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Accounting

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

AICPA wary of new PCAOB firm metrics standard

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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 approved two new standards, on firm and engagement metrics, and firm reporting. Both would have significant implications for firms. 

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.”

AICPA building in Durham, N.C.

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 pause work on its controversial NOCLAR standard, on noncompliance with laws and regulations, until next year. On Thursday, SEC chairman Gary Gensler announced he would be stepping down in January, which may affect the timing of its approval or disapproval by the SEC. With the incoming Trump administration, the SEC is expected to take a far less aggressive stance on enforcement and regulation. On Friday, the SEC announced that it filed 583 total enforcement actions in fiscal year 2024 while obtaining orders for $8.2 billion in financial remedies, the highest amount in SEC history.

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Accounting

Board members need more audit and finance skills

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Audit and finance skills are heavily in demand for corporate board members, according to a recent survey.

BDO’s 2024 Board Survey polled 249 corporate directors of public company boards in July and August and found that 27% of respondents said the top skill set for directors in 2025 is audit/finance.

“It was tied actually with cybersecurity as a skill set, and then just behind technology implementation and industry specialization, as well as corporate strategy,” said Amy Rojik, national managing principal for corporate governance of BDO USA. “I think this reflects several things that are important to public companies, in particular the heightened focus of stakeholders, especially regulators and investors, on the need for high-quality and reliable financial information and disclosures to aid in investment decisions. We all know that regulators are heavily pushing for transparency and disclosures across the board, and in particular with respect to financial accounting and reporting disclosures, along with important oversight responsibilities, particularly in increasing risk areas like cybersecurity where breaches can really have a material impact on a company’s financial condition.”

The New York offices of Top 10 Firm BDO USA
BDO New York offices

Photo: Richard Falco

The survey asked the board members what they believe are the greatest near-team opportunities for generative AI, and 11% cited finance and accounting.

“Anecdotally, the top three board education continuing education topics that we get asked to provide to the board are generative AI, cybersecurity and enterprise risk management,” said Rojik. “Those by far are the most requested things that, especially with the audit committee, we’re seeing as a topic of conversation that they want to dive deeper into. I find that very encouraging because it’s across the board.”

Some 17% of the survey respondents indicated that advancing the use of emerging technology is a top strategic priority, while lagging implementation of emerging technology (27%) is a top-cited risk. At the same time, a slight majority of directors (51%) indicated they plan to increase investment in emerging technology, while 41% intend to increase investment in cybersecurity, data privacy and governance over the next year. 

Generative AI has become a governance focus, with directors pursuing use cases and working to mitigate a wide array of risks. Approximately one third of directors (31%) selected customer experience (16%) or product/service development (15%) as the greatest opportunity for generative AI. 

Rojik pointed to a recent spotlight report from the Public Company Accounting Oversight Board on how auditing firms and financial statement preparers are using AI.

“It’s probably more at the forefront, where we’re probably on the audit side preparing more administrative documents or initial drafts of memos and presentations and researching internal accounting and auditing guidance,” she said. “Preparers may be doing something similar, maybe summarizing accounting standards and interpretations, and benchmarking company information. And then some are even using generative AI to assist in the performance of less complex and repetitive processes, such as preparing account recs or identifying reconciling items. I think the potential investments that companies are looking forward to are summarizing accounting policy and legal documents, evaluating completeness of audit documentation against relevant documentation requirements, performing risk assessment procedures and scoping the audit.”

But data privacy and security remain important factors, she added. Firms need to be careful about client information being loaded into a generative AI-enabled tool, who is allowed to use those types of tools on the audit, what level of staff, and where the supervision is in those models. 

“There’s still, fortunately for all of us, a very high human element of supervision and review to make sure this is all making sense and that we understand what’s going into these models that we’re exploring and what’s coming out has integrity,” said Rojik. “We have a long way to go on both sides of that, from an audit perspective and from a financial reporting perspective. I would say with confidence every audit firm is looking at how to do that, but they’re also looking at it from a lens of how the regulators are going to monitor, enforce and regulate that. There’s more to come in that space certainly, but that’s a huge area to keep an eye on for boards.”

The survey also included data on committee allocation for audit, and found 57% of the public company board respondents have an audit committee and serve on it, while 43% have an audit committee and do not serve on it, and 0% do not have an audit committee. 

The audit committee and others are confronting risks from technology and the economy.

“Organizations are really considering where they should be allocating risks, especially emerging risks, and so we’re taking a look at their traditional board structures in terms of the committee allocations,” said Rojik. “Is the audit committee the right committee to put all these emerging risks in? Should there be special committees of the board, or should there be separate committees? Several of our clients have recently instituted separate technology committees, or technology innovation committees. Some, especially financial institutions of a certain size, are required to have risk committees. The most important thing boards can be doing, though, is looking at how they’re putting together that allocation through their charters and other documents that hold them accountable, and then looking at how regulators are viewing the required disclosures.”

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Accounting

LGBTQ financial planning for second Trump administration

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Financial planners who work with LGBTQ clients are helping them prepare for a potential rollback of civil rights under President-elect Donald Trump’s second administration.

Expressing empathy for the clients’ fears about future Supreme Court decisions, congressional bills or executive actions and state-level laws has emerged as a key aspect of guiding households through careful considerations and avoiding rash choices — along with providing technical guidance on the ramifications to estate planning and residential moves, financial advisors told Financial Planning. Just as with clients of any background or political ideology, planners are trying to assist clients in dealing with events out of their control that are affecting their families’ financial future.

“Being a great listener” and understanding that “people are going to have unease about investments specifically” when they believe that their rights are under attack can go a long way, said Lindsey Young, founder of Baltimore-based registered investment advisory firm Quiet Wealth. Shortly after Trump’s victory in this month’s elections, she warned in a LinkedIn post that many clients’ marriages may no longer be secure in some states and that it was important for LGBTQ couples to “have estate plans and healthcare directives in place that incorporate the possibility that their marriages are no longer recognized.” But that should come after giving the clients the space to share their valid concerns, she said in an interview.

“It’s just recognizing that it could be a hard time,” Young said. “It’s just saying, ‘I’m here to help you.’ Saying that is really important.”

READ MORE: LGBTQ estates — when planning is a civil right

Marriage rights are rightfully getting “a lot of attention when it comes to the political battle for human rights, and rightfully so,” according to Leighann Miko, founder of Los Angeles- and Portland, Oregon-based RIA firm Equalis Financial. However, transgender clients and their loved ones are also wondering about “the medical care they need” and a range of issues including “access to hormones, surgery, legal changes to a birth certificate or gender markers on a driver’s license,” she said in an email. 

“Often as planners, we default to our technical skills to plan the risk away,” Miko said. “While helpful and usually the reason our clients seek us out, it’s equally important to provide a safe space for our clients to express their fears and concerns, especially as it relates to their financial lives. As a marginalized community that has had to fight tooth and nail for basic human rights, LGBTQ clients are exhausted. Be patient, be willing to see things through a different lens, and listen with empathy.”

Even before the election, LGBTQ advocates had been tracking a surge in state bills and laws involving IDs, drag shows, health care and schools. 

For 2.7 million LGBTQ people over the age of 50, the rankings for the best states to retire in vary greatly from a list that doesn’t take their civil liberties into account, according to a report last month by the Movement Advancement Project, a nonprofit think tank. MAP’s top 10 of Oregon, Connecticut, Maine, Vermont, California, Hawaii, Delaware, Colorado, Rhode Island and New Jersey contrasted with a Bankrate list that rated Delaware, West Virginia, Georgia, South Carolina, Missouri, Mississippi, Pennsylvania, Florida, Iowa and Wyoming at the top. Delaware was the only state that made both top 10 lists.

“Including even a minimal consideration of a state’s treatment of LGBTQ people would result in a different ranking of states altogether,” MAP wrote in the report. “MAP’s research team decided to compare Bankrate’s analysis to our publicly available data on state policy to illustrate how state rankings can change dramatically when you incorporate laws and policies that shape the lives and experiences of LGBTQ people. Our findings show strikingly different results and highlight a very different set of considerations for LGBTQ adults deciding where to spend their golden years.”

READ MORE: LGBTQ retirees face specific challenges. Here’s how advisors can help

As inviting as a new state may seem when considering policies, clients will need to weigh factors such as whether their residence may affect their pension and a possible higher cost of living if they depart from a southern state to a coastal state like California or New York, Young noted. Since fear can lead to common behavioral biases or mistakes, planners must “show them the facts in terms of the implications of a potential move” and “be realistic with them” as the clients think through their long-term goals, she said.

“The big thing is to say, ‘Let’s step back and run the numbers.’ I think there’s a temptation among many people to say, ‘I’m going to move, I’m going to get out and we’ll figure it out when we get there,'” Young said. “If they were to move, it actually makes them feel much more confident with that move, as opposed to just panicking.”

In terms of the possible challenges to same-sex marriage, advisors and their clients could seek second-parent adoptions, update the beneficiaries listed in a will or a trust or purchase life insurance to cover estate taxes if one of the spouses dies, Miko noted. Those possible steps come on top of other necessary ones, if there is a Supreme Court decision overturning same-sex marriage rights or if individual states pass their own restrictions, she said.

“Many of the pre-2015 safeguards will have to be implemented once again, which still don’t quite level the playing field compared to legally recognized marriage rights,” Miko said. “For example, a non-married partner does not automatically inherit assets upon the death of a partner, and, in community property states, the surviving partner would not receive the tax benefit of a full step-up in cost basis on the inherited asset, such as a home.”

READ MORE: Are Christian donor advised-funds pushing anti-LGBTQ politics?

She and Young pointed out how marriage affects the policy of unlimited gifts between spouses without estate taxes and the requirement for clients to get current and valid power of attorney and advanced health care directive documents on file. 

“The good thing is that there are many LGBTQ estate attorneys who have been doing this for decades,” Young said. “That provides the best protection against potential changes in the law.”

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