ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40), requires public business entities (PBEs) to disclose, in a table in the notes, the natural expense categories that sit inside the expense captions on the face of the income statement. The income statement itself does not change. The FASB's stated aim was more granular expense information for investors, following ASU 2023-07 on segment reporting and ASU 2023-09 on income tax disclosures.
Most clients of small CPA firms are not PBEs, and for them this ASU does not apply. It matters to firms that audit PBEs or entities that might become one, such as a company preparing for an offering or a borrower that may be a conduit bond obligor. For effective dates of other recent ASUs, see the ASU effective dates tracker.
Who does ASU 2024-03 apply to?
Public business entities only, in their annual and interim financial statements. The category includes SEC filers of every size, including smaller reporting companies and emerging growth companies, and entities whose financial statements are included in another entity's SEC filings. Private companies and nonprofits that are not PBEs are outside the scope. The KPMG effective-date table shows "N/A" in the all other entities column.
When is it effective?
- Annual periods: fiscal years beginning after December 15, 2026.
- Interim periods: interim periods within fiscal years beginning after December 15, 2027.
- Early adoption: permitted.
- Transition: prospective for all PBEs, with retrospective application permitted.
ASU 2025-01 clarified the effective date: the interim requirement starts one fiscal year after the first annual period, not in the interim periods of the first year. For a calendar-year PBE, the first annual statements are for the year ending December 31, 2027, because the fiscal year beginning January 1, 2027 is the first one beginning after December 15, 2026. The first interim disclosures are for the quarter ending March 31, 2028, because the fiscal year beginning January 1, 2028 is the first fiscal year beginning after December 15, 2027. The 2027 interim periods carry no new disclosure.
What must be disclosed?
Step 1: identify relevant expense captions. A relevant expense caption is a line on the face of the income statement, within continuing operations, that contains any of the prescribed natural expense categories. It can be a functional line, such as cost of sales, R&D or SG&A, or a natural line. Not every line is a relevant caption. A caption made up entirely of one prescribed category, such as depreciation, needs no further disaggregation.
Step 2: disaggregate each relevant caption in a table. The prescribed categories, presented separately for each relevant caption, are:
- purchases of inventory
- employee compensation
- depreciation
- intangible asset amortization
- depreciation, depletion and amortization of oil-and-gas producing activities
- depletion (for industries other than oil and gas)
The ASU also adds Master Glossary definitions of employee and employee compensation. Employee compensation follows the compensation costs in Topics 710, 712, 715 and 718, covering wages, bonuses, payroll taxes, benefits and stock compensation. One-time termination benefits for involuntarily terminated employees are shown on a separate line.
Step 3: add the additional lines that make the table reconcile to the face of the statement:
- certain expense reimbursements under cost-sharing arrangements
- specific expenses, gains and losses other US GAAP already requires to be disclosed, such as impairments and bargain purchase gains
- other items, with a qualitative description of what they contain, so the table totals to the caption on the income statement
- for captions that include inventory, changes in inventories and other adjustments and reconciling items when the cost-incurred basis is used
Step 4: disclose selling expenses. Companies disclose the total amount of selling expenses recognized in continuing operations, and in annual statements describe how they define it. Selling expenses is a management-defined measure. A change in definition requires recasting prior periods when practicable. The FASB did not say whether advertising cost belongs in it.
How does the inventory basis work?
For captions with inventory, a PBE may disaggregate on a cost-incurred or expense-incurred basis. Costs incurred include costs capitalized to inventory and amounts expensed directly. Expenses incurred include expense recognized on derecognition of inventory and amounts expensed directly. The choice must be applied consistently to all categories within the scope of Topic 330. KPMG's example: a company buys $100 of goods, sells $80 and holds $20 at year end. Purchases of inventory are $100 on the cost-incurred basis and $80 on the expense-incurred basis, and under the cost-incurred basis the $20 is a reconciling item. Changing basis requires recasting prior periods unless impracticable.
Two practical expedients exist. A company presenting a salaries and benefits caption under S-X Rule 9-04, such as a bank, may use that amount for employee compensation. A company may give a qualitative description of the composition of an expense caption instead of amounts when substantially all of it relates to purchases of inventory in the scope of Topic 330.
Worked table (illustrative)
A manufacturer (a PBE) presents cost of products sold of $470 on the face of the income statement and uses the cost-incurred basis:
| Cost of products sold | Amount |
|---|---|
| Purchases of inventory | 300 |
| Employee compensation | 80 |
| Depreciation | 40 |
| Intangible asset amortization | 10 |
| Warranty expense | 15 |
| Other cost of products sold | 40 |
| Changes in inventories | (15) |
| Total cost of products sold | 470 |
The first six lines add to 485 (300 + 80 + 40 + 10 + 15 + 40). Inventory grew by $15 during the year, so the changes-in-inventories line reduces the expense by 15 and the table totals the 470 shown on the face of the statements. The company would add a note on the composition of "other," such as freight and environmental accruals, and separately disclose selling expenses and its definition.
What does it mean for audit and close?
For a PBE audit, the new disclosure is a note the auditor tests for completeness and accuracy like any other. The numbers come from the general ledger, so the work is in mapping accounts to the prescribed categories. Common points to plan for:
- Whether payroll costs capitalized into inventory or into internal-use software are tracked by caption.
- How stock compensation is allocated across captions, since it is part of employee compensation.
- Whether the ledger can separate depreciation and amortization by caption.
- Where loss contingencies and warranty sit: if recorded entirely in one caption they get a separate line there.
- Whether the selling expense definition is documented and applied consistently.
A calendar-year PBE needs the mapping in place when the 2027 fiscal year begins for the annual note, and before the first quarterly note for the quarter ending March 31, 2028.
Frequently asked questions
Does ASU 2024-03 apply to private companies?
No. It applies to public business entities. A private company is not required to apply it.
What did ASU 2025-01 change?
It clarified the effective date: annual periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027.
Does the face of the income statement change?
No. The ASU requires note disclosure of natural expense categories within the existing captions. It does not add subtotals or change the presentation.
Is selling expense a defined term?
No. It is management-defined. The company discloses the total and, annually, how it defines it.
Is early adoption allowed?
Yes.
Sources
- FASB, ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40) (November 2024), and ASU 2025-01, Clarifying the Effective Date (January 2025). https://www.fasb.org/standards
- KPMG, Defining Issues: FASB issues ASU on disaggregation of income statement expenses - DISE (November 5, 2024).
- KPMG, Accounting standards effective dates (March 2026): ASU 2024-03 and ASU 2025-01 rows.
- KPMG Financial Reporting View, "Disaggregation of income statement expenses." https://kpmg.com/us/en/frv/reference-library/2025/disaggregation-income-statement-expenses.html
Related
- ASU effective dates tracker
- Inventory costing under ASC 330
- ASC 450 loss contingencies
- ASC 718 stock compensation
- Segment reporting
- Flux analysis calculator
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