ASU 2024-03 Expense Disaggregation: A Practitioner's How-To Guide

If you are a controller or CFO at a public company, ASU 2024-03 is the most operationally demanding disclosure standard FASB has issued in years. The rule does not change how you recognise or measure expenses, but it does require you to crack open every major income statement caption and show investors exactly what is inside. This guide walks through the concrete steps, sequencing, and traps that the standard itself, and most summaries of it, leave for you to figure out on your own.

For a full overview of what the standard requires and its effective dates, see Finrep's FASB ASU 2024-03 DISE disclosure requirements guide. For ERP and chart-of-accounts mapping, see the ASU 2024-03 systems guide. This article focuses on the practitioner decisions and sequencing you need to get right before your 2027 annual report.

Key takeaway: Calendar-year public companies must apply ASU 2024-03 in their fiscal 2027 annual report (10-K for the year ending December 31, 2027) and in interim periods of fiscal 2028. Early adoption is permitted. The data and systems work takes 12 to 24 months, so the window to start is now.

What Does ASU 2024-03 Actually Require?

ASU 2024-03, codified under Subtopic 220-40, requires public business entities (PBEs) to disclose, in the footnotes, the amounts of specific natural expense categories contained within each "relevant expense caption" on the face of the income statement. It does not require you to restructure the face of your income statement at all.

The FASB standard defines five natural expense categories that must be quantified within each relevant caption:

1. Purchases of inventory (amounts within the scope of ASC 330)
2. Employee compensation
3. Depreciation
4. Intangible asset amortization
5. Depreciation, depletion, and amortization from oil and gas producing activities (or other depletion)

In addition, selling expenses must be disclosed as a separate total in the footnotes, in annual periods with a definition of what the entity includes in that figure. As Deloitte notes, this mirrors how R&D expenses are currently presented: a single total, not a disaggregated breakdown by natural category.

The standard applies to all PBEs. Private companies, not-for-profit entities, and employee benefit plans are not required to adopt but may elect to do so.

Step 1: Identify Your Relevant Expense Captions

A "relevant expense caption" is any line item on the face of your income statement, within continuing operations, that contains at least one of the five natural expense categories listed above. This is the first decision that shapes everything else.

Two rules govern scope:

• Mixed captions are in scope. If a caption combines two or more natural expense categories, you must disaggregate them in the footnotes. A "Depreciation and amortization" line that bundles property depreciation and intangible amortization is a classic example: you will need to split those two figures separately.
• Single-category captions are exempt. If a caption consists entirely of one natural expense category, no further disaggregation is required. A standalone "Depreciation expense" line on your income statement does not need to be broken down further.

For most companies, the relevant captions will be cost of goods sold (or cost of revenues), SG&A, and possibly a combined D&A line. Run through your income statement line by line and ask: does this caption contain any of the five categories? If yes, it is in scope.

Common trap: Companies with a single "Operating expenses" caption that bundles COGS, SG&A, and D&A will face the broadest disaggregation requirement. If you are considering simplifying your income statement structure, now is the time to model whether separating captions reduces your DISE burden.

Step 2: Map Your Cost Structure to the Five Categories

Once you know which captions are in scope, you need to map every dollar in each caption to one of the five natural categories or to the catch-all "other items" bucket.

The trickiest category is purchases of inventory under ASC 330. This is not just the invoice cost of raw materials. Deloitte's Heads Up identifies the following as falling within ASC 330 inventory costs:

• Utilities of the production area
• Rents related to the production area
• Indirect labor for quality control, inspection, and supervisory activities
• Distribution and warehousing costs
• Costs to transport goods between company-owned facilities
• Depreciation of production-related capital assets
• Repairs and maintenance on production equipment
• Administrative costs for the manufacturing facility
• Taxes allowable under IRC Section 164 (excluding state, local, and foreign income taxes)

For a manufacturer, this means that depreciation on a production line sits inside "purchases of inventory," not in the standalone "depreciation" category. Getting this right requires a clean mapping between your GL accounts and the ASC 330 cost pool.

The "other items" bucket: After you have quantified the five categories and any existing required disclosures (such as impairment charges or operating lease costs), the residual amount in each caption is "other items." You must disclose this residual in the tabular format with a qualitative description of what it contains. You do not need to quantify individual line items within other items.

Step 3: Make the Inventory Election

This is the most consequential accounting policy decision in the standard, and it is one that most summaries gloss over.

For relevant expense captions that contain ASC 330 inventory amounts, you must elect one of two disclosure bases:

Consider a manufacturer that builds inventory in Q1 and Q2 and ships heavily in Q3 and Q4. Under the cost-incurred basis, the "purchases of inventory" disclosure in Q1 will be high even though little has hit the income statement. Under the expense-incurred basis, the disclosure tracks COGS timing. Neither is wrong, but the choice affects how investors read the quarterly pattern.

This election must be applied consistently. If you change it later, you must recast prior periods for comparative purposes (unless impracticable) and disclose the reason for the change. Per Deloitte, a change in this election is not a change in accounting principle under ASC 250, so it does not trigger the full retrospective restatement machinery, but the recasting requirement is still real.

Document your election and the rationale in your accounting policy memo before your first filing under the standard.

Step 4: Handle the Selling Expense Total

Selling expenses do not get disaggregated by natural category. They get disclosed as a single total. In annual periods, you must also provide a definition of what your entity includes in selling expenses.

This matters because "selling expenses" is not a defined term under U.S. GAAP, and companies draw the line differently. Some include sales force compensation only; others include marketing, trade promotions, and customer service. The standard requires you to tell investors exactly where you draw the line.

The practical question most teams ask is: do we need to add a new line to the face of the income statement? The answer is no. The disclosure lives in the footnotes. But if your current SG&A caption bundles selling and G&A together, you will need to be able to split the total to produce the required selling expense figure. That split may require a GL reclassification or a supplemental allocation.

Competitive sensitivity note: Disclosing total selling expenses as a separate figure, and disclosing employee compensation within COGS, will give investors and competitors more visibility into your margin structure than they have today. Some companies will find this disclosure straightforward; others, particularly those in industries where labor intensity within COGS is a competitive differentiator, should model the disclosure in advance and prepare investor communications.

Step 5: Assess Whether Estimates Are Sufficient

The standard explicitly permits entities to use estimates or other methods that produce a reasonable approximation of the required amounts. This is a meaningful practical relief. As Deloitte confirms, FASB acknowledged that many companies' financial reporting systems do not currently track expenses at the natural-category level across all cost centers.

But "estimates are permitted" does not mean "any allocation will do." Your estimation methodology must:

• Produce a reasonable approximation, not a rough guess
• Be applied consistently across periods
• Be documented so your auditors can evaluate it
• Be supportable if the SEC asks about it in a comment letter

The audit implication is real. These footnote disclosures will be subject to audit, and auditors will scrutinize your estimation methodology, particularly for the employee compensation split between COGS and SG&A, which is often the largest and most judgment-intensive allocation.

Step 6: Address Cost-Sharing and Reimbursement Arrangements

If your company participates in a cost-sharing arrangement or receives expense reimbursements from another entity, the standard has specific rules. Per PwC's Viewpoint guide (Section 3.11), you must:

• Disclose the amount of the reimbursement separately
• Disclose the required expense categories included in the relevant caption net of any reimbursement effects
• Disclose the elected presentation alternative and a qualitative description of the expense categories to which the reimbursement relates

This is relevant for pharma companies with co-development arrangements, shared services structures, and any entity that grosses up reimbursed costs through its income statement.

Step 7: Understand the Transition Requirements

ASU 2024-03 offers two transition methods:

1. Prospective: Apply to financial statements issued for reporting periods after the effective date only.
2. Retrospective: Apply to any or all prior periods presented.

Most calendar-year companies will face a practical choice: if your 2027 10-K presents two years of comparatives (2026 and 2027), can your systems produce the 2026 DISE data? If not, prospective adoption avoids the problem, but you must disclose that fact and explain why recasting was impracticable.

Changes to how you present the DISE footnote after initial adoption, such as switching your inventory election or redefining what counts as selling expenses, are not changes in accounting principle under ASC 250. You still recast prior periods (unless impracticable) and disclose the reason, but you do not trigger the full ASC 250 retrospective restatement process.

Your 2026 to 2027 Readiness Timeline

The mandatory date for calendar-year companies is the 2027 annual report. That sounds distant. It is not, given that systems changes and data mapping typically take 12 to 24 months.

For companies already mid-way through a GL or ERP implementation, early adoption may make sense: you can align the DISE data model with the new system rather than retrofitting it later. For others, waiting for the mandatory date while building the data infrastructure in parallel is the more common path.

Non-GAAP Measures: An Underappreciated Interaction

If your company presents adjusted EBITDA or adjusted operating income that excludes certain expense categories, the DISE footnote will make those adjustments more transparent. Investors will be able to see, for example, exactly how much employee compensation sits in COGS versus SG&A, and compare that to your non-GAAP add-backs. Companies that currently exclude stock-based compensation from adjusted metrics should model how the DISE disclosure interacts with their non-GAAP reconciliation narrative. The SEC's non-GAAP compliance framework is a useful reference for thinking through that interaction.

FAQ

Does ASU 2024-03 apply to foreign private issuers or IFRS reporters? No. ASU 2024-03 applies to U.S. GAAP PBEs only. Foreign private issuers reporting under IFRS are subject to IFRS 18, which has its own expense disaggregation requirements and restructures the face of the P&L rather than just adding footnotes. For a side-by-side comparison, see Finrep's IFRS 18 vs ASU 2024-03 comparison.

What is the effective date for ASU 2024-03? For annual periods: fiscal years beginning after December 15, 2026, meaning the first required filing for calendar-year companies is the 10-K for fiscal year ending December 31, 2027. For interim periods: within fiscal years beginning after December 15, 2027, meaning Q1 2028 for calendar-year companies. Early adoption is permitted.

Does ASU 2024-03 require changes to the face of the income statement? No. The standard adds footnote disclosures only. You do not need to add new line items to your income statement, though you may choose to restructure captions to simplify your DISE compliance.

How does DISE interact with segment reporting under ASC 280? The standard requires disclosures at the consolidated level, not at the segment level. However, if your segment disclosures already present certain expense categories separately, you will want to ensure consistency between the DISE footnote and your segment note to avoid investor confusion.

What happened to the "inventory and manufacturing expense" category from the 2023 exposure draft? FASB replaced it with the narrower "purchases of inventory" category, defined by reference to ASC 330. As Deloitte notes, this was a significant simplification from the proposed standard, which had required a second level of disaggregation within that category.

When must we start disclosing ASU 2024-03 in our SAB 74 footnote? SEC Staff Accounting Bulletin No. 74 requires disclosure of the expected impact of recently issued but not yet adopted standards. For most calendar-year companies, that means the 2026 10-K (filed in early 2027) should include a description of ASU 2024-03, your planned adoption date, and the expected impact on your disclosures. If the impact is not yet estimable, say so and explain why.