The Financial Accounting Standards Board (FASB) has recently issued two significant Accounting Standards Updates (ASUs): ASU No. 2023-07 and ASU No. 2024-03. These updates aim to enhance the transparency and usefulness of financial disclosures for public business entities (PBEs) and are only applicable to PBEs.
ASU No. 2023-07: Improvements to Reportable Segment Disclosures
Issued in November 2023, ASU No. 2023-07 seeks to improve the disclosures about a public entity's reportable segments.
Key provisions
- Significant expense principle: Entities must disclose, annually, and on an interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss. The term “significant” is not defined but PBEs should consider relevant qualitative and quantitative factors when determining whether segment expense categories and amounts are significant. The FASB also acknowledged in Basis for Conclusions (BC) paragraph 35 that this disclosure requirement will likely vary depending on the level of expense information provided to a PBE’s CODM. This variation will likely exist between entities in the same industry and possibly even within a PBE’s reportable segments.
- Other segment items: Entities must disclose annually and on an interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the segment expenses disclosed under the significant expense principle (see above) and each reported measure of segment profit or loss.
- Interim disclosures: A PBE must provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Accounting Standards Codification (ASC) Topic 280 in interim periods.
- Segment profit or loss measurement: PBEs must disclose the measure of segment profit or loss that most closely aligns with the measurement principles under U.S. generally accepted accounting principles (US GAAP). However, a PBE may disclose additional measures of segment profit or loss if used by the CODM in assessing segment performance and deciding how to allocate resources. However, the PBE is not required to disclose these additional measurements.
- CODM disclosure: PBEs must disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The CODM could be an individual or a group of individuals, such as a committee.
- Single reportable segments: PBEs with a single reportable segment are still required to meet the disclosure requirements of this ASU and any existing disclosure requirements in ASC Topic 280. The ASU also adds a disclosure example for those PBEs that only have one reportable segment starting at ASC 280-10-55-53.
It should be noted this ASU is not changing the method in which an entity identifies its operating segments and ultimately its reportable segments. Also, the FASB acknowledged there may be a duplication of information with these new disclosure requirements. For instance, some of this information may already be disclosed in the entity’s income statement. In BC paragraph 32, the FASB indicated, “While duplication is not prohibited, the Board believes that duplication of the entire consolidated income statement in the segment footnote is unnecessary; rather, a public entity may choose to reference the primary financial statements in the segment footnote.”
Effective date:
The amendments in ASU No. 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. So, for calendar year-end PBEs, this ASU will be effective in their December 31, 2024, financial statements.
ASU No. 2024-03: Disaggregation of Income Statement Expenses
On November 4, 2024, the FASB issued ASU No. 2024-03, which requires PBEs to provide expanded disclosures about specific expense categories in interim and annual reporting periods.
Key provisions
- Tabular disclosure: Entities must disclose, in a tabular format, amounts recognized in each relevant expense caption in the income statement for the following specific natural expenses:
- Purchases of inventory*
- Employee compensation**
- Depreciation
- Intangible asset amortization
- Depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities (DD&A)
- Other amounts: Certain amounts that are already required to be disclosed under U.S. GAAP must be included in the same tabular disclosure if those expenses are included in a relevant expense caption. These certain amounts are listed in ASC 220-40-50-21 and 22.
- Qualitative descriptions: A qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively is also required. Relevant expense captions are those that include one of the specific natural expenses listed above. So, for example, if depreciation is included in “occupancy expense” on the income statement, a qualitative description of the other expenses comprising “occupancy expense” would be required. If a relevant expense caption consists entirely of one expense category listed above, it is not subject to the requirements of this ASU.
- Selling expenses: Entities must disclose the total amount of selling expenses and, in annual reporting periods, provide their definition of selling expenses.
The ASU also provides some example disclosures broken down by industry (manufacturing, service operations, and a bank) in the “Implementation Guidance and Illustrations” section of the ASU.
*ASC 220-40-50-19 provides a practical expedient for inventory when substantially all of an entity’s income statement expense caption comprises purchases of inventory. In this case, the entity does not have to disclose this amount in its tabular disclosures but does need to provide a qualitative description of the composition of the expense caption.
**ASC 220-40-50-20 provides a practical expedient where an entity that presents an expense caption for salaries and employee benefits (or similarly named) on its income statement that complies with the Securities and Exchange Commission’s requirements, the entity may use that amount for purposes of satisfying the ASU’s disclosure requirements rather than following the definition of employee compensation specifically provided in the ASU.
Effective date
ASU No. 2024-03 is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027.
Implications for Public Business Entities
These ASUs represent a significant shift towards greater transparency in financial reporting. Entities are encouraged to assess their current reporting practices and make necessary adjustments to comply with the new requirements. Early preparation will be crucial to ensure a smooth transition and to meet investor expectations for enhanced financial disclosures. On their surface, it may appear as if these ASUs should be relatively easy to implement. However, upon diving into these ASUs, significant changes to existing practices may be required, depending on the level of detail of information currently being generated by your organization. As always, your BerryDunn team is here to help!
Skip to Main Content