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Disaggregated expense disclosures: Don’t roll the DISE · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office.
• 0:07
  SPEAKER_03: Hello and welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_03: I'm Heather Horn.
• 0:12
  SPEAKER_03: In today's episode, we're discussing the FASP's disaggregation of income statement expenses, or DICE, disclosure requirements.
• 0:20
  SPEAKER_03: While the standard doesn't change how companies recognize or measure expenses, it does require significantly more detail about what's included in key income statement expense captions.
• 0:30
  SPEAKER_03: And with the effective date rapidly approaching, many companies are beginning to assess the data, systems, processes, and judgments needed to comply.
• 0:42
  SPEAKER_03: Joining me today, I'm so happy to welcome Angela Ferguson, a partner in PWC's National Office, and Gary Sardo, a partner in PWC's deals practice, who works closely with companies in financial reporting and implementation matters.
• 0:55
  SPEAKER_03: Together, they'll discuss what the standard requires, key implementation challenges, and practical lessons learned from the companies preparing for adoption.
• 1:03
  SPEAKER_03: All right, that's a big sale, guys.
• 1:05
  SPEAKER_03: So I'm expecting a lot.
• 1:07
  SPEAKER_03: So with that, let's get started.
• 1:09
  SPEAKER_03: All right, so Angela, starting things off, hopefully all our listeners will know what DICE is, but why don't we give a quick summary?
• 1:16
  SPEAKER_04: Sure, Heather.
• 1:17
  SPEAKER_04: So DICE is all about giving financial statement users more visibility into what's inside the expense captions that companies already present in their income statement.
• 1:29
  SPEAKER_04: Most companies present their expenses in what we call functional categories.
• 1:35
  SPEAKER_04: So it may obviously vary from company to company or for different industries, but many companies use the standard expense captions like cost of sales, RD, SGA.
• 1:46
  SPEAKER_04: The new DICE disclosure is intended to give a more of a peek inside to those expense categories as far as what are the natural expenses that make up those functional categories.
• 2:00
  SPEAKER_04: Similar to some of the other recent new standards that have been implemented, including income taxes and segment reporting, this is a disclosure-only standard.
• 2:12
  SPEAKER_04: So it doesn't change anything about how you do your accounting, what goes into your financials, or even how you present your income statement.
• 2:20
  SPEAKER_04: None of that's changing.
• 2:22
  SPEAKER_04: This is only a supplemental disclosure and largely it will be a new table that goes into your footnotes with this additional information.
• 2:33
  SPEAKER_04: From a timing perspective, it's effective in 2027 annual financial statements for calendar year and companies.
• 2:41
  SPEAKER_04: And after that, it will be both an interim and an annual disclosure.
• 2:46
  SPEAKER_03: All right.
• 2:46
  SPEAKER_03: And then I know that there's a public round table at the end of May, so about a week ago, um, and the issue of deferring the effective date did get some discussion.
• 2:56
  SPEAKER_03: So are we expecting to see any changes there?
• 3:00
  SPEAKER_04: That's right.
• 3:00
  SPEAKER_04: There was a public roundtable that was held at the FASB to discuss DICE implementation, and that included preparers from a you know different industries, as well as investors and representatives from the audit firms.
• 3:15
  SPEAKER_04: And, you know, one of the things that did come up, and there were a couple of preparers who were uh really promoting to have a deferral of the effective date to give them more time to implement this new guidance.
• 3:28
  SPEAKER_04: But I would say, you know, the board members and all of the board members were present at this roundtable, I believe.
• 3:34
  SPEAKER_04: The board members did not commit to any kind of deferral.
• 3:38
  SPEAKER_04: In fact, the chair was talking about potential alternatives to a full deferral, such as a phase-in or a partial deferral.
• 3:48
  SPEAKER_04: I would say nothing really got a lot of traction.
• 3:51
  SPEAKER_04: Um, and there was clearly no commitment to reconsider it or to do any kind of vote on doing a deferral.
• 4:00
  SPEAKER_04: So while we don't know exactly whether the FASB will decide to take any action, they certainly did hear the feedback.
• 4:07
  SPEAKER_04: I would not be counting on a deferral at this point.
• 4:10
  SPEAKER_01: Yeah, I wouldn't count on it either.
• 4:12
  SPEAKER_01: And and even if the board votes to defer, their standard setting process takes months.
• 4:16
  SPEAKER_01: And so a decision to finalize a deferral would take a very long time.
• 4:20
  SPEAKER_01: The only other avenue that that could potentially occur is if the SEC steps in to defer, which I don't anticipate happening, then and there's been no indication of that occurring.
• 4:29
  SPEAKER_03: So all right.
• 4:30
  SPEAKER_03: So definitely sounds like at least at this point, continue to prepare for the year-end uh reporting next year.
• 4:36
  SPEAKER_03: I guess one other question, Angela, you mentioned that for 2027, it's the annual period and then quarterly periods thereafter.
• 4:45
  SPEAKER_03: And so will companies then have to go back and change their 2027 quarters to match up, or no, it's truly 2027 year end.
• 4:55
  SPEAKER_04: In fact, the standard can be adopted purely prospectively, or you can provide comparative periods.
• 5:02
  SPEAKER_03: So it will be a choice.
• 5:03
  SPEAKER_03: All right, that's at least some good news for companies.
• 5:06
  SPEAKER_03: So it's a little more time for preparation.
• 5:09
  SPEAKER_03: Okay.
• 5:09
  SPEAKER_03: So then um, anything else coming out of the round table that you guys would highlight?
• 5:14
  SPEAKER_01: No, I think that the only as Angela mentioned, the the main thing to highlight was that there was not a clear action item coming out of the round table.
• 5:22
  SPEAKER_01: No announcement for an amendment, no changes to the standard, again, no indication for a deferral.
• 5:28
  SPEAKER_01: So just keep marching towards that 2027 effective date.
• 5:31
  SPEAKER_04: Yeah, I mean, there were a few things that got some discussion, and we'll try to highlight those as we go through different topics today.
• 5:37
  SPEAKER_04: I mean, at a high level, the investors that were there continued to reiterate that they will use this data, that they need this data, and the preparers that were there were largely um talking about some of the challenges that they're facing and gave an update on their implementation status, which did vary from company to company.
• 5:57
  SPEAKER_03: All right.
• 5:58
  SPEAKER_03: So then let's go back to the standard.
• 6:00
  SPEAKER_03: And again, hopefully our listeners are aware of this.
• 6:03
  SPEAKER_03: But who exactly is impacted by the standard?
• 6:06
  SPEAKER_04: So it applies to uh what is defined as a public business entity.
• 6:12
  SPEAKER_04: And generally that's going to include all public companies and then companies that otherwise file financial information with the SEC.
• 6:19
  SPEAKER_01: Yep.
• 6:19
  SPEAKER_01: And just to jump in here and given my deals background, I always am talking about this.
• 6:24
  SPEAKER_01: So I think it's very important.
• 6:25
  SPEAKER_01: It's a it's a big sleeper issue.
• 6:27
  SPEAKER_01: Um, private companies should not tune out to DICE since it could become relevant for them in certain scenarios.
• 6:34
  SPEAKER_01: So, for example, if a private company is exploring an IPO, um, companies will need to prepare uh and get ready for implementation of DICE in their public uh financials once they're effective with the SEC.
• 6:48
  SPEAKER_01: And then additionally, through acquisitions, if a private company is acquired by a public company and that acquiry is significant under the SEC thresholds, that private company acquiry will have to implement DICE and show those DICE disclosures in their standalone financial statements.
• 7:05
  SPEAKER_01: So very, very important big sleeper issue that private companies can be easily impacted by this.
• 7:11
  SPEAKER_03: Yes, and especially given the fact you're saying the complexity to adopt that people already are asking for an extension and they're still 18 months, uh, that definitely is something for these companies to be thinking about.
• 7:22
  SPEAKER_01: Exactly.
• 7:22
  SPEAKER_01: It's a very compressed time frame compared to public companies who've now had multiple years to prepare.
• 7:28
  SPEAKER_03: All right.
• 7:28
  SPEAKER_03: So something to keep in mind then.
• 7:30
  SPEAKER_03: And then uh maybe going a little deeper into this, can you give some examples, Angela, of how much detail the standard requires?
• 7:38
  SPEAKER_04: Yeah.
• 7:39
  SPEAKER_04: So for each uh expense caption in the income statement, um, it's called the relevant expense caption, but that's generally going to be your major line items, such as cost of sales, SG ⁇ A, R D.
• 7:51
  SPEAKER_04: Uh, there will be a new table in the footnotes that takes each of those expense captions and provides additional detail about what's inside.
• 8:01
  SPEAKER_04: There are five required categories of what we're calling natural expenses that you have to show for each expense caption as long as it's applicable.
• 8:12
  SPEAKER_04: Those five categories are purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depreciation, depletion, and amortization, or sometimes called DDNA, which is applicable to certain industries such as um oil and gas.
• 8:31
  SPEAKER_04: Then there are certain other amounts that need to be separately presented in the table.
• 8:36
  SPEAKER_04: And this includes certain types of cost reimbursements, and then amounts that already require disclosure in the footnotes.
• 8:45
  SPEAKER_04: And there's kind of a long list of these, but this would include things like warranty expense and impairment charges.
• 8:52
  SPEAKER_04: So most companies are going to have a balance left over, and that will be the other expenses.
• 8:58
  SPEAKER_04: And that doesn't that needs to be described qualitatively.
• 9:02
  SPEAKER_04: So you will need to have information about what's in that balance, but just for the qualitative disclosure.
• 9:08
  SPEAKER_04: Then, separate from this new table, there is one other requirement to highlight, which is that companies will have to disclose selling expenses, which is a term that's not defined in the guidance on purpose, right?
• 9:22
  SPEAKER_04: So companies will have their own company specific definition of selling expenses, and they will need to quantify that and then describe how they've defined that category.
• 9:33
  SPEAKER_03: And then, Angela, for this other category, is there any sort of quantitative limit to how much can be included, or is it just whatever's left?
• 9:43
  SPEAKER_04: It's whatever's left.
• 9:44
  SPEAKER_04: So for some companies, that could be a pretty big number.
• 9:47
  SPEAKER_04: Um, now, of course, companies could choose to provide a further quantitative breakdown of that other amount, but they don't, they're not required to.
• 9:58
  SPEAKER_04: And they only need to describe it qualitatively.
• 10:01
  SPEAKER_01: Yep.
• 10:01
  SPEAKER_01: And this got some some traction at the round table as well.
• 10:04
  SPEAKER_01: I think, you know, for some of the board members and the uh investor stakeholders that were present, there just continues to be some stress on whether this other bucket will be too significant for some companies.
• 10:15
  SPEAKER_01: And then if it is, did did the FASB really achieve what they've set out to achieve given the potential size of this category?
• 10:22
  SPEAKER_01: Um, and there was one early adopter that was present at the round table that did disclose additional discretionary line items to reduce the size of that other, but um, other preparers chimed in saying they'd be highly unlikely to do that.
• 10:36
  SPEAKER_01: So all right.
• 10:37
  SPEAKER_03: And then just listening to the number of captions and thinking about information.
• 10:42
  SPEAKER_03: I know we're gonna get into preparedness, but I guess, Gary, since you've been working with companies, are you seeing that companies do have this information available or not really?
• 10:52
  SPEAKER_01: No, for most companies, it takes a little bit of a digging exercise to see what data is available.
• 10:58
  SPEAKER_01: So you'll likely need to go a level or so deeper than your general ledger into subledger data, um, possibly plant level information if you're you know an inventory manufacturer, your cost accounting records, and so on.
• 11:12
  SPEAKER_01: So it'll it'll depend highly on your current chart of accounts and and other information that feeds your GL and your consolidation systems.
• 11:20
  SPEAKER_01: And aside from where your data is coming from, your process to produce these disclosures needs to be repeatable and it all needs to tie back to the financials.
• 11:28
  SPEAKER_01: So that means obviously reliable sources of data, completeness and accuracy of the data, chart of accounts mappings, getting comfortable with how that mapping is feeding into your consolidations, reconciliations, controls, and the like.
• 11:41
  SPEAKER_01: So this is a pretty heavy lift and in part a digging exercise to figure out what's what's there, right?
• 11:49
  SPEAKER_01: Um, and just like any other financial statement disclosure, the dice disclosures will be subject to audit.
• 11:54
  SPEAKER_03: So then it's interesting because you mentioned repeatable, which is obviously extremely important.
• 11:59
  SPEAKER_03: Are you seeing that companies are anticipating automating these disclosures or is it initially going to be a spreadsheet exercise or a mix?
• 12:07
  SPEAKER_01: They're they're trying to automate as much as they can.
• 12:09
  SPEAKER_01: Um, I would say it's highly unlikely to have it entirely automated.
• 12:13
  SPEAKER_01: So I think companies are taking, you know, as far as they can go within their systems using transactional level data, and then from there, you know, applying some sort of estimates and allocations to top off the disclosure amounts.
• 12:27
  SPEAKER_03: And did that come up at all at the roundtable?
• 12:30
  SPEAKER_03: Because again, for most companies, not being able to automate something that you have to report every quarter, that's going to be a challenge.
• 12:36
  SPEAKER_01: Yeah, it did.
• 12:37
  SPEAKER_01: It it came up from a you know timing of uh being able to develop these disclosures, especially for 10 Qs, right?
• 12:45
  SPEAKER_01: Um and also, you know, the the idea of estimation and allocations and and what that looks like and what's you know permissible, so to speak.
• 12:53
  SPEAKER_01: Um, that that continues to be a topic of discussion amongst preparers.
• 12:57
  SPEAKER_04: Yeah, estimates have been a big area of discussion and and you know, question about okay, what what are the estimates we should use?
• 13:03
  SPEAKER_04: I mean, the challenge is that it it just really varies from company to company.
• 13:07
  SPEAKER_04: What estimates are gonna make sense depends what data you have as a starting point.
• 13:12
  SPEAKER_04: So it's difficult to say there's any kind of like one size fits all approach.
• 13:16
  SPEAKER_03: Yeah, and I guess it's interesting because you made an interesting point about the subject to audit, but this definitely something that you should talk to your auditors about up front because you don't want to get to the end and have different points of view about the estimation or otherwise.
• 13:30
  SPEAKER_03: That would be a good idea.
• 13:32
  SPEAKER_03: Yes.
• 13:32
  SPEAKER_03: All right, everyone's smiling here.
• 13:34
  SPEAKER_03: Um, anything else then, Angela, that you would highlight as kind of people are approaching this?
• 13:39
  SPEAKER_04: Yeah, I mean, two things I want to mention just to really frame our discussion.
• 13:44
  SPEAKER_04: One we just touched on, which is that uh the the standard even says in it that you can use estimates and approximations.
• 13:54
  SPEAKER_04: So that is explicitly allowed.
• 13:56
  SPEAKER_04: I mean, it it really is anytime, but the but the FASB wanted to make a point by actually putting it in the standard.
• 14:03
  SPEAKER_04: So again, how estimates are used is going to vary from company to company.
• 14:08
  SPEAKER_04: But um, you know, we sometimes call this the top-down approach.
• 14:11
  SPEAKER_04: And just to make it clear that that is something that's permissible.
• 14:14
  SPEAKER_04: It doesn't have to be something that's built up through a bottoms up approach.
• 14:19
  SPEAKER_04: Um, the other really important concept is that just like any other disclosure, uh, you do not have to disclose things that are not material, right?
• 14:29
  SPEAKER_04: So materiality applies.
• 14:31
  SPEAKER_04: And even when you're talking about things that are required disclosures, um, it's only if that amount is material to the financials.
• 14:41
  SPEAKER_04: Again, materiality is a judgment, and companies are gonna have to think about and agree internally and with their auditors about how they think about materiality, but that's an overlay over all of the requirements we're talking about today.
• 14:56
  SPEAKER_03: All right.
• 14:56
  SPEAKER_03: So definitely also something to think about as companies are preparing, where they're gonna need the assessments, what's going to be material, et cetera.
• 15:04
  SPEAKER_03: So hopefully to some extent that will be helpful.
• 15:06
  SPEAKER_03: But I guess, Gary, going back to you and preparedness then.
• 15:10
  SPEAKER_03: So I said, okay, it's about 18 months from 2027, year and for calendar year and companies.
• 15:16
  SPEAKER_03: That's not that far away given the amount of data we've just talked about.
• 15:20
  SPEAKER_03: So are you seeing that companies are, where are they on the spectrum of preparedness?
• 15:25
  SPEAKER_01: Yep, it's it's a wide spectrum.
• 15:27
  SPEAKER_01: So some companies have admittedly not started yet, right?
• 15:30
  SPEAKER_01: And and many companies are in early stages.
• 15:33
  SPEAKER_01: So they're still figuring out ownership across the organization, what stakeholders from the company across the organization should be involved, uh, account scoping and doing that digging exercise to figure out what data is available.
• 15:45
  SPEAKER_01: Um, a handful have progressed their initial assessments and are formulating that preliminary plan on, you know, we've identified the data gaps, we've identified the requirements.
• 15:54
  SPEAKER_01: We we now have a plan to either develop or gather the data in a way that allows us to do this on a repeatable basis, to start preparing for the disclosure.
• 16:03
  SPEAKER_01: Um, and equally some have completed their assessments and started drafting tables, testing data pulse and finalizing coordination uh with their advisors and as you pointed out, their auditors as well.
• 16:14
  SPEAKER_04: And I guess we know of one early adopter.
• 16:16
  SPEAKER_01: Right, exactly.
• 16:17
  SPEAKER_01: Yeah.
• 16:18
  SPEAKER_01: So I think, you know, the consistent theme here, and and some of the roundtable participants said this is that implementation is more challenging and is taking longer than expected.
• 16:28
  SPEAKER_01: And and so with all that said, I think we we expect to see things really pick up over the next few months as we get closer to that effective date.
• 16:35
  SPEAKER_01: Right.
• 16:36
  SPEAKER_01: It's not first required to be reported until your 2027 10K, but that 1-1-2027 start date is the date on which the data needs to be ready for disclosure, right?
• 16:47
  SPEAKER_01: Um, and again, since there's no indication of a deferral at all, companies should not be taking their foot off the gas here.
• 16:53
  SPEAKER_03: Yeah.
• 16:54
  SPEAKER_03: So to your point then, what you're saying is if you're planning to automate anything or want to be able to gather that data, you might need to have that in place by 1127, or you're gonna have to go back and do a lot of rework later in the year next year.
• 17:08
  SPEAKER_03: So it is actually quite a short timeline from that point of view.
• 17:11
  SPEAKER_03: I guess, Angela, it's so interesting.
• 17:13
  SPEAKER_03: You highlighted that there is at least one early adopter.
• 17:17
  SPEAKER_03: Did they give any indication of why they early adopted?
• 17:21
  SPEAKER_04: I'm trying to remember if they did at the round table.
• 17:24
  SPEAKER_04: Uh, but maybe just because they uh felt like it, you know, like I like Gary mentioned, they actually included some additional categories beyond what was required.
• 17:33
  SPEAKER_04: And this is a company that doesn't have inventory, so they didn't have that complexity.
• 17:37
  SPEAKER_04: And I and I think this was just a way to show some transparency and says some information that they already wanted to be providing to their users.
• 17:45
  SPEAKER_03: Yeah, and I mean, I guess to that point, because we're focused here, it's complex, there's a lot of work, those things.
• 17:50
  SPEAKER_03: I mean, the reason this was adopted is because there's a view that this information is of interest to investors.
• 17:57
  SPEAKER_03: So I guess they're getting ahead of the curve then from that point of view.
• 18:01
  SPEAKER_03: So I guess, Gary, it listening to you, you know, obviously people are in various places on this spectrum of preparedness, but it sounds like companies listening thinking, wow, I haven't started.
• 18:13
  SPEAKER_03: I mean, they're not alone, but they better start soon.
• 18:16
  SPEAKER_01: Yep, exactly.
• 18:16
  SPEAKER_01: So I think it's that's that's exactly spot on.
• 18:19
  SPEAKER_01: I think it's important to highlight a few things.
• 18:21
  SPEAKER_01: And you hit on this with the automation and the and the time frame and the like, right?
• 18:25
  SPEAKER_01: Companies that start early have more options, right?
• 18:28
  SPEAKER_01: They have options to explore automation, they have more options to, you know, uh consult with others, consult with their peer groups.
• 18:35
  SPEAKER_01: Um, they can make design choices more thoughtfully versus scrambling to create a workaround at that first reporting deadline, right?
• 18:42
  SPEAKER_01: And also given how unique each company's profile is, their geographic footprint, what their IT landscape is, everyone's implementation process will be different.
• 18:51
  SPEAKER_01: So companies need to keep in mind as they continue to socialize with one another about their implementation plans and progress, that no two plans look the same, right?
• 19:01
  SPEAKER_01: And readiness isn't just do we understand the guidance.
• 19:04
  SPEAKER_01: Again, it's can't we produce this disclosure consistently with supportable methods on a repeatable basis, which goes, you know, back to that point we made earlier.
• 19:13
  SPEAKER_01: You know, I think the one other important thing to keep in mind here is that the extent of the work that needs to be done to implement really isn't going to be known until you start kicking the tires and getting into the details, right?
• 19:25
  SPEAKER_01: Um, so you might think you have the information needed readily available.
• 19:29
  SPEAKER_01: And I've consulted with some companies that thought they did, um, and it turned out they did not.
• 19:33
  SPEAKER_01: And so you really don't know until you get in there.
• 19:35
  SPEAKER_03: All right.
• 19:36
  SPEAKER_03: It's a good reminder.
• 19:37
  SPEAKER_03: So then if we just take a step back, and I'm a listener that's either very early stages or is in this category, I haven't started yet.
• 19:45
  SPEAKER_03: Angela, is there a standard approach that you are recommending when you're talking to companies?
• 19:50
  SPEAKER_04: Well, if you're just getting started, I would say high level.
• 19:54
  SPEAKER_04: I would start with, you know, three initial key steps.
• 19:57
  SPEAKER_04: And maybe this sounds a little obvious, but just where are you gonna start?
• 20:01
  SPEAKER_04: I mean, step one is understand the new requirements, right?
• 20:05
  SPEAKER_04: And what are the definitions of all these different categories?
• 20:08
  SPEAKER_04: How do they apply to your company's specific uh facts and circumstances in your business model?
• 20:15
  SPEAKER_04: For example, the category purchases of inventory, that's gonna mean something different depending on whether you're a retailer, a manufacturer, an oil and gas company, or a company that has long-term construction contracts, right?
• 20:29
  SPEAKER_04: Inventory is like a different concept for all those companies.
• 20:32
  SPEAKER_04: Step two is start your scoping exercise.
• 20:36
  SPEAKER_04: Which of your expense captions are you going to have to disaggregate?
• 20:40
  SPEAKER_04: Which of the required categories and required other information applies to you?
• 20:46
  SPEAKER_04: And when do you have the amounts that are material in those categories?
• 20:50
  SPEAKER_04: And then lastly, you do your gap assessment.
• 20:53
  SPEAKER_04: What information is available today?
• 20:55
  SPEAKER_04: What do I already have readily available?
• 20:57
  SPEAKER_04: And then what's missing based on how I do my current system reporting?
• 21:03
  SPEAKER_04: And of course, how am I going to close that gap?
• 21:05
  SPEAKER_04: And as we've already talked about, is it something I can do through the system, something that's automated, making some changes to my GL accounts, changes to my sub ledgers to get the information to come together differently.
• 21:18
  SPEAKER_04: But maybe that's not practical.
• 21:20
  SPEAKER_04: And you're going to need to use some estimates.
• 21:22
  SPEAKER_04: So starting to scope out what I can do through the system and what am I going to have to do manually.
• 21:28
  SPEAKER_03: And then, Gary, if you look at that from an implementation perspective, what does that really look like?
• 21:33
  SPEAKER_01: Yeah, that's that's exactly how we've been we've been going at it when we've been helping um companies implement DICE here, right?
• 21:39
  SPEAKER_01: So the steps that Angela described are really how we would kick off a project, um, understanding what's what's relevant from a disclosure requirements perspective, performing what we call that a short diagnostic assessment, really to understand data availability and identify possible gaps, um, identifying those other sources of information that may be needed beyond the GL, right?
• 22:00
  SPEAKER_01: I mentioned before, most companies, almost all companies, I could say with pretty high certainty, can't click a button in their GL and get the information needed, right?
• 22:08
  SPEAKER_01: So just doing that exercise to find out what else is there that's going to feed the dice disclosures.
• 22:14
  SPEAKER_01: And then figuring out what you can do with estimation.
• 22:18
  SPEAKER_01: We've also been recommending to companies that they develop sort of a proof of concept, maybe on a smaller portion of their business that can possibly be replicated or at least help steer the ship for broader organization or implementation rather.
• 22:33
  SPEAKER_01: It'll help validate your planning, your decisions made to date, possibly reveal any other data gaps that you might have.
• 22:39
  SPEAKER_01: And like I said, help sort of guide you for the rest of the journey there.
• 22:42
  SPEAKER_04: I've seen some companies do a test case on like one month of data.
• 22:47
  SPEAKER_04: Can I pull the data for one month?
• 22:49
  SPEAKER_04: Does it all reconcile back to the financial statements just to get a start of how hard is this gonna be?
• 22:56
  SPEAKER_03: Yeah, that definitely makes sense.
• 22:58
  SPEAKER_03: And one other thing in listening, Angela, I was reflecting.
• 23:01
  SPEAKER_03: I feel like every time we talked about the revenue standard, and this is a case for the lease standard as well.
• 23:06
  SPEAKER_03: It's like, okay, this is not something accounting can do by themselves.
• 23:09
  SPEAKER_03: And that definitely seems like the case here as well.
• 23:12
  SPEAKER_03: Particularly, let's say you do your test case and realize, you know, you are gonna need to do a lot more to get the information together.
• 23:18
  SPEAKER_03: So, Gary, what are you really seeing there?
• 23:21
  SPEAKER_01: Yeah, you know, this isn't just write a memo and off you go, right?
• 23:25
  SPEAKER_01: It it DICE touches more than just accounting policy.
• 23:28
  SPEAKER_01: It's gonna involve multiple stakeholders across the organization, uh, finance ops, HR, payroll, procurement, inventory, FPA, you know, internal controls.
• 23:39
  SPEAKER_01: We're talking a lot about systems and processes, right?
• 23:41
  SPEAKER_01: And uh internal controls is super important.
• 23:44
  SPEAKER_01: And even investor relations, right?
• 23:45
  SPEAKER_01: This is new information that's going to be put out into the public regarding materials and labor costs.
• 23:50
  SPEAKER_01: And how do you want to tell your story about that?
• 23:52
  SPEAKER_01: What's the messaging?
• 23:53
  SPEAKER_01: And so teaming with IR is equally as important too.
• 23:57
  SPEAKER_01: So, with all that said, most successful implementations thus far have that cross-functional team with very explicit ownership responsibilities across systems, processes, and controls, from who owns inventory data, for example, all the way to who owns that final disclosure.
• 24:13
  SPEAKER_01: And then, you know, in addition to those individual stakeholders, establishing some sort of governance oversight um committee is also helpful again, just to guide and and uh provide um insights into those significant decisions along the way.
• 24:27
  SPEAKER_03: And you mentioned FPNA there.
• 24:29
  SPEAKER_03: So are you seeing that companies are at least thinking about using some of this additional disaggregated data internally as well for decision making?
• 24:37
  SPEAKER_01: Yeah, possibly.
• 24:38
  SPEAKER_01: I mean, some have said, you know, we're gonna we're gonna compile this for external reporting, and so why not use it for internal reporting purposes too?
• 24:45
  SPEAKER_01: And then equally leveraging the resources within the FPNA function to also help the other direction on, you know, does FPNA have some information that I can use for external purposes?
• 24:56
  SPEAKER_03: And as particularly, I would guess with estimation allocation, that could be a helpful resource.
• 25:01
  SPEAKER_03: All right, that makes sense.
• 25:02
  SPEAKER_03: So then actually moving into some of the key challenges.
• 25:05
  SPEAKER_03: And I think some of them um we've already highlighted in our discussion, and some may seem obvious, but I think Angela's always helpful to still catalog them.
• 25:14
  SPEAKER_03: So, what are some of the key challenges that you're seeing as companies are beginning to implement this?
• 25:19
  SPEAKER_04: Yeah, I mean, there's some reasons why implementation will generally be more challenging for some companies compared to others, such as companies that have multiple ERP systems.
• 25:31
  SPEAKER_04: Um, and we've heard people say that they have 50 plus ERP systems, but that's obviously gonna make it more complicated.
• 25:38
  SPEAKER_04: You know, if you have detailed data that's in a lot of different subledgers or separate systems, that's just gonna be a broader exercise to pull all that information.
• 25:48
  SPEAKER_04: And then companies that have uh multiple subsidiaries, especially if you have a lot of significant intercompany transactions, especially around inventory, that will just make it uh, again, a little more challenging in general.
• 26:01
  SPEAKER_04: Uh, but we thought we would focus on three big picture topics uh in more detail.
• 26:06
  SPEAKER_04: The first is purchases of inventory, the second is cost allocations, and the third is cost reimbursements, which we think is a little bit of a sleeper in this in this new standard.
• 26:20
  SPEAKER_03: All right.
• 26:20
  SPEAKER_03: Well, cost reimbursements are complicated anyway, but let's let's save that one for last.
• 26:25
  SPEAKER_03: So starting with purchases of inventory, then what additional perspective do you have?
• 26:29
  SPEAKER_04: So the disaggregation of uh I'll just say cost of goods sold, although people use different terms for that caption, right?
• 26:36
  SPEAKER_04: That is uh what we hear going to be one of the bigger challenges and what we've experienced is one of the bigger challenges, especially for companies that have significant manufacturing activities or have intercompany transactions where inventory kind of moves between different subsidiaries as it's being manufactured.
• 26:54
  SPEAKER_04: Cause as you can imagine, you start to lose visibility into those natural cost components, you know, material and labor as it's moving through that system.
• 27:05
  SPEAKER_04: So one of the biggest early decisions, and we were talking about, you know, being able to make some of these decisions early, is the basis you're going to use for disaggregating um inventory-related captions.
• 27:17
  SPEAKER_04: And this is a policy choice.
• 27:19
  SPEAKER_04: You can use either the cost-incurred approach or the expense incurred approach.
• 27:26
  SPEAKER_03: Okay, and what's the difference?
• 27:28
  SPEAKER_03: Because those sound extremely similar.
• 27:30
  SPEAKER_04: So the cost incurred approach includes what got capitalized into inventory during the period and what got directly expensed during the period.
• 27:41
  SPEAKER_04: So, in other words, what did you buy during the period?
• 27:46
  SPEAKER_04: The expense incurred approach includes inventory that was derecognized during the period, as well as amounts directly expensed.
• 27:55
  SPEAKER_04: So, in other words, what did you sell during the period?
• 27:59
  SPEAKER_04: So why two choices, right?
• 28:01
  SPEAKER_04: For many companies, it may be more achievable to determine the breakdown of cost in the period purchases are made rather than looking backwards at the time you sell the inventory to look and see what were the what was the cost buildup of that inventory in the past.
• 28:20
  SPEAKER_04: Now, obviously, this will depend on how quickly does your inventory turn over, you know, and the longer that period, the harder it may be to look backwards in the period you sell through your inventory.
• 28:32
  SPEAKER_04: So that may cause many companies to lean towards this cost incurred approach.
• 28:37
  SPEAKER_04: But again, for cost incurred, you're also going to have to have some reconciling items in order to get back to the amount of expense that's in the income statement.
• 28:47
  SPEAKER_03: So then, Gary, just to make this very clear, and I know both you and Angela said this, in the cost incurred model, you're looking at what you actually are putting in inventory for that particular period.
• 29:02
  SPEAKER_01: Exactly.
• 29:02
  SPEAKER_03: And then in the expense incurred, you actually may have to go back in time and say, well, I capitalized this inventory three years ago, but I'm recognizing it this year.
• 29:12
  SPEAKER_01: That's right.
• 29:12
  SPEAKER_01: Expense incurred would say I sold a hundred bucks of inventory.
• 29:16
  SPEAKER_01: I have to go back and say, of that hundred bucks, how much was my materials?
• 29:20
  SPEAKER_01: How much was my comp?
• 29:21
  SPEAKER_01: How much was my overhead?
• 29:23
  SPEAKER_01: And it's very, very hard to do that.
• 29:26
  SPEAKER_03: And then that will depend on even your inventory method, right?
• 29:30
  SPEAKER_03: Okay.
• 29:30
  SPEAKER_03: So very complicated.
• 29:31
  SPEAKER_03: So now definitely makes sense why you guys are saying for many companies, the cost and current model then is going to be more straightforward.
• 29:39
  SPEAKER_03: But either way, it sounds like making this decision up front is going to be very important because otherwise you could spend a lot a lot of time going down sort of the quote wrong path.
• 29:50
  SPEAKER_01: Yeah.
• 29:50
  SPEAKER_01: And it drives all of that data gathering, reporting, what you know, the level of detail I need to go down, how do I do my estimation approximations?
• 29:58
  SPEAKER_01: Um, they're they're two completely different methods.
• 30:01
  SPEAKER_01: So sort of doing that groundwork and making that decision up front will just help shape the the rest of your implementation efforts.
• 30:07
  SPEAKER_03: All right.
• 30:07
  SPEAKER_03: A lot to think about.
• 30:08
  SPEAKER_03: Any other challenges then related to purchases of inventory?
• 30:12
  SPEAKER_04: Yeah, there's been a lot of discussion around what costs are included in purchases of inventory.
• 30:18
  SPEAKER_04: And this might sound pretty straightforward, but when you start to get into the details, there are some types of costs that it may that may not be completely clear whether that should be included in purchases of inventory.
• 30:30
  SPEAKER_04: And so companies might have to make some judgments or policy decisions here.
• 30:35
  SPEAKER_04: And the standard itself does not have a very prescriptive definition of purchases of inventory, other than saying that inventory refers to costs that are in the scope of ASC 330.
• 30:50
  SPEAKER_04: So only if you're applying that standard would it would it be in considered inventory.
• 30:56
  SPEAKER_04: And it also excludes inventory acquired through a business combination.
• 31:00
  SPEAKER_04: So that's very clear in the standard.
• 31:02
  SPEAKER_04: But beyond that, it's not very prescriptive.
• 31:06
  SPEAKER_04: So once you start to look at all of the costs that end up in inventory, questions have come up.
• 31:11
  SPEAKER_04: So is it just raw materials?
• 31:12
  SPEAKER_04: Does it include other things such as shipping and taxes and tariffs and contract manufacturing, services that you purchase from others and uh companies who have long-term contracts, questions have come up around those costs, are they included in this scope or not, or are those costs to fulfill a contract instead?
• 31:33
  SPEAKER_04: So this also came up during the round table.
• 31:35
  SPEAKER_04: We were not surprised.
• 31:37
  SPEAKER_04: Um, one preparer actually suggested that the board provide some more clarity.
• 31:42
  SPEAKER_04: However, uh, you know, I think that you think it was the chair who commented that they didn't necessarily want to be that prescriptive, especially now that companies have already started working on this, do you have to come back and have a more specific definition maybe is not such a good idea.
• 31:57
  SPEAKER_04: So I don't necessarily think they're gonna they're gonna do that.
• 32:01
  SPEAKER_04: So in the absence of further guidance, you know, our advice is to, you know, use your judgment, may have a policy, and potentially if you think you've um, you know, something is material, disclose what you're doing.
• 32:14
  SPEAKER_03: All right, always good advice from that point of view.
• 32:17
  SPEAKER_03: So definitely if you have a material inventory, this is a huge area it sounds like to focus on.
• 32:23
  SPEAKER_03: Uh let's move on though.
• 32:24
  SPEAKER_03: You the next challenge you mentioned then was cost allocation.
• 32:27
  SPEAKER_01: Yeah.
• 32:28
  SPEAKER_01: So the the the problem with cost allocations, and a lot of what we're talking about today is that blurred vision back into the composition of expenses, right?
• 32:36
  SPEAKER_01: And so when you look at cost allocations between functions and and that means, you know, I incur these costs within SGNA, and then maybe I push them out to COGS and RD and the like, um, it's a common pain point that companies are going to have to deal deal with because it it really blurs the trail between the original natural expense that's being incurred in that SGNA pool and pooled with other costs and where it ultimately lands on the income statement after that allocation occurs.
• 33:03
  SPEAKER_01: And so, you know, again, examples of these are um allocations of of shared services, occupancy, IT costs or overhead.
• 33:12
  SPEAKER_01: And so if these allocations are complex or if or if they run late, then disaggregating SGNA or cost of sales into the natural categories can become a real challenge.
• 33:22
  SPEAKER_01: The other thing with cost allocations, too, is that you know, some of these allocations might have been established and set, you know, many periods ago, right?
• 33:30
  SPEAKER_01: And and so to go back and dig through and say what was the composition of this is going to be an exercise.
• 33:36
  SPEAKER_03: And so then from that perspective, what advice do you have for companies?
• 33:40
  SPEAKER_01: Yeah, I think it all goes back to what we've been talking about.
• 33:43
  SPEAKER_01: It's it's really getting that lay of the land in terms of what data do we have available?
• 33:49
  SPEAKER_01: And then how, if at all, can that data be used to develop an estimate that can be consistently applied so that I can take that allocation across functions and and come up with the breakdown of the natural components, right?
• 34:02
  SPEAKER_01: Because you can't just say an allocation of a hundred bucks is an allocation.
• 34:06
  SPEAKER_01: You have to break it down into comp and and the other things.
• 34:09
  SPEAKER_01: So um, and I think just again on on the point of estimation, and we've been talking about discussing with your auditors, um, you you have to get your auditors comfortable with this level of estimation too, right?
• 34:21
  SPEAKER_01: And and like I said, you you have to go back all the way down to the the source and and level that the allocation was established to understand those components, which may not be readily available without some digging.
• 34:34
  SPEAKER_03: All right.
• 34:34
  SPEAKER_03: So definitely a lot to think about there.
• 34:36
  SPEAKER_03: Let's go to the last one, cost reimbursement.
• 34:39
  SPEAKER_04: Yeah.
• 34:40
  SPEAKER_04: So to recap uh the requirement, so the standard has certain requirements related to cost sharing or cost reimbursement arrangements, both for reimbursements received and those paid to other parties.
• 34:54
  SPEAKER_04: So for cost reimbursements received from another party, you can either present those as a reduction of the category it relates to.
• 35:06
  SPEAKER_04: So if you're getting a reimbursement of employee compensation, you would show that as a reduction of the employee compensation category.
• 35:14
  SPEAKER_04: Or you can present that entirely as a separate line item or a separate category in the table, just cost reimbursements received as a separate line item.
• 35:25
  SPEAKER_04: For cost reimbursements paid, you need to show those as a separate line.
• 35:30
  SPEAKER_04: So there's no netting allowed for payments out.
• 35:34
  SPEAKER_04: So some people you may not be necessarily as aware of this requirement.
• 35:39
  SPEAKER_04: And this was highlighted during the roundtable as an area where it's a little unclear around scoping what gets scoped into this requirement.
• 35:48
  SPEAKER_04: Um, so some judgment may be required there.
• 35:51
  SPEAKER_04: I mean, some common types of uh cost reimbursement arrangements in some sectors include collaboration arrangements, um, RD funding agreements, but there are other types of arrangements that really could be akin to this type of cost sharing arrangement that would get kind of caught up in this requirement.
• 36:12
  SPEAKER_04: Um, I would point out, though, that this only applies when the cost reimbursement is included in one of those expense captions that you're putting in the table.
• 36:23
  SPEAKER_04: So if you have amounts that you're recognizing as other income or revenue, right, that doesn't get covered by the DICE requirement.
• 36:32
  SPEAKER_03: All right.
• 36:32
  SPEAKER_03: So it sounds like understanding how you're accounting for these arrangements to begin with is going to be important.
• 36:38
  SPEAKER_03: And I think we might have some past podcasts on some of that.
• 36:41
  SPEAKER_03: So yes.
• 36:42
  SPEAKER_03: All right.
• 36:43
  SPEAKER_03: So then um, Gary, in practice, how are you recommending companies manage this?
• 36:48
  SPEAKER_01: Yeah, it's it's all the same flavor of the data availability, right?
• 36:51
  SPEAKER_01: So first just take stock of all of your material cost reimbursement and cost share arrangements.
• 36:57
  SPEAKER_01: You might already have existing disclosures in your 10Ks and Qs that have some visibility here.
• 37:02
  SPEAKER_01: And, you know, determine how amounts from those arrangements are presented in the income statement, right?
• 37:07
  SPEAKER_01: So we're only talking about here on the receipt side um amounts that are presented in expense captions.
• 37:13
  SPEAKER_01: So if you're reducing RD by a cost reimbursement, that's relevant.
• 37:17
  SPEAKER_01: If you present that reimbursement in other income, that's not relevant, right?
• 37:21
  SPEAKER_01: Because we're not, we're not disaggregating another line here.
• 37:24
  SPEAKER_01: And so once you've compiled all the all of that together, really make a go through and scrutinize what what belongs in the scope of this and and what does not.
• 37:33
  SPEAKER_01: So for example, a a good example of of what's out of scope of the cost reimbursement guidance is if a company reimburses its vendors for out-of-pocket expenses in a service contract.
• 37:43
  SPEAKER_01: That that would not be, and nor is it the intent for that to be included in the scope here.
• 37:48
  SPEAKER_01: The other thing that I think is just important to appreciate here is that there's probably not a separate chart of accounts line that would hold cost reimbursements or payments.
• 37:58
  SPEAKER_01: And so companies will have to go to other data sources to compile that.
• 38:02
  SPEAKER_01: Um, like I said, a lot of times companies already disclose this in your your K's and Q's.
• 38:07
  SPEAKER_01: And so you you probably have some footnote support to compile the information, but um, it's likely not going to be sitting in your GL.
• 38:14
  SPEAKER_03: Although this actually seems somewhat easier to create a separate, at least sub-account for than some of the other things that we've talked about.
• 38:22
  SPEAKER_03: Yep.
• 38:22
  SPEAKER_03: All right.
• 38:23
  SPEAKER_03: So we've covered a huge amount here and definitely I think highlighted why companies should be paying attention to this now.
• 38:31
  SPEAKER_03: Um any final advice then that you would leave our listeners with, Angela?
• 38:35
  SPEAKER_04: Uh well, I guess I'll probably repeat some things we've already said.
• 38:38
  SPEAKER_04: Okay, repetition says, Yeah, just to further highlight, I mean, it's really about um making those key elections and interpretations early on and getting everyone aligned and on board, especially around inventory if you're you know a company that has manufacturing or it's making those key decisions early on, so you can uh really get started on the data gathering process.
• 39:05
  SPEAKER_04: Um, also just around internal coordination, it's being aligned with your um your auditors as well as internally around what's material, right?
• 39:15
  SPEAKER_04: So everybody, again, is is on board with the approach and then how you're gonna use estimates as well.
• 39:21
  SPEAKER_04: That's gonna be something um important to get agreement on early.
• 39:25
  SPEAKER_04: Um, I think Gary mentioned earlier, IR, you know, investor relations being uh making sure that they're aware of what is the new information that's gonna be provided.
• 39:35
  SPEAKER_04: So we're thinking about what story is this gonna tell, how might it impact things like mDNA, um, how you describe your changes in your business and questions that could come up from users and analysts.
• 39:48
  SPEAKER_04: And that also might inform your adoption approach, right?
• 39:51
  SPEAKER_04: Do you want to show a comparative period, or is it uh, do you want to just adopt prospectively?
• 39:58
  SPEAKER_03: All right.
• 39:58
  SPEAKER_03: And then Gary, how about from your perspective?
• 40:01
  SPEAKER_01: Yep.
• 40:01
  SPEAKER_01: I'll also be repetitive in what I what I have to say as a closing remark.
• 40:05
  SPEAKER_01: And but I think it's it's super important to reiterate, you know, I touched on how this can creep up for private companies from a deals perspective with IPOs and acquisitions if if significant.
• 40:16
  SPEAKER_01: I think it's also just to think in mind the broader deals perspective, even from a divestiture's standpoint, right?
• 40:22
  SPEAKER_01: So a public company that's preparing for this now, they might have a spin-off in the future or a disposal that's significant to an acquirer, and they'll have to prepare carve out financial statements, presumably at a lower materiality threshold that might lead to more, you know, granularity and disaggregation, and possibly some of those refinements or some of those estimates and and judgments need to be refined because maybe they don't work at the carve out level.
• 40:48
  SPEAKER_01: And then, you know, something we didn't touch on here, this is a continuing ops standard.
• 40:53
  SPEAKER_01: And so anything that you've presented or disclosed rather previously from a continu from a continuing ops basis needs to be adjusted to take out what's what now may be discontinued ops.
• 41:04
  SPEAKER_01: So a lot to think about from a deals perspective.
• 41:06
  SPEAKER_03: All right.
• 41:07
  SPEAKER_03: So definitely, again, I'm sure our listeners are wanting to know more.
• 41:12
  SPEAKER_03: So, Angela, where should people go for more information?
• 41:15
  SPEAKER_04: Well, we added a section to our financial statement presentation guide, and it's in chapter three that goes into detail on the requirements.
• 41:24
  SPEAKER_04: We also have some frequently asked questions in there, and you know, we'll continue to update that as we go.
• 41:29
  SPEAKER_04: Uh, but then you can go there for all the all the details.
• 41:32
  SPEAKER_03: All right.
• 41:32
  SPEAKER_03: Well, and I also look forward to having you both back on the podcast as we get deeper into the implementation because I'm sure there'll be some more lessons learned.
• 41:39
  SPEAKER_03: So such a pleasure to talk to you.
• 41:41
  SPEAKER_03: Thanks so much for joining me today.
• 41:42
  SPEAKER_03: Thanks for having us.
• 41:44
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• 42:06
  SPEAKER_02: From Thought Leadership at PwC, I'm Heather Horn.
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