilty to evading more than $4 million in federal taxes over 21 years.
Grimes pleaded guilty to one count of tax evasion relating to his 2014 taxes, admitting that he failed to pay $1,690,922 to the IRS. He did not pay federal income taxes for 23 years — 2002 through 2005, 2007, 2009 through 2011, and 2014 through 2023 — a total of $4,071,215 owed to the IRS. Grimes also admitted he did not file a 2013 federal return.
From at least September 2011, the IRS issued more than 30 levies on his personal bank accounts. From at least May 2014 to April 2020, Grimes evaded payment of the outstanding income tax by not depositing income he earned from his clients into those accounts. Instead, he bought some 238 cashier’s checks totaling $16 million to keep the money out of the reach of the IRS, withdrawing cash from his client trust account, his interest on lawyers’ trust accounts and his law firm’s bank account.
Sentencing is Feb. 11. Grimes faces up to five years in federal prison, though prosecutors have agreed to seek no more than 22 months.
Sacramento, California: Residents Dominic Davis and Sharitia Wright have pleaded guilty to conspiracy to file false claims with the IRS.
Between March 2019 and April 2022, they caused at least nine fraudulent income tax returns to be filed with the IRS claiming more than $2 million in refunds. The returns were filed in the names of Davis, Wright and family members and listed wages that the taxpayers had not earned and often listed the taxpayers’ employer as one of the various LLCs created by Davis, Wright and their family members. Many of the returns also falsely claimed charitable contributions.
Davis prepared and filed the false returns; Wright provided him information and contacted the IRS to check on the status of the refunds claimed.
Davis and Wright agreed to pay restitution. Sentencing is Feb. 3, when each faces up to 10 years in prison and a $250,000 fine.
St. Louis: Tax attorneys Michael Elliott Kohn and Catherine Elizabeth Chollet and insurance agent David Shane Simmons have been sentenced to prison for conspiring to defraud the U.S. and helping clients file false returns based on their promotion and operation of a fraudulent tax shelter.
Kohn was sentenced to seven years in prison and Chollet to four years. Simmons was sentenced to five years in prison.
From 2011 to November 2022, Kohn and Chollet, both of St. Louis, and Simmons, who is based out of Jefferson, North Carolina, promoted, marketed and sold to clients the Gain Elimination Plan, a fraudulent tax scheme. They designed the plan to conceal clients’ income from the IRS by inflating business expenses through fictitious royalties and management fees. These fictitious fees were paid, on paper, to a limited partnership largely owned by a charity. Kohn and Chollet fabricated the fees.
Kohn and Chollet advised clients that the plan’s limited partnership was required to obtain insurance on the life of the clients to cover the income allocated to the charitable organization. The death benefit was directly tied to the anticipated profitability of the clients’ businesses and how much of the clients’ taxable income was intended to be sheltered.
Simmons earned more than $2.3 million in commissions for selling the insurance policies, splitting the commissions with Kohn and Chollet. Kohn and Chollet received more than $1 million from Simmons.
Simmons also filed false personal returns that underreported his business income and inflated his business expenses, resulting in a tax loss of more than $480,000.
In total, the defendants caused a tax loss to the IRS of more than $22 million.
Each was also ordered to serve three years’ supervised release and to pay $22,515,615 in restitution to the United States.
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The American Institute of CPAs is still concerned about the Public Company Accounting Oversight Board’s new firm and engagement metrics standard, despite some modifications from the original proposal.
During a board meeting Thursday, the PCAOB
Under the new rules, PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer will be required to publicly report specified metrics relating to such audits and their audit practices. The metrics cover the following eight areas:
- Partner and manager involvement;
- Workload;
- Training hours for audit personnel;
- Experience of audit personnel;
- Industry experience;
- Retention of audit personnel (firm-level only);
- Allocation of audit hours; and,
- Restatement history (firm-level only).
The AICPA reacted cautiously to the announcement. “We’re still studying the components of the final firm metrics requirements but, as we stated in our comment letter to the PCAOB this past summer, these rules will place a significant burden on small and midsized audit firms and could lead some to exit public company auditing altogether,” said the AICPA in a statement emailed Friday to Accounting Today. “This is not just conjecture: a majority of respondents (51%) to a recent survey we did of Top 500 firms with audit practices said they would rethink engaging in public company audits if the requirements were approved.”
The PCAOB it made some modifications to the original proposal in response to the comments had received since April:
- Reduced the metric areas to eight (from 11);
- Refined the metrics to simplify and clarify the calculations;
- Increased the ability to provide optional narrative disclosure (from 500 to 1,000 characters); and,
- Updated the effective date. (If approved by the SEC, the earliest effective date of the firm-level metrics will be Oct. 1, 2027, with the first reporting as of September 30, 2028, and engagement-level metrics for the audits of companies with fiscal years beginning on or after Oct. 1, 2027.)
The AICPA welcomed those changes but doesn’t think they go far enough. “We’re glad the PCAOB took some comments to heart by extending implementation dates, particularly for smaller firms, and lowering the number of required metrics,” said the AICPA. “But the potential consequences of the remaining requirements — reduced competition and market diversity in the public audit space — are a significant risk. We hope the SEC will give these unintended outcomes the weight they deserve before giving final approval to the requirements.”
The Securities and Exchange Commission would still need to give final approval to the standard, as well as the new firm reporting standard. Last week, the PCAOB decided to
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