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Disaggregated expense disclosures – The FASB’s new DISE standard · PwC's accounting podcast

0:00
SPEAKER_00: Thought leadership from PWC's National Office.
0:06
SPEAKER_03: Hello, and welcome to PWC's Accounting Podcast.
0:10
SPEAKER_03: I'm Heather Horn.
0:11
SPEAKER_03: Today's episode delves into the FASBI's recent accounting standards update on the disaggregation of income statement expenses, also referred to as DICE, a highly anticipated standard that is poised to reshape financial disclosures.
0:26
SPEAKER_03: We'll discuss why this standard was issued, the key provisions, and the practical challenges companies will face as they prepare for adoption.
0:37
SPEAKER_03: Today's episode is hosted by Kyle Moffitt, PWC's professional practice leader.
0:42
SPEAKER_03: Kyle is joined by Angela Ferguson, PWC's Standard Setting Leader, and Gary Sardo, a partner in our national office, and a former FASBE fellow who worked on this project during his time at the FASBE.
0:54
SPEAKER_03: Angela and Gary are the perfect guests to guide us through this new standard.
0:58
SPEAKER_03: There's a lot to cover, so let's get started.
1:02
SPEAKER_02: Guys, glad that uh both of you could could join today.
1:05
SPEAKER_02: I'm joined by Angela Ferguson and Gary Sardo, both partners in our national office.
1:10
SPEAKER_02: Very interested in hearing your collective insights, both, you know, obviously, Angela, in your role as a standard setting leader.
1:16
SPEAKER_02: And then, Gary, you know, you recently completed a fellowship at the FASBE, and so you you know a lot about what's going on.
1:22
SPEAKER_02: You both pay attention to what's going on with the FASBE's standard setting.
1:26
SPEAKER_02: So today we're going to talk about the FASBE's recent accounting standards update on the disaggregation of income statement expenses, or DICE.
1:34
SPEAKER_02: So we'll refer to it a lot as DICE throughout this conversation.
1:37
SPEAKER_02: Um but again, this is this is one of those FASBE projects, and you think about the SEC, what they've been focused on, the FASBE, more information, more disaggregated, more granular information.
1:48
SPEAKER_02: So very consistent theme here.
1:50
SPEAKER_02: Um this one was issued on November 4th, and so it's certainly gotten a lot of interest.
1:55
SPEAKER_02: So it's great to have you both on today and give us some, share some insights on the new standard.
1:59
SPEAKER_02: I I know we're gonna talk in in more detail about effective days, although they can be a little bit dry, but I know we'll talk a little bit more about it.
2:06
SPEAKER_02: We'll talk about scope as we get in the conversation.
2:08
SPEAKER_02: But I do want to highlight that for calendar year end public business entities, the new standard will be effective for the year-ended December 31st, 2027.
2:17
SPEAKER_02: Sounds like it's far off.
2:19
SPEAKER_02: And every time we do a podcast or a webcast, we always talk about something that's in the future, and then lo and behold, it's right upon us.
2:25
SPEAKER_02: And so certainly um people in our audience need to listen to it now to get prep prepped, get up to speed on the new standard.
2:32
SPEAKER_02: So with that, Gary, can you start by just giving us a high-level overview of the new standard and why it was issued?
2:39
SPEAKER_01: Yeah, sure.
2:40
SPEAKER_01: So today there's very limited guidance on the expense categories that should be presented in the income statement, unless it's either prescribed by SEC rules or industry-specific guidance.
2:50
SPEAKER_01: And so in practice, what we tend to see is many companies present income statement expenses by function.
2:55
SPEAKER_01: So thinking cost of sales, SGNA, RD expense, but there's limited visibility into the types of natural expenses that an entity incurs.
3:03
SPEAKER_02: Aaron Powell, so when you think about the natural expenses, give us some examples.
3:06
SPEAKER_02: What is a natural expense?
3:08
SPEAKER_01: Sure.
3:08
SPEAKER_01: So a natural expense is one that is categorized by type of economic benefit it provides.
3:13
SPEAKER_01: So some examples include salaries and wages, employee benefits, professional service fees, supplies, depreciation, amortization, the list goes on.
3:22
SPEAKER_01: So at a high level, the standard requires disclosures about specific types of natural expenses that are included in expense captions presented on the face of the income statement, as well as disclosures about selling expenses.
3:34
SPEAKER_01: What's important to call out here is it does not change the requirements for presentation of expenses on the face of the income statement.
3:41
SPEAKER_01: And so, really, why this came about was this is in response to longstanding requests from investors for more expense information.
3:49
SPEAKER_01: Those investors really asserted that this information is critical to understanding a company's performance, assessing its prospects for future cash flows, and comparing its performance both over time and with that of other companies.
4:01
SPEAKER_01: And really, this has been a long time coming.
4:03
SPEAKER_01: While there this was a top priority from investors in connection with the FASBI's 2021 invitation to comment on its agenda, a project that addresses this request has been on the agenda for almost two decades in some form, although the scope and requirements have evolved along the way.
4:19
SPEAKER_02: Yeah, it certainly is something that I know that just in prior conversations or even following kind of the SEC's rulemaking, right?
4:25
SPEAKER_02: It's an area that the SEC has looked at, obviously looked at human capital and thought a lot about uh you know employee compensation expense, all of those disclosures.
4:34
SPEAKER_02: So I think obviously some overlap there.
4:36
SPEAKER_02: So I'm sure the SEC and I think we were happy to see the FASBE take the lead on that.
4:42
SPEAKER_02: And I think um human capital is something that that is still on the agenda.
4:46
SPEAKER_02: Although I think with this next administration, we probably won't see much in the way of movement on that front.
4:51
SPEAKER_02: But certainly more information with respect to these disclosures will will provide some of those uh data points that investors were looking for.
4:57
SPEAKER_02: Um so really appreciate that that overview.
5:00
SPEAKER_02: You mentioned scope.
5:02
SPEAKER_02: Let's get into the details.
5:03
SPEAKER_02: Who's gonna be impacted by these new requirements?
5:06
SPEAKER_04: So I'll take that one, Kyle.
5:07
SPEAKER_04: Um so this standard will only apply to public business entities or PBEs, we call it.
5:14
SPEAKER_04: This is a definition that the FASBIs used for other standard setting.
5:18
SPEAKER_04: That means it doesn't apply to private companies, not-for-profit entities, or employee benefit plans.
5:24
SPEAKER_04: So good news for private companies, don't need to apply this new standard, but companies do need to pay close attention to that PBE definition because it isn't just limited to SEC registrants.
5:36
SPEAKER_04: For example, it includes companies that have securities trading on an over-the-counter market.
5:42
SPEAKER_04: It also includes companies that have financial statements that get included in another entity's SEC filing.
5:49
SPEAKER_04: So that may be because a company is an investee of a public company and they're significant to that company, or it could be the company is getting acquired by a public company.
6:00
SPEAKER_04: Um private companies may not be immediately impacted, but could be impacted.
6:05
SPEAKER_04: Can't ignore it.
6:06
SPEAKER_04: Yeah, if they're gonna get included in another company's filing, for example.
6:09
SPEAKER_04: And also if a company is gonna go public, they would need to adopt this in the normal timeline in their registration statements.
6:17
SPEAKER_04: Um there would be no sort of a different adoption date for emerging growth companies like there is sometimes for standards, because there's no private company timeline here.
6:27
SPEAKER_04: It would all be according to the same public company timeline.
6:30
SPEAKER_02: Right, right.
6:31
SPEAKER_02: So as far as kind of industry applicants, so every every industry is impacted, right?
6:36
SPEAKER_02: Everyone's scoped in.
6:37
SPEAKER_04: There's no scope outs for any particular industry.
6:39
SPEAKER_04: So it is gonna apply to all public companies.
6:42
SPEAKER_04: But you know, as we get into the details, there will certainly be some companies that will be impacted more than others.
6:50
SPEAKER_04: And just to give an example, um, we'll get into this in more detail later, but one of the potentially more challenging aspects of the new requirements is the information that will be required around inventory.
7:03
SPEAKER_04: So companies that have significant inventory, you know, a lot of manufacturing activities, they will definitely be more impacted than companies that, for example, don't have any inventory, like a financial institution is not gonna be as impacted.
7:18
SPEAKER_04: But the expectation is that all public business entities will have some additional disclosure that's required under this new standard.
7:27
SPEAKER_04: So it really is gonna impact everyone, at least to some extent.
7:31
SPEAKER_02: Yeah.
7:31
SPEAKER_02: Yeah.
7:31
SPEAKER_02: No, I think that's a great point.
7:32
SPEAKER_02: And I think, you know, to you to your point about, hey, you know, if you're a private company, you just never know, right?
7:38
SPEAKER_02: And so if if there is active interest in the company itself or, you know, a potential transaction down the road, certainly something that they're gonna have to be ready to position to comply with.
7:50
SPEAKER_04: Yeah, need to start to potentially get prepared to give these disclosures.
7:53
SPEAKER_02: So Gary, I'll turn back to you.
7:55
SPEAKER_02: Um can you walk through kind of the key requirements in the standard?
7:59
SPEAKER_01: Yeah, sure.
7:59
SPEAKER_01: So I'll I'll start off with the tabular disclosure requirement and then go into selling expenses.
8:04
SPEAKER_01: So the standard requires a tabular format disclosure that will include the amounts of five different types of natural expenses included in each relevant expense caption.
8:13
SPEAKER_01: The first is inventory purchases, which Angela briefly touched on.
8:17
SPEAKER_01: The others are employee compensation, depreciation, and tangible asset amortization, and then depreciation, depletion, and amortization as part of oil and gas producing activities.
8:27
SPEAKER_01: We'll shorten that to DDNA to interest of time.
8:30
SPEAKER_01: And then, as well as other amounts of depletion expense, for example, for anyone in the mining industry.
8:35
SPEAKER_02: So maybe explain what a relevant expense caption is and why that's important to this.
8:40
SPEAKER_01: Yep.
8:41
SPEAKER_01: So a relevant expense caption is an expense caption presented on the income statement that is subject to the disaggregation requirements in the standard.
8:48
SPEAKER_01: An expense caption is a relevant expense caption if it includes any one of those five expense categories.
8:54
SPEAKER_01: So going back to what we said at the at the beginning, likely expense categories that you'll see would be cost of sales, cost of services, SGNA, RD, because they include at least one of those expense categories.
9:05
SPEAKER_01: Right, right.
9:06
SPEAKER_01: That seems to make sense.
9:07
SPEAKER_01: So getting back to the key requirements, within that same tabular disclosure, companies need to also disclose certain expense gain or loss amounts that are already required to be disclosed under GAAP.
9:18
SPEAKER_01: And the standard includes a list of about 30 or so items.
9:20
SPEAKER_01: Think of things like warranty expense, impairment of fixed assets, amortization of cost to obtain a contract with a customer, and so on.
9:28
SPEAKER_01: And after all those amounts are quantified, companies need to disclose an amount remaining in each relevant expense caption to reconcile that total expense caption presented on the face of the income statement to what's listed in the disclosure.
9:40
SPEAKER_01: That amount doesn't need to be further disaggregated regardless of size.
9:44
SPEAKER_01: Instead, companies need to disclose a qualitative description of the amounts included in that other bucket, really paying more attention to items that are of more significance.
9:54
SPEAKER_02: For our listeners, can you give a quick example of the tabular disclosure to kind of recap those requirements?
10:00
SPEAKER_01: Yep.
10:01
SPEAKER_01: So assume that a company's cost of sales is a relevant expense caption that includes inventory purchases, employee comp, depreciation, intangible asset amortization, warranty expense, and PPE impairment.
10:13
SPEAKER_01: You would disclose in a tabular format disclosure separate amounts for each of those expenses, as well as an amount for other.
10:20
SPEAKER_01: The components of other would just be described in the note, and the total for all of those amounts would reconcile back to the amount presented as cost of sales on the income statement.
10:29
SPEAKER_02: So now that you kind of lay that out, so what about the selling expense requirement?
10:34
SPEAKER_01: So separate from the tabular disclosure requirement that I just walked through, companies will also need to disclose a total amount for selling expenses based on its own definition of what constitutes a selling expense.
10:46
SPEAKER_01: So a couple of examples that we might expect to see in a company's definition include advertising expenses and commissions, but there's really nothing prescribed in the standard.
10:55
SPEAKER_01: So companies can determine what they believe should be included and need to disclose that policy on an annual basis.
11:02
SPEAKER_01: And then from a frequency standpoint, the tabular disclosure and the disclosure for total selling expenses are required in both interim and annual reporting periods.
11:21
SPEAKER_02: It's one of those where I think as you think about investors, you know, that is something they've been pushing for.
11:26
SPEAKER_02: And even the SEC staff over the years, like whether it's in comments, more details in MDNA, right, you still see that flavor come through.
11:34
SPEAKER_02: But now obviously this additional information is going to be presented in the footnotes.
11:39
SPEAKER_02: And then, of course, on top of that, I think the expectation would then be results of operations, may have a little more detailed discussion than maybe they have in the past, certainly with respect to this the new segment disclosures, just significant segment expenses.
11:52
SPEAKER_02: So it's just more and more and more.
11:54
SPEAKER_02: And so you think about this MDNA is going to get large, thinking about it, it's getting larger and larger and larger.
11:59
SPEAKER_02: Um I want to spend some time unpacking purchases of inventory because I know that's been a hot topic of comment and certainly was a big focus of the the FASB during the exposure.
12:10
SPEAKER_02: Um before we do that, can we quickly hit on some of the points you just described?
12:13
SPEAKER_02: So starting with employee compensation, you know, what's included in that amount and more importantly, maybe what's what shouldn't be included in that amount?
12:21
SPEAKER_01: Sure.
12:21
SPEAKER_01: So employee compensation is defined in the standard and it's anchored to that existing definition of employee used in the stock compensation guidance that many of us are familiar with.
12:32
SPEAKER_01: So the definition includes specific types of consideration granted or issued to employees in exchange for services, such as cash compensation, share-based payments, and employee benefits.
12:42
SPEAKER_01: Importantly, what it does not include are amounts for non-employee subcontractors, and companies are precluded from combining amounts for those individuals with the amounts disclosed for employee compensation.
12:54
SPEAKER_01: So instead, a company can either separately disclose amounts for non-employee subcontractors or include it in the amount for other.
13:01
SPEAKER_02: Is there anything to mention for the depreciation, intangible asset amortization, or the DDNA and other depletion categories?
13:09
SPEAKER_01: Aaron Powell The key point here is that the composition of those categories are anchored to existing guidance for PP ⁇ , intangible assets, and industry-specific guidance for extractive activities.
13:19
SPEAKER_01: So companies should follow their current practices for disclosing those amounts when determining the amounts to disclose for dice.
13:25
SPEAKER_01: Gotcha.
13:25
SPEAKER_02: That makes sense.
13:27
SPEAKER_02: Angela, you mentioned inventory before as kind of that area that's going to require more effort.
13:31
SPEAKER_02: What are some of the additional details related to disclosures about inventory?
13:36
SPEAKER_04: Yeah.
13:36
SPEAKER_04: So as we've talked about, one of the required expense categories is purchases of inventory.
13:42
SPEAKER_04: Also, inventory-related costs could include some of the other categories like employee compensation, depreciation, amortization.
13:51
SPEAKER_04: So the standard allows two different approaches to the disclosure of expenses that relate to inventory.
13:59
SPEAKER_04: And so we're talking typically about expense captions like cost of sales, cost of goods sold, or some similar expense caption that includes inventory cost, right?
14:08
SPEAKER_04: And the reason for two approaches is that the FASB receive feedback that once inventory costs are getting expensed, for example, in cost of sales, it's really hard to go back and split that expense into these different natural expense categories.
14:25
SPEAKER_04: So the first approach that's permitted is called a cost-incurred approach.
14:30
SPEAKER_04: And under this approach, employee purchases, employee compensation and depreciation, et cetera, will be based on the costs that were incurred during the period.
14:41
SPEAKER_04: So this is going to require then some reconciling amounts to get back to the amount that's actually expensed in the income statement.
14:50
SPEAKER_04: So it's probably easiest for me to go through a very simple example here.
14:54
SPEAKER_02: I was actually thinking in my head, and the example would be perfect.
14:57
SPEAKER_04: So suppose you have a company that just for simplicity has no beginning inventory balance.
15:03
SPEAKER_04: And then during the period, they incur$100 of inventory costs.
15:09
SPEAKER_04: So that could be materials, labor, overhead, et cetera.
15:12
SPEAKER_04: And then during the period,$75 of that inventory is sold and expensed through cost of sales.
15:20
SPEAKER_04: So then at the end of the period, we have$25 left in inventory on the balance sheet.
15:25
SPEAKER_04: So under the cost incurred approach in our dice table, you would disclose the$100 of costs that were incurred during the period.
15:36
SPEAKER_04: And that would be disaggregated into the required category.
15:39
SPEAKER_04: So that include purchases of inventory, employee comp depreciation.
15:44
SPEAKER_04: And then you would also need to have a$25 reconciling item to get you back to the$75 that got expensed through custody sales.
15:55
SPEAKER_04: So the other approach you can use, the second permitted approach, is the expense incurred approach.
16:01
SPEAKER_04: And under that approach, you would be disaggregating that$75 that got expensed into the required categories.
16:09
SPEAKER_04: And you wouldn't need any kind of reconciling item in that case.
16:24
SPEAKER_02: I mean, I know I would have a preference if I were a company based on that description, but what what are we hearing companies plan on doing in the space?
16:32
SPEAKER_04: Trevor Burrus, Jr.
16:32
SPEAKER_04: Well, we expect that most companies that have a significant amount of inventory will be using the cost incurred approach.
16:40
SPEAKER_04: And that's really because often it's just not going to be practical or possible to do the expense incurred approach.
16:47
SPEAKER_04: I mean, some companies may be able to just because of the way their systems are set up.
16:51
SPEAKER_04: Maybe they have really fast inventory turns, or companies that uh essentially buy and resell finished goods, if that's their expenses are mostly purchases of inventory, maybe that approach would make sense for them.
17:04
SPEAKER_04: But otherwise, we're generally expecting companies to use the cost incurred approach.
17:09
SPEAKER_04: Uh one thing to keep in mind is that you can't mix and match.
17:13
SPEAKER_04: So for a particular expense caption, so like for cost of sales, you either do everything on the cost incurred approach or everything on the expense incurred approach.
17:24
SPEAKER_04: You have to use the same approach for the for the whole caption.
17:26
SPEAKER_02: Okay.
17:27
SPEAKER_02: That makes sense.
17:28
SPEAKER_02: So what about companies that don't sell physical inventory but have inventory-like costs?
17:33
SPEAKER_02: So software film costs, the entertainment space, even environmental credits.
17:38
SPEAKER_04: So this is an important point.
17:40
SPEAKER_04: The the purchases of inventory category only includes inventory that meets the definition of inventory in ASC330, which is the inventory guidance.
17:51
SPEAKER_04: And that's essentially tangible personal property that's held for sale in the ordinary course of business.
17:58
SPEAKER_04: So not you would not include other capitalized costs, even if you think of those as your inventory in your industry or you use inventory guidance by analogy, right?
18:09
SPEAKER_04: Those things are not going to be included in purchases of inventory.
18:13
SPEAKER_04: And importantly, other capitalized costs other than inventory don't need to be disaggregated when they get expensed in the income statement.
18:24
SPEAKER_04: So just what I mean by that is just to give an example, you know, software development costs might be capitalized on the balance sheet, right?
18:32
SPEAKER_04: And that often will include things like employee compensation, right, when it's capitalized.
18:37
SPEAKER_04: But when that asset is subsequently amortized in the income statement, you do not have to go back and split out the amounts that were originally employee comp.
18:48
SPEAKER_04: The entire amount will be included in depreciation expense or um amortization expense, whatever's whatever is applicable.
18:56
SPEAKER_04: So the same thing is true for things like capitalized cost to fulfill a contract or self-constructed PPE.
19:03
SPEAKER_04: Like you don't have to do that other disaggregation when it hits the income statement.
19:08
SPEAKER_02: Gotcha.
19:09
SPEAKER_02: Okay.
19:09
SPEAKER_02: Well, anything else to highlight for the inventory?
19:12
SPEAKER_04: Yeah.
19:12
SPEAKER_04: One other thing I wanted to mention is that the uh purchases of inventory category specifically excludes inventory that's uh purchased in a business combination and also inventory that's that's included based on consolidating a VIU or a variable interest entity.
19:32
SPEAKER_04: So those amounts would be either in the other category or a company could elect to show them separately.
19:40
SPEAKER_04: Okay.
19:40
SPEAKER_04: But they would not be in purchases of inventory.
19:42
SPEAKER_04: However, in contrast, if you have an asset acquisition, you do include that inventory, that acquired inventory in your purchases of inventory.
19:53
SPEAKER_04: So that that kind of makes sense.
19:54
SPEAKER_04: It does.
19:55
SPEAKER_04: But sometimes there's a fine line between a business acquisition and an asset acquisition.
20:00
SPEAKER_04: So just something to keep in mind that there is a difference in how um that will be presented.
20:05
SPEAKER_02: No, that's very helpful.
20:06
SPEAKER_02: So, Gary, uh switching gears a bit, so the FASB decided to specify in the standard that companies can use estimates and other methods of approximation to determine these amounts for the disclosures.
20:18
SPEAKER_02: Can you explain a little bit more about what that means for companies and why that decision was made?
20:23
SPEAKER_01: Aaron Powell Sure.
20:24
SPEAKER_01: So not surprisingly, the main area of concern raised by almost all companies that provided feedback on this project really focused on the data limitations in their ERP and consolidation systems.
20:36
SPEAKER_01: They said, look, we don't really have sufficient detail on these expense amounts at the transaction level.
20:41
SPEAKER_01: And so therefore building these disclosures from the bottoms up would be challenging or possibly impossible.
20:48
SPEAKER_01: And so in the later phases of the project, the FASBE indicated that it wasn't their intent for companies to drill down into that transaction level detail to build these disclosures.
20:57
SPEAKER_01: And so, based on that intent and the extent of feedback raised by companies, the FASB ultimately decided to clarify that companies can use estimates and what's referred to as other methods of approximation to build the disclosures out.
21:12
SPEAKER_01: And obviously that the types of estimates and other methods that a company uses will depend on facts and circumstances and the natural expense amounts subject to estimation.
21:21
SPEAKER_01: So just as a very high-level quick example, to determine how much employee compensation is included in RD expense, a company might be able to utilize headcount data and payroll information for employees allocated to the RD function to estimate that amount if the information's not readily available in their systems.
21:41
SPEAKER_02: So any key takeaway from thinking about that point is thinking about these potential estimates and use of approximation methods.
21:50
SPEAKER_02: Any takeaways for listeners here?
22:00
SPEAKER_01: Methodologies you're considering using.
22:01
SPEAKER_01: Right.
22:02
SPEAKER_04: And we're starting to get questions about like, you know, what types of estimates are can be used, what's reasonable, but it's really hard to just give like a one size fits all answer.
22:10
SPEAKER_04: There's not one, right?
22:11
SPEAKER_02: Like every company is just going to depend on.
22:14
SPEAKER_02: Yeah.
22:14
SPEAKER_02: Yeah.
22:14
SPEAKER_02: So Angela, so we've we've talked through so a lot of these key requirements.
22:19
SPEAKER_02: Any other areas that our listeners need to be thinking about getting ahead of?
22:23
SPEAKER_04: Yeah.
22:24
SPEAKER_04: One other thing I want to highlight that we haven't covered yet, and this was something that got added a little late in the process.
22:30
SPEAKER_04: So maybe a little bit of a sleeper.
22:33
SPEAKER_04: And this is the requirements around expense reimbursements.
22:37
SPEAKER_04: So these are things that like cost-sharing arrangements such as collaborations, where expense reimbursements are either being paid to another party or being received from another party.
22:48
SPEAKER_04: So for reimbursements that are being received from another party and are offsetting expenses, the standard allows two different approaches to including those in the table.
23:02
SPEAKER_04: So the first approach is to take that expense reimbursement and offset it against the relevant category that it applies to.
23:11
SPEAKER_04: So that could require some allocating.
23:13
SPEAKER_04: So part of it might relate to employee comp or to other categories.
23:17
SPEAKER_04: And so you'd be like potentially spreading it across different categories.
23:21
SPEAKER_04: The second approach is just to put the entire amount in one separate line item in the table.
23:28
SPEAKER_04: And the FASBI decided to provide that second option basically to make it easier in situations where it might be challenging to figure out how to allocate the expense reimbursement across different categories.
23:53
SPEAKER_04: So reimbursements you are making to another party, those also need to be presented in a separate line item on the table.
24:02
SPEAKER_04: So if you know companies have material amounts of this, they will need to separate those out and put them on a separate line item.
24:08
SPEAKER_04: So just something to be aware of.
24:10
SPEAKER_02: Right, right.
24:11
SPEAKER_02: So look, we've a lot of details that companies are going to have to provide in response to this, you know, adopting the standard.
24:20
SPEAKER_02: One question that that obviously comes to mind as you're talking about kind of these changes, right?
24:24
SPEAKER_02: Inherently companies are probably going to be rethinking even how they are reporting their expense captions today on the income statement.
24:32
SPEAKER_02: You know, so how they present their income statement, maybe they want to change it, maybe to rethink kind of certain where expenses are included in specific captions on the face of the income statement.
24:41
SPEAKER_02: Can they do that as part of adopting the standard?
24:43
SPEAKER_02: Is that something that we're getting questions on from clients?
24:47
SPEAKER_04: That is a question that's starting to come up.
24:49
SPEAKER_04: And as Gary mentioned at the beginning, one key point is that this standard does not have any guidance on how expenses are presented in the income statement, so on the face of the income statement.
25:02
SPEAKER_04: So there really would not be any change to the face of the income statement that's directly a result of adopting this new standard, right?
25:11
SPEAKER_04: However, having that being said, you know, companies can voluntarily change their presentation of their income statement in certain circumstances.
25:21
SPEAKER_04: They could potentially change the expense captions they use or where certain types of expenses are presented.
25:28
SPEAKER_04: But there are a couple things to keep in mind there going forward, doing something like that.
25:32
SPEAKER_04: The first thing is making sure you're assessing whether the change is really correcting an error.
25:40
SPEAKER_04: Was the previous presentation really acceptable or not?
25:43
SPEAKER_04: Are you really correcting an error?
25:45
SPEAKER_04: Because that of course raises other things that you have to think about and also disclosures you'd have to provide, et cetera.
25:50
SPEAKER_04: If it's not an error and you're changing from one acceptable presentation to another acceptable presentation, you would also need to consider whether that represents a change in accounting policy, because a change in accounting policy, uh, you have to assess whether the new approach is preferable.
26:10
SPEAKER_04: And also there's certain disclosures that come with that.
26:12
SPEAKER_04: So I would say this is a little bit of a gray area.
26:16
SPEAKER_04: You know, which changes represent a change in accounting policy.
26:19
SPEAKER_04: There are some things that are pretty widely viewed as a change in accounting policy, like for example, changing where you present shipping and hailing costs from like you know operating expenses to cost of sales, for example.
26:32
SPEAKER_04: Other changes, it may not be quite as clear whether it's uh a change in accounting policy.
26:37
SPEAKER_04: I mean, we tend to think like rule of thumb, if you're changing like a subtotal like gross profit, you probably need to think really hard about whether that's a change in accounting policy.
26:49
SPEAKER_04: But certainly something you would want to work with your auditors on and make sure you you you know what the impact would be.
26:55
SPEAKER_02: I think that's those that's a really great point, too, because I think a lot of people go into this probably thinking, oh, it's just a regular reclassification and we'll just throw it in there.
27:03
SPEAKER_02: Well, then we adopt it and we'll just throw this and pretend like that's a reclass.
27:06
SPEAKER_02: No, they you better make sure you're looking at.
27:08
SPEAKER_02: And I think certainly the staff, when they look at and review filings, they're gonna be asking that question of where was it before?
27:14
SPEAKER_02: Is it changing a subtotal?
27:16
SPEAKER_02: Is it changing margin?
27:17
SPEAKER_02: Is it changing something there that you know that total was you know presented differently in a prior period?
27:22
SPEAKER_02: Like that may not be um as easy to just explain away and just move it around.
27:27
SPEAKER_02: Like you definitely need to make sure you're complying with with the accounting rules on this.
27:31
SPEAKER_02: So great points there.
27:33
SPEAKER_02: Um so Gary, uh, you know, as we wrap up, and I I know this can be it's a lot to cover, um, and it's always a I'm sure a good time for you to explain transition and effective dates.
27:45
SPEAKER_01: Yep.
27:46
SPEAKER_01: So for calendar urine companies, the standard will be effective for the year ended December 31st, 2027, and the first quarter ended March 31st, 2028.
27:56
SPEAKER_01: From a transition standpoint, prospective is required and retrospective is optional.
28:01
SPEAKER_01: But if a company opts for retrospective, that would be starting, of course, with 2025 information.
28:07
SPEAKER_01: So if there's a chance you're considering that, you should start thinking about that now.
28:11
SPEAKER_01: With that said, we're not hearing many companies collecting for retrospective.
28:15
SPEAKER_02: But just putting that point out there.
28:16
SPEAKER_02: Gotcha.
28:17
SPEAKER_02: I mean, look, 2027 does feel like a long way away.
28:19
SPEAKER_02: I've said it before, but certainly there's a reason behind that date, right?
28:23
SPEAKER_02: That they're they're putting their thoughts, they know that it's gonna it's gonna be a lift.
28:28
SPEAKER_02: Um, they certainly couldn't require this overnight.
28:30
SPEAKER_02: So anything you want to add there?
28:32
SPEAKER_01: That's right.
28:32
SPEAKER_01: So, like you said, there's a runway here.
28:34
SPEAKER_01: Um, the effective date was intentional.
28:36
SPEAKER_01: It was selected because this will be likely a significant data aggregation exercise for most companies.
28:43
SPEAKER_01: And so while this will be an undertaking, right, the first step is identif is understanding the requirements and then assessing what information is currently available in your systems.
28:53
SPEAKER_01: So really identifying your data gaps.
28:56
SPEAKER_01: Um the sooner the better, of course, so that you have the maximum amount of time to adopt the new standard and address those gaps.
29:03
SPEAKER_01: Of course, there may be some implementation questions or challenges that come up as well that aren't quite apparent yet.
29:09
SPEAKER_01: So again, the sooner, the better you start working through it, the faster you identify those things.
29:14
SPEAKER_01: Um it's really difficult to provide a list of the potential challenges because it will vary company to company, but just thinking of some things like how your systems are set up today, how allocations are done, how intercompany transactions are recorded, your type of business.
29:30
SPEAKER_01: Also, new systems and processes may be required, as well as coordination across geographies depending on your type of company, business segments, functions, and multiple reporting systems.
29:42
SPEAKER_01: That's a lot.
29:43
SPEAKER_02: Yeah, that's a lot to think about.
29:44
SPEAKER_02: A lot to think about.
29:45
SPEAKER_02: So I'll kind of close with this.
29:47
SPEAKER_02: So, and I'll I'll start with you, Angela.
29:50
SPEAKER_02: Any final thoughts?
29:51
SPEAKER_04: Well, you kind of touched on this before, Kyle.
29:54
SPEAKER_04: I'm gonna double down on the whole idea of you know, for some companies, this is gonna be a new level of detail that maybe wasn't available before, that's now being provided in the footnotes.
30:06
SPEAKER_04: So as companies are putting this information together, I think they also need to be thinking about like what story does this tell about the company and start to get coordinated across the organization, including investor relations, in you know, thinking about things like what kind of questions might this raise, or how do we proactively want to get in front of like what story this tells about trends and changes in the company?
30:31
SPEAKER_04: And it might impact, as you said, things like mDNA and might be something that needs to be included in discussions of trends.
30:38
SPEAKER_04: Um, so something that you'd probably want to get in front of earlier rather than later.
30:41
SPEAKER_04: So there's everyone's coordinated and there's no surprises there.
30:45
SPEAKER_01: That's a great point.
30:46
SPEAKER_01: Yep.
30:46
SPEAKER_01: And for me, you know, I mentioned estimates, and while that sounds great, I would say don't assume that this can all be done with estimates, right?
30:54
SPEAKER_01: So based on our discussions with some companies to date, we'll likely see some sort of hybrid approach taken using both transaction level detail and estimates to top this off.
31:04
SPEAKER_01: Um, one other item to keep in mind is if you have other system transformation projects going on, for example, an ERP implementation or upgrade, you might want to consider DICE now while that project is in flight, so you can get coordinated on the requirements and see what you can tackle up front.
31:20
SPEAKER_01: And then lastly, while we covered some of the points made during this episode, we did issue a publication in November that includes responses to frequently asked questions related to application.
31:31
SPEAKER_01: That publication can be found on Viewpoint and in the show notes for this episode.
31:34
SPEAKER_02: And and we do update that.
31:36
SPEAKER_02: We do.
31:37
SPEAKER_02: We do.
31:37
SPEAKER_02: So there you go.
31:38
SPEAKER_02: So I think it'll be a living document.
31:40
SPEAKER_04: It's a living document.
31:41
SPEAKER_02: I love that.
31:42
SPEAKER_02: So want to thank you both for joining today.
31:44
SPEAKER_02: Really great, uh, a lot of great insights.
31:46
SPEAKER_02: And I think we did it in about a half an hour.
31:48
SPEAKER_02: So um, kudos to both of you.
31:50
SPEAKER_02: Thank you.
31:50
SPEAKER_02: All right, thank you.
31:51
SPEAKER_02: Thanks, Cal.
31:52
SPEAKER_03: That's our show for today.
31:54
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31:58
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32:00
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32:05
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32:14
SPEAKER_03: From Thought Leadership at PWC, I'm Heather Horn.
32:19
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32:30
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