FASB Approves New Requirements for Disclosure of Big Expenses by Segment
July 26, 2023
Companies will have to share more detail on their business divisions, information that might help investors evaluate the company
U.S. public companies will have to break out big-ticket expenses incurred by their business divisions under updated requirements approved by the Financial Accounting Standards Board, a bid to give investors a clearer view of financial performance.
Companies usually split their operations into segments by business line or geography. They are required to disclose a measure of their profits or losses by operating segment in their financial statements, but don’t have to go into much additional detail.
On Wednesday, the U.S. accounting standards-setter for companies voted 6-1 to adopt an update that would require publicly traded businesses to disclose significant expenses in those divisions on a quarterly and annual basis. These expenses could include labor, technology fees, rent and cost of goods sold.
The information is limited to companies that already provide segment information to a so-called chief operating decision maker, an accounting designation used by FASB and its international counterpart, the International Accounting Standards Board. Businesses that don’t currently share this information with their chief executive, chief operating officer or their board’s executive committee won’t have to disclose it to investors. These businesses will have to state in their disclosure that their senior executives don’t receive this data. Companies with only one business segment will also have to report their significant expenses.
Under the update, businesses will have to disclose the title and position of the individual or group they have deemed chief operating decision maker, something not currently mandated.
The requirements, for which the FASB issued a proposal in October, are set to go into effect for annual reporting periods beginning after Dec. 15, 2023, though companies can adopt them early. The FASB expects to formally issue the requirements this fall, a spokeswoman said.
The FASB had been considering tweaks to the rules on business-segment reporting since 2017. “I do believe we’re better off with this standard than without and I do think it moves the needle,” Chairman Rich Jones said. “Every entity will disclose additional information about expenses.”
The approval marks a step forward for investors, many of whom have called for more-detailed breakdowns of companies’ expenses and other information to help forecast revenue and margins when valuing a business. The CFA Institute, which represents investment professionals, said in a March letter to the FASB that the proposal didn’t do enough to address investor concerns, for example a lack of improved geographic disclosures and no insight on how companies make capital-allocation decisions.
Board member Christine Botosan voted against the update, saying she was skeptical about the value of the requirements because companies could easily circumvent them by reducing the information they provide to the decision maker.
Many companies sought clarification in the proposal on how to assess the significance of the expenses, among other decisions they will have to make.
For example, pharmaceutical company Eli Lilly said the proposal should focus on disclosure of significant expenses that are regularly reviewed by the decision maker, not only provided to them. Certain financial information that the executive could receive isn’t necessarily used for decision making, Donald Zakrowski, the Indianapolis-based company’s senior vice president of finance and chief accounting officer, said in a January letter to the FASB.
The FASB on Wednesday declined to make that change, saying it could result in less information for investors.
Software and services-design company Autodesk said requiring companies to separately disclose expenses they might not otherwise could cause competitive harm. “As interpreted, the requirement wouldn’t provide any additional information to users of the financial statements beyond what is already available elsewhere in the financial statements,” Stephen Hope, the San Francisco-based company’s chief accounting officer, said in a December 2022 letter to the FASB.
Companies, in providing their views on the proposal to the FASB, said they didn’t expect hefty costs to comply with the requirements. Bank of America, in a December letter, said the proposed requirements offer a cost-effective means of providing the information to investors and other users of financial statements.
Eli Lilly, Autodesk and Bank of America declined to comment on the adoption Wednesday.
The income-statement project is unrelated to another potential new rule on expense disclosure. The FASB in March voted to propose requiring U.S. public companies to further break down the operating expenses that appear on their income statement, for example by disclosing the amount of employee compensation.
The income-statement plan could require executives to disclose information they don’t already have and would need to accumulate. The board has yet to issue a proposal on which the public would comment.
[The Wall Street Journal]
