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Standards aren't just boxes to check. This show digs into the audit, accounting, and tax rules that shape the profession and what they actually mean when you're the one applying them.
Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!
Meredith Mednick, CPA, CA: [00:00:00] Picture a controller sitting in a budget meeting. Someone from Investor Relations slides a note across the table. It says that an analyst wants to know how much of cost of goods sold is labor versus materials versus depreciation. They don't want the total. They want the breakdown. And the controller's honest answer is we don't track it that way. We've never had to. That scene has been playing out in finance departments all across the country for the last year and a half, ever since FASB dropped a standard that sounds almost boring on paper. Disaggregation of income statement expenses. Say that five times fast. But underneath that mouthful of a title is a genuinely simple, genuinely disruptive idea. Investors have been asking for decades for more details about what companies actually spend money on, and FASB finally said yes. If you're a preparer, this is the standard that's about to rewire how you think about your general ledger. If you're in public practice, this is the standard your clients are going to be asking you about soon, if they're not already. And if you're just trying to keep up to date on your CPE and your sanity intact, this is the episode where we make all of it make sense. Welcome to Standard Practice, the show where we take the standards you're required to know and make them into the standards you actually understand. I'm your host, Meredith Mednick, CPA, and today we're talking about ASU 2020 403 Disaggregation of income statement expenses along with its companion ASU 2025-01, which clarified the effective date together, the profession just calls it dice.
Meredith Mednick, CPA, CA: [00:01:48] You'll hear me say that a lot today. So get comfortable with that acronym. This one is a financial reporting standard, not an audit standard. Dice lives in the world of accountants, including prepares, controllers and the people who build income statements. If you're an auditor advisory, I think you should still stick around because your clients are going to need you to speak this language fluently and soon. By the end of this episode, I want you to be able to do three things. First, explain why FASB issued this standard and what problem it was trying to solve. Two walk through the main provisions whose in scope. What a relevant expense caption is. The five required expense categories the selling expense disclosure and the practical expedients available to you. And third, apply the transition guidance correctly, including the effective dates for annual and interim periods and the rules around early adoption. Let's start with the problem this standard is trying to solve, because standards make a lot more sense once you understand what they're trying to fix. Here's the thing about how the income statement exists today. Under current GAAP, you don't get much of a say in how granular your expense captions are. Companies present cost of sales or cost of revenue or S, G, and A or research and development.
Meredith Mednick, CPA, CA: [00:03:07] And those captions can be enormous. Black boxes and black holes. $100 million of sG&A might be salaries, might be rent, could be legal fees, maybe a mix of everything. And an outside investor usually has no way to tell. Investors have been telling FASB for years in comment letters and outreach sessions. And basically most of the venues FASB has ever offered that this lack of detail makes their job harder. They can't compare one company's cost structure to another. They can't tell how much of a cost base is fixed versus variable. They can't build a reliable model of what happens to earnings if revenue drops 10%, because they don't know what's labor, what's depreciation, and what's a one time charge buried in the middle of an expense caption. Faseb's own language on this is worth remembering, because it tells you exactly what the board was aiming for. The objective was to address requests from investors for more detailed information about the types of expenses in commonly presented expense captions, things like cost of sales S, G, and A and R&D. Investors told the board that disaggregated expense information is critically important for the understanding of performance, for assessing QBO cash flows, and for comparing one company against another in its own history. Now, if your instinct here is don't we already have segment reporting for this kind of detail? You may be on to something, and it's worth pausing on. Segment reporting gives you a view of expenses by business unit or by geography.
Meredith Mednick, CPA, CA: [00:04:39] What it doesn't give you is a view of expenses by nature. This standard is the nature cut, not where the cost happened, but what kind of cost it fundamentally is. Is it people? Is it stuff? Is it the slow wearing down of an asset over time? It's also worth noting how long investors have actually been asking for this. This resident request that showed up from nowhere. Faseb has fielded some version of this ask through multiple gentle consultations over the years, and an early attempt at solving it never made it past the finish line, mostly because preparers pushed back hard on the cost of producing that level of detail directly on the face of the income statement. This time around, FASB took a different approach. Instead of redesigning the income statement itself, which is what made the early attempts so contentious, it moved the detail into a footnote. Same underlying investor asks a much less disruptive delivery mechanism. That's part of why this version actually made it to a final standard. And here's the part that makes the standard genuinely elegant, even if implementing it is not going to feel elegant at all. Faseb did not touch the face of the income statement. Your cost of sales caption still says what it sales before your s g and a caption is unchanged. Nobody's redesigning your income statement. All of this new information goes into a footnote.
Meredith Mednick, CPA, CA: [00:06:02] So the deliverable here is a new disclosure built from data. Your systems may or may not currently produce in a usable form. That last point is a whole ballgame for implementation. And we'll come back to it because the standard is generous about how you get to the numbers. It lets you use estimates. It lets you it lets you use reasonable approximations. Fasb was explicit that it does not expect companies to chase down transactional level details to build this disclosure, but generous methodology doesn't mean the project is small. For a lot of companies, this is going to mean real work. In the GL, real conversations with FP and A, and in some cases a genuine systems change. One more piece of context before we move into the mechanics. This standard had a companion in January 2025, just two months after the original ASU FASB issued ASU 2020 501. A narrow, single purpose amendment that clarified the effective date. Specifically, it addressed a wrinkle for companies that don't run on a calendar fiscal year. Without that clarification, some non calendar year end companies could have read the original effective date language and concluded they'd have to adopt this in the middle of an interim period, rather than at the start of a fiscal year. Fasb fixed that. We'll walk through exactly what that means when we get to transition. But I wanted you to know now why you'll sometimes see the standard referred to with two ASU numbers together.
Meredith Mednick, CPA, CA: [00:07:31] It's one standard with one quick correction bolted on a couple months later. Before we move on, I want you to think about your own organization or our clients. If someone handed you your income statement tomorrow and asked you to break cost of sales into labor materials and depreciation, could your GL answer that question today? Or would you be starting from a spreadsheet and a lot of assumptions? Who's in scope for this standard. Let's clear this up first, because it changes how much of this episode applies to your work personally. This standard applies to public business entities. That's the FSB defined term, and it's broader than just companies listed on an exchange. It includes any entity that files or furnishes financial statements with the SEC, and that includes brokers and dealers and securities and voluntary filers. Private companies are out not for profits are out. Employee benefit plans are out. Fasb was direct about this. The amendments do not apply to private companies, not for profit entities or employee benefit plans, and the board punted the question of whether private companies should eventually get some version of this to the Private company council for future consideration. So if you exclusively work with private clients, you can relax a little, though I wouldn't get too comfortable because standard like this have a way of trickling down eventually and your private clients are going to be curious about what their public company competitors are disclosing.
Meredith Mednick, CPA, CA: [00:08:59] Here's a wrinkle worth knowing. A private company that's in the process of going public, or one whose financial statements get included in someone else's SEC filings, say because of an acquisition subject to regulation S rule 305 or an equity method investee filing under rule 309, that company meets the definition of a public business entity for this purpose. So a private company can absolutely find itself needing to comply with dice the moment it swept into somebody else's SEC filing. If you've got a client heading toward an IPO or a significant SEC registered transaction, this is on their list, whether they know it or not yet. Here's the core concept of this. The relevant expense caption. This is the concept that everything else in the standard hangs off of. Faseb calls it the relevant expense caption. And once this clicks, the rest of the standard gets much easier to follow. Here's the logic. You don't disaggregate every single line on your income statement. You only disaggregate the expense captions that contain one or more of five specific natural expense categories, which we're about to walk through one at a time. If a caption on your income statement includes any of those five categories, it becomes a relevant expense caption, and it has to be broken out in the footnote. If a caption doesn't include any of those categories, say interest expense or income tax expense, it's left alone entirely.
Meredith Mednick, CPA, CA: [00:10:31] There's a nuance worth catching here, and it may trip you up. What if a caption on your face of the income statement is already a natural expense caption, like a line item literally called depreciation and amortization? You might think that's already disaggregated by definition. It's already showing me the nature of the cost. Not quite. If that caption bundles more than one of the five required categories together, say, depreciation and intangible amortization sitting in one combined line. You still have to split those apart in the footnote, because the standard wants each of the five categories called out individually. On the flip side, if a caption on your face of the income statement consists entirely of just one of the five categories, say a line that's purely depreciation, expense and nothing else, you're done. There's nothing left to disaggregate because there's only one flavor of expense in there to begin with. One more scope note that's easy to overlook. Your share of earnings or losses from an equity method investment is not treated as a relevant expense caption, so you don't have to disaggregate that line. Okay, we've talked about these five required expense categories. Let's go through them. Get familiar with these because if you remember nothing else from this episode, I want you to remember this list. First purchases of inventory Two. Employee compensation. Three. Depreciation. Four. Intangible asset amortization and five. Depreciation. Depletion and amortization related to oil and gas producing activities or other depletion expense more generally.
Meredith Mednick, CPA, CA: [00:12:11] Let's take these one at a time. Because each one has its own texture and its own traps. Category one purchases of inventory. This one sounds simple and gets complicated pretty fast, so let's slow it down here. The expenditures in this category have to fall within the scope of a s 330. The standard on inventory, along with any industry specific guidance layered on top of it. There's an important exclusion inventory acquired through a business combination, a joint venture formation, or the initial consolidation of a variable interest entity that isn't a business does not get counted here, but inventory acquired in an asset acquisition does count. Now here's the part that turns into a genuine judgment call. And it's probably the single most consequential decision a manufacturer or retailer will make in implementing this standard. Faseb gives you two acceptable ways to present this category a cost incurred basis or an expense incurred basis. And they won't give you the same number. Think of a manufacturer of packaged food under the cost incurred basis. You're disclosing the cost that was incurred during the period, whether that cost got capitalized into inventory on the balance sheet or expense straight through to the income statement. Because some of what you incurred sits on the balance sheet at period end, rather than flowing through the income statement. You also have to disclose a changes in inventory line and another adjustments and reconciling items line to tie your incurred costs back to what actually landed on the income statement as an expense under the expense incurred basis.
Meredith Mednick, CPA, CA: [00:13:52] You flip that lens, you're disclosing the expense associated with inventory that was actually sold and derecognized during the period, plus anything directly expensed in the period under this method. You don't need to change. You don't need the changes in inventory reconciliation because you're only looking at what actually hit the income statement. Here's something worth remembering. Faseb itself acknowledged that for companies using LIFO or average cost, the expense incurred approach can be operationally difficult, maybe even impractical, because it requires you to trace which specific costs relate to units actually sold in the period. A lot of manufacturers are going to find the cost incurred basis is simply more achievable with the systems they already have. That's not a recommendation. Every company's facts and circumstances are different. But it's the pattern that some are seeing in the field right now. One important guardrail. Once you pick a basis, cost incurred or expense incurred, you have to apply it consistently to all the required categories within that expense caption. And if you ever switch from one basis to the other, you generally have to recast prior periods for comparability unless doing so is impractical. Here's an example tied to the standard that I think is one of the more useful teaching tools. So let's go through it.
Meredith Mednick, CPA, CA: [00:15:13] Picture a company that manufactures and sells cheese. It buys milk enzymes and packaging materials from third parties, runs a two day production process, then ages the cheese for six months before final packaging. And typically the cheese sells within 30 days of that packaging. This company uses standard costing method, meaning it estimates inventory cost using predetermined standard rates, and any purchase price variances or manufacturing variances get recognized directly on the income statement, with management estimating at each reporting date how much of that variance should actually be capitalized back into inventory. Now layer in the overhead utilities for the production facility. Rent on the production space and direct labor for quality control and supervision, which is itself a form of employee compensation. Distribution and warehousing costs. Depreciation on the production. Equipment. Repairs and maintenance. And a handful of allowable tax items. All of that sits inside the cost of goods sold, which is this company's relevant expense caption. Here's where it gets genuinely interesting. Under the cost incurred basis, the purchases of inventory category captures everything purchased during the period at actual cost, including whatever variance got directly expensed period. However, because some of what was purchased, this period is still sitting in inventory at year end. Aging in a warehouse not yet sold. The company also has to disclose a changes in inventory line and another adjustment and reconciliation items line to reconcile what was purchased against what actually flowed as an expense under the expense incurred basis.
Meredith Mednick, CPA, CA: [00:16:53] You're looking at something different entirely. The purchases of inventory category now reflects only the costs associated with units that were actually sold and derecognized in the current period. That six month aging cycle, plus a 30 day sales window, means a meaningful chunk of what was purchased. This period hasn't even hit the income statement yet as an expense. Under that basis, there's no changes in inventory line needed because you're only counting what actually flowed through to the income statement. The punchline is this for a company with a real aging or production cycle. Think cheese, wine, or anything that sits in inventory for months before it sells. The cost incurred number and the expense incurred number for the exact same period can look meaningfully different. Neither one is wrong. They are just answering slightly different questions. Cost incurred tells you what you spent this period. Expense incurred tells you what actually hit earnings this period And this is exactly the kind of judgment call that needs to get made early, ideally by someone who understands both the accounting and the actual physical flow of the company's inventory. Not decided by default because nobody thought about it until the disclosure was due. One more wrinkle from the same example that I want you to remember a change in an excess and obsolescence reserve under the cost incurred basis typically lands in the changes in inventory line, because there's no explicit guidance in the standard on exactly where reserve changes belong.
Meredith Mednick, CPA, CA: [00:18:21] So judgment is genuinely required here, and there may be more than one defensible way to present it under the expense incurred basis. That same reserve change gets disaggregated across the natural expense categories based on what kind of cost originally drove it, and outbound shipping and handling that you don't get reimbursed for is treated the same way under either basis, because it was never capitalized to inventory in the first place. It's directly expensed either way, so it just falls into the other cost of goods sold bucket regardless of whatever method you're using. There is also a practical expedient tucked into this category that's worth knowing. If an entity has an expense captured on its income statement, where substantially all of the expense relates to inventory, it can skip the full quantitative disaggregation and just qualitatively describe what's in that caption instead. Faseb didn't define substantially all with a bright line percentage. However, the board did say the term should be applied consistently with how it's used elsewhere in GAAP and the general market interpretation of substantially all in other contexts like ASC 606 or ASC 842 tends to land around 90% or more. That's not a rule stated in this ASU itself, so don't treat it as a bright line here. However, it's the frame of reference most practitioners are using. Let's move on to category two employee compensation. This is probably the category with the broadest reach across every single company, because virtually every relevant expense caption is going to have some people cost buried in it somewhere.
Meredith Mednick, CPA, CA: [00:19:59] Faseb actually amended the definition of employee in the master glossary for this standard, aligning it with the definition already used in ASC 718 stock compensation. That means full time, part time, temporary and seasonal workers all counted as employees for this purpose. Employee compensation itself is meant to be consistent with the compensation costs already defined in ASC 710. 712. 715 and 718. So we're talking wages, bonuses, the employer share of Social Security contributions, benefits, and stock based compensation. There's a specific carve out that shows up constantly. In the illustrative examples FASB published alongside the standard one time employee termination benefits have to be broken out separately within the tabular disclosure, rather than fold it into the general employee compensation number. So if your organization runs a restructuring or a reduction in workforce during the period, those termination costs get their own line. They don't just disappear into the compensation bucket. There's also an election available here where that's worth flagging for anyone with a fringe benefit. Heavy comp structure. An entity can can choose to include amounts related to other transactions entered into for the benefit of employees. Think about subsidized meals, subsidized transit, that kind of thing. Inside the employee compensation category, if you make that election, you have to apply it consistently and disclose both that you made the election and what those transactions are.
Meredith Mednick, CPA, CA: [00:21:34] There is a practical expedient specifically for banks and similar entities. If your income statement already presents as salaries and employee benefits caption in compliance with the SEC regulation S-x rule 904 you can simply use that existing amount rather than recalculating. Employee compensation from scratch. Under the standards definition, that's meaningful relief for financial institutions. And we'll actually talk about that in a moment. When we look at how bank might handle this disclosure. Categories three and four. Depreciation and intangible asset amortization. These two are more mechanical, thankfully, because your system should already track this information for other purposes, depreciation expense should tie to the amounts you're already recording under ASC 360 ten. Property, plant and equipment. Intangible asset amortization should tie to what you're recording under ASC 350-31 nuance worth mentioning amortization of a finance lease, right of use asset and amortization of leasehold improvements recorded under ASC 800 42-20. Need to land in either the depreciation category or the intangible amortization category. Whichever one you already use for similar assets. So there's no third bucket invented here. You just have to be consistent with how you classify comparable assets elsewhere. The fifth category depreciation, depletion and amortization in oil and gas and other depletion. This one is narrower and mostly relevant if you're in extractive inventories. It captures DNA of capitalized acquisition, exploration, and development costs recognized under ASC 932-360.
Meredith Mednick, CPA, CA: [00:23:20] The Oil and Gas Extractive Activities guidance, along with other depletion expense more broadly. If you're not an oil and gas mining or similarly resource extraction heavy industries, this category is likely to show up rarely, if at all, in your disclosures. And then there's the stuff that doesn't fit neatly other items. Here's something important almost no expense caption is going to be made up of entirely these five categories. There's always a residual the leftover amount in a relevant expense caption that isn't one of the five natural categories. Faseb requires you to disclose that leftover amount in the tabular format, along with a qualitative description of what's actually in it, and the standard is refreshingly reasonable about how much detail that description needs. Faseb said the level of detail and the qualitative description should be commensurate with the significance of the amount being described. In other words, if the leftover bucket is small, a sentence or two will do. If it's a big chunk of the caption, you owe it to your readers and investors a more thoughtful explanation. There's also a separate category of items that current GAAP already requires you to disclose elsewhere. Things like impairment of long lived assets, warranty expense, operating lease costs, foreign currency transaction gains and losses, and quite a few others. Faseb actually pulled together a whole list of these preexisting disclosure items and said, if these amounts sit inside a relevant expense caption, bring them into this same tabular disclosure, rather than leaving them scattered elsewhere in the footnotes.
Meredith Mednick, CPA, CA: [00:24:58] Some of these have only to be broken out if the entire amount sits in one relevant expense caption. If the same type of cost warranty expense is. A classic example is spread across multiple captions, say some in cost of sales and some in S, G, and A. You're not required to disaggregate it separately in each one. Here's a relief provision that's easy to miss if you're just skimming the standard. Certain liability related expenses can actually be excluded from the disaggregation requirements altogether. Faseb didn't hand you a neat checklist here. Instead, it gave a principal. Expenses that are Excludable are generally those based on an obligation. That's an estimate of an uncertain amount that will be settled sometime in the future. Examples that tend to meet the bar here include provisions for contract losses, claims and claim adjustments and asset retirement obligations. What doesn't meet the bar, meaning they still have to be disaggregated normally are things like accruals for goods or services you've already received but haven't paid or invoiced yet, including amounts owed to employees, accrued bonuses, vacation pay, pension obligations, that kind of thing. The distinction Faseb is drawing is between a genuine future estimate of an uncertain settlement, which gets a pass and a garden variety accrual for something that's already happened, which does not. Let's talk about expense reimbursements and cost sharing arrangements quickly. If your organization has a cost sharing or cost reimbursement arrangement with another entity, a joint research agreement is a common example.
Meredith Mednick, CPA, CA: [00:26:33] The. The standard requires you to disclose how these reimbursements amounts flow through your relevant expense captions. You've actually got a choice here you can disclose the amount of the reimbursements separately, or you can disclose your expense categories, net of the reimbursement effect. Either approach is acceptable, but once you pick one, you apply it consistently going forward. And either way, you have to explain the disclosure, how expense reimbursements are being reflected in that tabular format. One more piece of housekeeping guidance that's worth knowing if your organization ever changes how it presents the disclosure, say, switching your inventory basis or redefining what counts as a selling expense, you're required to disclose the reason for the change in the period it happens and generally restate prior periods presented so the comparison stays meaningful unless restating is genuinely impractical, in which case you disclose the fact and explain why. Here's a detail that will matter to some of you and not to others, but it's worth knowing. Regardless, Faseb was explicit that these kind of changes switching an election, redefining a disclosure do not represent a change in accounting principle under the accounting changes in error correction guidance. That's a meaningful distinction, because a change in accounting principle typically carries a heavier justification burden. Fasb deliberately didn't want a routine refinement of how you're presenting this new disclosure to trigger that heavier standard.
Meredith Mednick, CPA, CA: [00:28:01] Separately from that tabular disclosure we just walked through, the standard also requires every in-scope entity to disclose a single total for its selling expenses, presented in a manner similar to how you'd already present research and development or advertising expense on the face of the statement or in the footnotes. But there's a twist. Fasb does not define what selling expenses mean. Your organization has to make its own determination of what belongs in that bucket, and then disclose your definition on an annual basis, along with this number itself. If your definition changes midyear, you have to disclose that change in the interim period where it happens. This is one of the few places in the standard where you genuinely get to exercise judgment about what belongs in a category, so long as you're transparent about how you drew the line and consistent once you've drawn it. Faseb actually included three worked examples in the standard itself to show how differently this disclosure can look depending on the entity. It's worth walking through each of these because they look different depending on what kind of entity you're working on. First picture a manufacturer with meaningful service operations alongside its product business. That entity ends up disaggregating cost of products sold, cost of services, and S, G and A because those are the captions carrying the five natural categories. It elects the cost incurred basis for its inventory related costs, so it discloses the changes in inventory and reconciling items we talked about earlier.
Meredith Mednick, CPA, CA: [00:29:32] It also happens to have an impairment sitting inside S, G, and A and warranty expense sitting entirely inside. Cost of products sold. So both of those get their own line item in the tabular disclosure, right alongside those five required categories. Second, think of a services company that has no meaningful inventory at all. Its relevant captions end up being cost of sales. A separate depreciation and amortization caption, sG&A and R&D. This entity has a one time reduction in workforce during the year. Spread across three different expense captions. So the termination benefits get broken out into their own line, separate from ordinary employee compensation. It also has a cost sharing research arrangement with a partner company receiving reimbursement for some of its R&D spend, and it elects to disclose that reimbursement separately rather than netting it invisibly into the R&D number. Third picture a bank. It's relevant captions are its occupancy and depreciation expense line, and a catch all other expense line, interest expense provision for credit losses, data processing and professional fees don't get touched because none of those captions contain the five natural categories. And this bank uses that practical expedient we talked about earlier, the one for salaries and employee benefits under SEC regulation S x rule 904. So it simply carries forward the number it's already required to present rather than rebuilding that number from scratch.
Meredith Mednick, CPA, CA: [00:31:04] Three very different disclosures, the same five categories underneath. That's the whole design philosophy of the standard in a nutshell. Industry agnostic rules, industry specific results. Before we move on, I want to make sure this point lands because it's genuinely good news. Buried in a dense standard, Faseb explicitly permits entities to use accounting estimates or other methods that produce a reasonable approximation. To build these disclosures, the board said plainly that it wants to alleviate concerns about reporting system limitations, and that entities are not expected to chase transaction level detail to comply. If your gut reaction to everything we just covered was, oh my goodness, there's no way our general ledger can produce this level of precision. Take a breath, because precision was never the bar. Reasonable approximation is. Take a second to think about the relevant expense captions that are on your own income statement or those of a client's. Which one of the five categories is going to be the hardest to pull cleanly out of your existing chart of accounts? And is that a system problem or a process problem, or simply a conversation that nobody's had yet with the people who own that data? Let's move on to some transition guidance. This is the part that everyone wants the straight facts on. So let's make sure we get every date right, because getting an effective date wrong on your calendar is the kind of mistake that's genuinely embarrassing to walk back later.
Meredith Mednick, CPA, CA: [00:32:34] Asu 2020 403 is effective for all public business entities for fiscal years beginning after December 15th, 2026, for interim reporting periods. It's effective within fiscal years, beginning after December 15th, 2027. Say that back with me one more time, because the annual date and the interim date are a full year apart. And that gap is exactly what led to ASU 2020 501 annual periods fiscal years beginning after December 15th, 2026 interim periods fiscal years beginning after December 15th, 2027. Here's why Faseb felt the need to issue that follow up. Asu just a couple of months after it issued the original ASU. Think of a company with a fiscal year that doesn't run on the calendar. Read literally. The original language could have been interpreted to mean that a non-calendar year end company might have to start applying the standard in the middle of an interim period, rather than cleanly at the start of an annual reporting period. That's an awkward, confusing place to first apply a brand new disclosure standard FASB issued ASU 2020 501 specifically to clarify the effective date and eliminate that confusion so that all public business entities, regardless of fiscal year end, apply this cleanly, starting with an annual period and then interim reporting follows a year later for a calendar year end company with a December 31st year end. Here's what that looks like in plain English. Your first annual disclosure under this new standard covers the year ending December 31st, 2027.
Meredith Mednick, CPA, CA: [00:34:15] Your first interim disclosure. Let's assume that same calendar year end company applies, starting with the quarter ending March 31st, 2028. Annual comes first, interim follows a year later. And yes, that does mean your very first annual 10-K under the standard will include the new disclosure before your interim ten. Cuz do think about early adoption for a second. It is permitted. Fasb did not attach any restrictions or conditions to that permission. It's a clean, unconventional. Yes. If your organization's systems are ready sooner and your audit committee is on board, you can get ahead of the required date on method of adoption. Public business entities are required to adopt this prospectively. That's the default, and it's what most companies will do. Meaning you apply the new disclosure requirements starting the period of adoption without restating prior periods. You are also permitted to apply it retrospectively if you choose to. That's an option, not a mandate. If your organization has robust historical data and wants comparability across periods from day one, retrospective application is available to you. For most companies, though, prospective application is going to be the more operationally realistic path, mainly because pulling this level of expense detail out of historical periods might not be possible because the systems may not have been built to capture it in the first place. I want to close this section with something that isn't technically part of the standards text, but it's squarely part of being a responsible practitioner.
Meredith Mednick, CPA, CA: [00:35:51] The effective date might feel comfortably far away from now, but it's not. Building this disclosure requires you to look at your general ledger and ask whether it currently produces employee compensation, depreciation, and inventory cost information at the level of granularity that this standard demands. Broken out by expense caption, not just an aggregate for a lot of organizations. The honest answer may not be no, not yet. That means chart of account changes, potentially some system configuration work, and almost certainly some new coordination between accounting and F, B and A that didn't previously need to exist. None of that's going to happen in a weekend. The earlier your organization starts mapping its own income statement against these five categories, the less painful the actual adoption period is going to be. Here's a question. If your first required annual disclosure is your fiscal year ending after December 15th, 2026, how many closed cycles do you actually have between now and then to get your systems and your chart of accounts ready? And does that number feel comfortable, or does it feel like you need to start this conversation internally sooner rather than later? Let's zoom back to where we started this episode. An analyst slides a note across the table asking what's really inside, cost of goods sold, and a controller who's honestly never had to answer that question before. That gap between what investors want to know and what companies have historically had to tell them is exactly what the standard closes.
Meredith Mednick, CPA, CA: [00:37:23] Dice doesn't change what you earned. It doesn't change your margins, your net income, or a single number on the face of your income statement. What it changes is how visible the anatomy of your cost structure becomes to the people reading and relying on your financial statements. Investors now have the ability to compare companies on an apples to apples basis by expense nature, not just by. However, each company happened to organize its own captions and that. According to the people who actually asked FASB for the standard in the first place, is exactly the kind of transparency that they wanted. So where do you actually start? Here are four concrete steps. One, I want you to map your income statement against the five categories right now. Go caption by caption and ask which of your existing expense captions contain purchases of inventory, employee compensation, depreciation, intangible amortization, or D, G, a and depletion. That map is your scope, and it's the single most useful first thing you can produce. Second, if you have inventory, decide early on whether cost incurred or expense incurred is realistic for your systems. And don't wait until the deadline to make that call because it shapes what data you need to start capturing now. Third, start the conversation between accounting, FP and A and your systems teams about whether your chart of accounts and your GL can currently produce this level of detail.
Meredith Mednick, CPA, CA: [00:38:54] And if not, what needs to change? Remember, estimates and reasonable approximations are explicitly permitted, so this doesn't have to mean rebuilding your entire GL from scratch, but it does mean having an honest conversation about the gap between what you can produce today and what you'll need to disclose tomorrow. Four. Put the actual dates on your calendar in writing right now. Annual periods beginning after December 15th, 2026. Interim periods within fiscal years beginning after December 15th, 2027. And if early adoption might serve your organization, raise that conversation with your audit committee well ahead of time, not the quarter before you'd like to file. That's dice in a nutshell. A standard that sounds like an acronym Soup, built around a genuinely simple idea. Tell investors more about what you actually spend money on, wrapped in a genuinely real implementation lift for the people who have to build it. If this episode was useful for you, I'd love for you to claim your CPE credit for it. Head on over to earmark.app. Complete the short quiz and you'll have documented learning that counts towards your annual CPE. That whole process takes just a few minutes, and if you haven't explored the rest of the earmark library, I'd really encourage you to do so. It's designed for professionals who want to stay sharp and keep growing. I'm Meredith Mednick, CPA. Thanks for spending this time with me. Have a great day.