In November 2024, the FASB issued Accounting Standards Update (ASU) 2024-03, introducing new disclosure requirements on the disaggregation of income statement expenses for public business entities (PBEs). While only applicable to PBEs, non-PBE entities may benefit from understanding the new guidance to inform any changes that would help management or external users better understand the income statement. The ASU does not change presentation requirements on the face of the financial statements but mandates further breakdowns of certain expense captions within the footnotes. This article highlights the purpose and key provisions of the new guidance, along with the potential impact for equipment lessors.

Purpose of the New Guidance

The new disclosure requirements respond to investor requests for greater detail about expense categories within the major financial statement captions such as cost of sales and selling, general and administrative expense. Existing disclosure requirements are limited, particularly under the Accounting Standards Codification (ASC), leading to diversity in practice for what expenses are disclosed and where. ASU 2024-03 enhances comparability by standardizing the level of detail required in financial statement footnotes for specific broad expense categories.

Key Provisions of ASU 2024-03

Entities must provide a tabular presentation of the following expenses if they are included within major expense captions on the income statement:

• Purchases of Inventory – Entities must disclose amounts related to inventory purchases per ASC 330 (Inventory). The costs can be presented under either a cost-incurred or expense-incurred basis, though most companies are expected to use the cost-incurred method due to relative ease of implementation in comparison to the expense-incurred method. This category should specifically include i) changes in inventory and ii) other adjustments and reconciling items necessary to reconcile amounts to the face of the income statement.
• Employee Compensation – This category is relatively broad and will include disclosure of expenses such as wages, bonuses, social security contributions, employee benefits, and stock-based compensation. One-time termination benefits are excluded and must be separately disclosed. 
• Depreciation - The presentation of depreciation amounts should represent amounts recorded under the guidance of ASC 360-10 (Property, Plant and Equipment).
• Intangible Asset amortization - The presentation of amortization amounts should be consistent with amounts recorded under ASC 350-30 (Intangibles Other than Goodwill). The new ASU further highlights the amortization of a finance lease right of use asset and leasehold improvements should be included in depreciation or intangible amortization consistent with how the entity presents amortization of similar assets. 
• Depreciation, Depletion, and Amortization for Oil and Gas Producing Activities – Entities engaged in oil and gas extraction must disclose depreciation, depletion, and amortization (DD&A) expenses in accordance with ASC 932-360. The ASU requires that these amounts be included in either the depreciation or amortization categories, depending on company classification policies. Entities should ensure alignment with their current financial reporting practices to maintain consistency.

Additional Disclosure Requirements and Considerations

There are a number of additional requirements and considerations covered under the new standard. A few of these are:

• Selling Expenses – Must be presented separately from the tabular format, with a qualitative description of what constitutes selling expenses. The standard allows some flexibility in defining selling expenses, provided the entity consistently applies its policy.
• Use of Estimates – The ASU allows entities to use reasonable estimates to reduce the cost of implementing changes to reporting systems or processes, helping to ease the transition burden.
• Items Already Disclosed Under US GAAP – Certain expenses (e.g., impairments, exit/disposal costs, bargain purchase gains) must also be included in the new tabular format if they are part of a relevant expense caption.
• Expenses Spanning Multiple Captions – Some items, such as provision for expected credit losses or warranty expenses, must be disclosed in the tabular format if they are contained within a single expense caption. If spread across multiple captions, they may be aggregated into an "other" category with qualitative descriptions. Entities should ensure that the level of detail provided in qualitative descriptions aligns with the significance of the amounts being described.
  

Equipment Leasing Impact & Example

For equipment lessors, the new disaggregation requirements are likely to predominantly impact how depreciation and selling expenses are disclosed. Lessors typically classify leased equipment as property, plant, and equipment (PP&E) and recognize depreciation expense for operating leases.

In addition, lessors may need to modify their financial reporting systems to track and classify expenses more precisely, particularly if depreciation on leased assets has historically been grouped with broader fixed asset categories. Companies should assess whether additional internal reporting modifications are necessary to align with the standard’s disclosure requirements.

The following is an example of how a disaggregation disclosure may look for a leasing company in a simplified case.

ASC 220-40-55 includes some more comprehensive examples of how income statement line items should be disaggregated into the new footnote disclosure which may aid in further understanding the impact to your entity.

Scope and Effective Date

The guidance applies to PBEs only. Adoption is required for fiscal years beginning after December 15, 2026, with interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The ASU allows prospective adoption but also permits retrospective application for all periods presented in the year of adoption.

Conclusion

While ASU 2024-03 does not alter any fundamental accounting principles or change the face of the income statement, it requires lessors to provide more clarity to investors through a new footnote disclosure with the disaggregation guidance outlined above. Lessors should review their reporting processes to ensure compliance and comparability within the industry. Additionally, given the significant changes in disclosure requirements, entities should engage with auditors and industry peers to establish best practices for implementing the new standard effectively.