FASB targets greater transparency with latest accounting standards update

The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) that mandates new expense disclosures for public companies.

Published on November 4, this update, which responds to long-standing calls from investors, aims to provide a clearer view of companies’ cost structures, helping investors assess financial performance, compare companies, and better forecast future cash flow.

The new update is a direct response to feedback FASB gathered in 2021 and earlier consultations. Investors have consistently expressed the need for greater detail on companies’ expenses, particularly around major areas like cost of sales and selling, general, and administrative (SG&A) expenses.

Many investors believe that more granular information on these categories, including employee compensation costs, would enable them to make more informed judgments on a company’s financial health and outlook.

FASB Chair Richard R. Jones emphasised this sentiment, noting, “We heard time and again from investors that additional expense detail is fundamental to understanding the performance of an entity.”

What  Companies Need to Disclose

Under the new rules, public companies are required to include specific breakdowns of expenses in their financial statements at both interim and annual reporting periods. This includes disclosures in the notes to the financial statements that detail amounts for:

• Inventory purchases
• Employee compensation
• Depreciation
• Intangible asset amortization
• Depreciation, depletion, and amortisation related to oil and gas-producing activities (or other depletion expenses)?

Additionally, companies must disclose their total selling expenses and, in annual reports, define what is included under “selling expenses.” For expenses that don’t fit neatly into these categories, companies must provide qualitative descriptions of the remaining expenses.

Implications for Investors and Companies

This ASU represents a significant shift in how companies report expenses, and it is expected to offer investors a more detailed view of companies’ operational costs. By requiring companies to disclose specific expense information, FASB aims to support investors in their analyses, helping them evaluate trends over time and compare financial performance across different entities. For companies, however, the update will likely require adjustments in financial reporting practices, as the new requirements introduce a higher level of detail and consistency in disclosures than many companies currently provide.

Timeline for Implementation

The ASU takes effect for annual reporting periods beginning after December 15, 2026, and for interim reporting periods starting after December 15, 2027. Companies can also opt for early adoption if they are prepared to implement the changes sooner?.

FASB’s latest update on expense disaggregation aligns with its broader push to improve transparency across financial reporting.

In recent years, FASB has introduced standards that enhance disclosures around revenue and income tax information. Coupled with these earlier updates, the new ASU on expense reporting is intended to provide investors with a more comprehensive picture of a company’s income statement by disclosing specific information on revenue, expenses, and taxes.

This article first appeared in Accountancy Age’s sister publication, The CFO.