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[US] Companies Will Have to Disclose Spending on Worker Pay for the First Time

June 26, 2024

Despite corporate pushback, the Financial Accounting Standards Board voted to require U.S. public businesses to break out things like inventory purchases and employee compensation in the footnotes of their financial statements

The Financial Accounting Standards Board voted Wednesday to require U.S. publicly traded businesses to break out things like inventory purchases and employee compensation spending in the footnotes of their financial statements, giving investors more insight into companies’ operations.

The standard setter voted 7-0 to mandate quarterly disclosure of employee compensation, depreciation of property and equipment, amortization of intangible assets such as trademarks, and inventory purchases in the footnotes of income statements. The details will provide more information about the cost of goods sold and selling, general and administrative expenses for companies.

Companies will have to provide the amount of employee compensation spending that is included in each expense line item on the income statement. For example, with the cost of goods sold, companies would provide how much of that expense item is spending on salaries, bonuses, share-based payments and medical and pension benefits. They won’t have to give a total employee compensation figure.

Companies will have to put all required expense items, except selling expenses, into a table, along with some expenses they already disclose. The footnotes to companies’ financial statements will grow under the rule, but the face of their income statement wouldn’t change.

Businesses will separately need to disclose selling expenses, which are expenses tied to distributing, marketing and selling products or services, along with their reasoning behind that classification.

All disclosures will have to be provided quarterly, except for how they define selling expenses, which must be done annually with any changes from the previous year’s definition noted.

Currently, income statements present how much revenue the company earned over a particular period, along with the related costs and expenses and net earnings or losses. They have to disclose things like the cost of sales and operating expenses, such as those from research and development and advertising. No further breakdown of those operating expenses was mandated until now.

The requirements are set to go into effect for most companies’ 2027 annual financial reports, and the following year for quarterly reporting, though companies can adopt them early. The FASB is aiming to formally issue the requirements by later this year, a spokeswoman said.

Companies have moved from denial to acceptance over the last seven years that the project has been in the works, board member Christine Botosan said. “I think where we’ve ended up is very much in a compromise,” she said. “I suspect that all parties are happy with parts of this and not happy with other parts of it, and that probably means that we’ve struck the right balance.”

Corporate concerns
The rule is intended to help investors better grasp companies’ operations through wider disclosure, but some businesses have pushed back.

International Business Machines, Apple, Starbucks and others urged the FASB to revise the proposal it issued last July, saying it would be costly to carry out, and deliver little benefit to investors.

“We have significant concerns about the operability of the proposed standard, the significant cost of compliance, and whether the resulting disclosure will provide additional decision-useful information to users of our financial statements,” Kathleen McDonald, IBM’s assistant controller, said in an October 2023 letter to the FASB. IBM declined to comment Wednesday.

Companies have said they expect to incur meaningful one-time costs to implement and redesign their enterprise resource planning systems and potentially hire additional employees. Companies said they would likely have recurring costs for annual audits and interim reviews, which will vary depending on the businesses’ size and complexity.

The FASB in May adjusted the proposed rule to remove subtotals for inventory and manufacturing expenses and replace them with purchases of inventory, in response to companies’ concerns about compliance costs and to provide clearer information for investors. “Effectively, what we did was lessen the burden of the standard as opposed to increase it,” Rich Jones, the board’s chair, said at Wednesday’s meeting.

The rule would have the largest impact on companies across industries of any other FASB project this year, and is likely the highest priority for investors too, Jones said in a December interview.

Wednesday’s approval comes after another big expense-related project. The FASB last November issued a new rule requiring U.S. public companies to disclose large expenses incurred by their business divisions.

The latest rule requires executives to disclose information they likely don’t already have and would need to accumulate. That is in contrast with the November segment-reporting rule, which seeks information companies already provide to a top executive or corporate board’s executive committee.

[Wall Street Journal]

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