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FASB issues standard on income statement expenses sought by investors

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The Financial Accounting Standards Board released an accounting standards update Monday to improve financial reporting by requiring public companies to disclose, in their interim and annual reporting periods, more information about certain expenses in the notes to financial statements.

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.

Financial Accounting Standards Board offices with new FASB logo sign.jpg
FASB offices

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 ASU, FASB is issuing a FASB in Focus summary of the new standard and two videos, one short and the other more in depth that walks through some of the illustrative examples in the ASU about how the new standard works in practice. The ASU and other educational materials are available at www.fasb.org. Cannon does not believe it will require a great deal of training to implement the new standard, but accounting technology systems will need to be updated.

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.

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Accounting

IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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