Income Statement Upgrades Would Add Costs

On February 16, the Financial Accounting Standards Board (FASB) voted to reframe its project to revise the income statement, sticking with the objective of providing investors with more useful information. This project would require more detailed breakouts of expenses, which would cause companies to incur costs.

Old project, new name

The income statement project started in 2017 under the name “disaggregation of performance reporting.” The effort was paused in 2019 to allow the FASB to work on segment reporting, which had intertwining issues.

Now the income statement project has been resurrected and rebranded with the name “disaggregation of the income statement.” The focus will be on business entities, both public and private. Not-for-profit organizations would be excluded.

Need for change

Revisions to the project come in response to investor outcry that the income statements of nonfinancial companies are lacking key information about certain items, such as human capital. The Great Resignation is leading to high turnover rates. However, few companies provide information on their financial statements about what they’re doing to attract and retain skilled workers.

“If you think about today, we have rising inflation costs, you have conference calls over and over again where managements are talking about rising labor costs, rise in raw material costs, or transportation costs are exploding — you have no information on this in the income statement,” said FASB member Gary Buesser.

Many companies don’t break out information about cost of goods sold and cost of sales. However, investors and lenders are clamoring for granularity and detailed line items. This contrasts heavily with financial statement preparers, who have expressed concerns about the cost of tracking, reporting, disclosing and auditing the additional disaggregated information.

Plan of attack

Based on stakeholder feedback, the FASB will work to disaggregate three areas of expense:

  1. Selling, general and administrative expenses (SG&A),
  2. Cost of services and other cost of revenues, and
  3. Cost of tangible goods sold.

There may not be a one-size-fits-all solution. So, discussions will start with SG&A, then will be followed by the other categories.

“We have a large volume of disclosures related to the income statement already that I do think we need to be aware of and be cognizant of. We’re not here to duplicate information, we’re here to disaggregate information on the income statement,” said FASB Chair Richard Jones.

Cost-benefit analysis

Last year, the FASB issued Invitation-to-Comment (ITC) No. 2021-004, Agenda Consultation. Its goal is to solicit public feedback about which projects to add or prioritize when developing its five-year technical agenda. Respondents to the ITC said that the FASB’s agenda should include more investor-focused projects, such as the effort to revise the income statement. Rather than simply listening to preparers, the FASB is committed to giving equal credence to investors when comparing the costs and benefits of any potential new rules.