Financial reporting is entering a new era of transparency. With the issuance of Accounting Standards Update (ASU) 2024-03, the Financial Accounting Standards Board (FASB) has introduced the Disaggregation of Income Statement Expenses (DISE) standard, codified in ASC 220-40. This new requirement is poised to significantly impact how public business entities present and disclose expense information, offering investors and stakeholders a clearer window into the true drivers of company performance.

Why DISE? The Push for Greater Clarity

For years, investors and analysts have called for more granular information about expenses reported in financial statements. Traditionally, companies have presented expenses by function—such as cost of sales, selling, general and administrative (SG&A), or research and development (R&D). While functional reporting provides a high-level view, it often obscures the underlying nature of costs, making it difficult to compare companies or assess trends over time.

The DISE standard responds to these concerns by requiring public business entities to break down—or “disaggregate”—key expense captions into natural expense categories. The goal is to help users of financial statements better understand what’s driving costs, assess future cash flows and make more informed investment decisions.

What’s Required Under DISE?

The heart of the DISE standard is a new tabular disclosure in the notes to the financial statements. For each relevant expense caption presented on the face of the income statement—such as cost of goods sold, SG&A or R&D—companies must disclose the amounts attributable to the following natural expense categories:

• Purchases of inventory

• Employee compensation

• Depreciation

• Intangible asset amortization

• Depreciation, depletion, and amortization (DD&A) for oil, gas or mining entities

In addition to these categories, companies must integrate certain existing disclosures, such as impairment losses, exit costs and warranty expenses, into the new table. The standard also requires disclosure of total selling expenses and a clear definition of what constitutes “selling expenses” for the reporting entity.

If a company receives or pays expense reimbursements (for example, through cost-sharing arrangements), these must be disclosed either as separate line items or netted against the relevant expense category, accompanied by a qualitative explanation.

Inventory: Choice and Challenges

Recognizing the operational complexity of inventory accounting, the standard provides two acceptable approaches for disaggregating inventory-related expenses:

• A cost incurred basis, which focuses on costs incurred during the period (including amounts capitalized to inventory), with required reconciliation items such as changes in inventory balances; or

• An expense incurred basis, which focuses on amounts recognized in expense during the period upon derecognition of inventory.

This flexibility reflects a deliberate balance between investor usefulness and preparer operability, while still requiring consistent application once a method is selected.

In practice, it is expected that many entities will elect to use the cost incurred basis when a relevant expense caption contains inventory related expenses. While the expense incurred basis provides conceptual alignment with cost of sales, it can be operationally challenging to track and recharacterize inventory costs that were capitalized in prior periods—particularly in complex or global supply chains, standard costing environments or situations involving long inventory holding periods.

As a result, the cost incurred basis is likely to be viewed by many preparers as the more operable and sustainable approach, while still achieving the transparency objectives of the DISE standard.

Effective Dates and Transition

The DISE standard is effective for annual periods beginning after Dec. 15, 2026, and for interim periods within annual periods beginning after Dec. 15, 2027. Early adoption is permitted. Companies may apply the standard prospectively or retrospectively, but regardless of the approach, the time to prepare is now.

Implementation: More Than a Compliance Exercise

Implementing DISE is not simply a matter of updating disclosures. It requires a comprehensive review of systems, processes and internal controls. Companies should begin with a diagnostic phase, identifying which expense captions and natural expense categories apply to their business. A gap analysis will reveal whether existing systems can capture the necessary data or if upgrades are needed.

Cross-functional collaboration is essential. Accounting, finance, IT, procurement and investor relations teams must work together to develop business requirements, update policies and design new processes. Training and communication are critical to ensure that staff understand both the technical requirements and the practical implications for day-to-day operations.

Key Challenges and Considerations

DISE presents several challenges. Companies must determine whether their ERP and reporting systems can accurately capture and report the required expense categories. Defining “selling expenses” in a way that is both meaningful and consistent with industry practice may require careful judgment. Decisions about whether to transition prospectively or retrospectively, and whether to use practical expedients for inventory or employee compensation, will have significant implications for both reporting and operations.

Stakeholder communication is also vital. Management, audit committees and investors will need to understand the changes and their impact on reported results.

Action Steps for Success

To prepare for DISE, companies should:

• Start early with a thorough diagnostic and gap analysis

• Build a cross-functional project team

• Document policies and procedures for defining expense categories and selling expenses

• Invest in training and change management

• Benchmark against industry peers and monitor FASB updates

Conclusion

The Disaggregation of Income Statement Expenses standard marks a significant shift in financial reporting. By providing greater transparency into the nature of expenses, DISE will help stakeholders make better-informed decisions and foster greater trust in financial reporting. While the road to implementation may be complex, companies that embrace the change will be well-positioned to deliver enhanced value to investors and other users of their financial statements.