The Financial Accounting Standards Board's (FASB) new disaggregation of income statement expenses (DISE) standard, issued through ASU 2024-03, may appear straightforward at first glance. The guidance does not change how companies recognize or measure expenses, nor does it require a new income statement presentation. Instead, it introduces expanded footnote disclosures designed to provide investors with greater transparency into the composition of key expense captions such as cost of sales, selling, general and administrative expenses, and research and development.

While the new requirements do not take effect for calendar-year public companies until 2027 annual reporting, organizations that view DISE as simply a disclosure exercise risk underestimating the effort required for implementation. The standard applies to all public business entities (PBEs), including certain non-SEC registrants that meet the PBE definition. The amendments apply to all public business entities, including entities that meet the public business entity definition but are not SEC filers. As clarified by ASU 2025-01, the amendments are effective for annual reporting periods beginning after Dec. 15, 2026, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2027. Early adoption is permitted. Accordingly, a calendar-year public business entity that does not early adopt generally will first apply the annual requirements in its financial statements for the year ending Dec. 31, 2027.

Companies that begin assessing their readiness now will be better positioned to comply efficiently, avoid last-minute surprises, and potentially gain valuable insights into their cost structures along the way.

The five expense categories companies must disaggregate

At the center of DISE are five required natural expense categories that must be disclosed when included within relevant income statement captions:

• • Purchases of inventory
  • Employee compensation
  • Depreciation
  • Amortization of intangible assets
  • Depletion, depreciation, and amortization (DD&A) as part of oil- and gas-producing activities, or other amounts of depletion expense

Companies must identify relevant expense captions and disaggregate these costs within a tabular footnote disclosure. They must also disclose certain expenses already required by U.S. GAAP, include an "other" category that reconciles the disclosure back to the income statement, provide a qualitative description of that residual balance, and disclose total selling expenses including how the entity defines selling expenses. A “relevant expense caption” is an expense caption presented on the face of the income statement within continuing operations that contains one or more of the specified expense categories.

For investors, the new requirements offer greater insight into what drives operating costs. For preparers, however, they raise broader operational and reporting challenges.

The biggest challenge isn't understanding the standard;  It's implementing it.

Although the disclosure requirements may appear straightforward, implementation may be complex if existing systems do not capture the required information accurately, consistently, and on a repeatable basis.

Depending on an entity’s existing reporting architecture, relevant information may reside across general ledger systems, payroll platforms, inventory modules, fixed-asset subledgers, consolidation tools, and data warehouses. When expenses are aggregated by function or allocated through multiple systems, tracing costs by their original nature may require additional processes.

Depending on their existing systems and processes, organizations may determine that implementation activities should include:

• • Developing new mapping methodologies
  • Creating allocation approaches for shared costs
  • Establishing new internal controls
  • Documenting assumptions and estimates
  • Maintaining auditable reconciliations back to the financial statements

 As part of a readiness assessment, an organization may find it useful to trace each applicable category from its source data through allocations, eliminations, consolidation entries, and the relevant financial statement caption.

 Because the disclosures will form part of the audited financial statements, management should retain sufficient documentation to support the reported amounts and the significant judgments, estimates, allocation methodologies, and reconciliation processes used in preparing them.

Inventory and compensation may require the greatest effort

While implementation challenges will vary by organization, inventory and employee compensation are expected to present the greatest complexity for many companies.

Inventory disclosures may require organizations to determine whether a cost-incurred or expense-incurred approach is most appropriate. Depending on the method selected, companies may need to reconcile inventory activity and distinguish direct material costs from embedded labor and overhead components. Once costs are capitalized into inventory, the original nature of those expenses can become more difficult to identify and disclose.

Employee compensation can be equally challenging because compensation costs often appear across multiple income statement captions. In addition to salaries and wages, disclosures may need to incorporate bonuses, stock-based compensation, benefits, payroll taxes, and retirement-related costs. Organizations with international operations, shared service centers, or extensive allocation methodologies may face additional complexity in tracing compensation expenses to their final financial statement presentation.

 Existing controls and governance processes may need to evolve

One of the most frequently overlooked aspects of DISE is its impact on internal controls.

Because the disclosures will be included in the financial statements, organizations should evaluate whether existing controls address the completeness and accuracy of source data, mapping, estimates, allocation methodologies, review procedures, and reconciliations. Depending on the organization’s current processes, this evaluation may result in modifications to existing controls or the design of new controls. Public business entities should also evaluate how the implementation affects their internal control over financial reporting, taking into account the entity’s applicable regulatory and reporting requirements.

This is particularly important because FASB permits companies to use reasonable estimates and judgment when obtaining required information that produce a reasonable approximation of the amounts required to be disclosed. While this flexibility may ease implementation, it also increases the need for careful documentation and consistent application of assumptions.

Organizations should consider establishing clear ownership of the disclosure process, defining review procedures, maintaining audit-ready evidence, and evaluating the implications for internal control over financial reporting.

Why finance teams can't do this alone

Another common misconception is that DISE can be handled solely by SEC reporting or technical accounting teams.

Depending on the organization’s structure and systems, implementation may benefit from participation by finance, technical accounting, information technology, human resources, operations, internal audit, and personnel responsible for ERP and reporting systems.

Organizations with multiple subsidiaries, disparate systems, extensive allocations, or international operations may face additional complexity. The individuals who understand how costs are originally captured, coded, and allocated often sit outside the financial reporting function. Engaging those stakeholders early can help avoid costly rework and strengthen implementation efforts.

Companies should also ensure that close calendars, reporting packages, disclosure committee processes, and audit support procedures are aligned to support both annual and interim reporting requirements.

Start with a readiness assessment

Although many organizations still have time before implementation becomes mandatory, delaying preparation could create unnecessary pressure.

A practical first step is assessing whether existing systems and processes can generate the required information. Companies should evaluate:

• • How expenses are currently classified and tagged
  • Whether ERP systems support the required disaggregation
  • Where relevant data resides
  • What estimates or allocations may be necessary
  • Whether existing controls can support repeatable reporting
  • Which stakeholders should participate in implementation

Many organizations are also conducting dry runs using historical data to identify gaps before the standard becomes effective.  These exercises may help iderntify   data limitations, process weaknesses, and documentation requirements while there is still time to address them. A prototype disclosure based on a recent quarter or year can be particularly useful in testing assumptions and validating reporting processes.

Looking beyond compliance

While DISE was designed to improve transparency for investors, many organizations may discover broader benefits from the implementation process.

The exercise of identifying and tracking natural expenses can provide management with greater visibility into cost drivers, spending patterns, and resource allocation decisions. As a result, capabilities developed for compliance may also enhance internal reporting and operational decision-making.

The key message is clear: DISE may be a disclosure standard, but its impact extends well beyond the financial statement footnotes. Companies that begin preparing now, identify process gaps, and involve the right stakeholders early will be in the strongest position to meet the requirements efficiently and confidently when the standard becomes effective.

For a deeper dive, watch the full webinar: DISE: New requirements in ASU 2024-03.