May 25, 2021
The Investor Advisory Committee (IAC) met on May 25, 2021. At the meeting, the FASB staff delivered updates and IAC members provided input on the following FASB topics:
- Financial Performance Reporting—Disaggregation of Performance Information: IAC members discussed the Board’s current project on the disaggregation of performance information and what improvements could be made to the information currently presented on the income statement. One of the primary improvements that IAC members requested is increased disaggregation of both the costs of goods sold (COGS) line item and the selling, general, and administrative (SG&A) expenses line item. Members explained that it is very challenging to understand how changes in raw materials or labor costs affect COGS or SG&A expenses. IAC members explained that the increased disaggregation should be both qualitative and quantitative. Members acknowledged that requiring a precise, quantitative breakdown of those line items may be difficult or impractical for some companies and, thus, they suggested utilizing associated footnotes to disclose percentages or ranges for the individual items aggregated within COGS or SG&A expenses. IAC members explained that this additional information is important to understand how certain business or market changes could affect a company’s growth or margin profile. They added that understanding a company’s exposure to those changes will help investors better understand business models and they believe it will allow for more detailed earnings forecasts. A few IAC members explained that given the shift to retail media advertising and cloud solutions, the disaggregation in COGS and SG&A becomes even more critical because it could offer more insight into a company’s intangible assets, which investors have become increasingly focused on. Other suggestions explained by IAC members included (a) providing for more consistency in the reporting and disaggregation of advertising expenses; (b) providing overarching principles for the presentation and reporting of COGS and SG&A expenses to enhance comparability between companies; (c) providing further disaggregation, either on the income statement or in the footnotes, and explanation of quarterly provision or reserve activity, such as movement in contra revenue balances; and (d) further disaggregation of other expense line items.
- Statement of Cash Flows Disaggregation: IAC members discussed potential additional disaggregation or changes investors would like to see for the statement of cash flows. One IAC member noted that, overall, there was preference for the statement of cash flows to be presented utilizing the direct method; however, because companies primarily utilize the indirect method, the improvements or changes discussed assumed the use of the indirect method. The member explained that one of the primary improvements discussed was related to how components within the operating section are presented. The member explained that there is diversity in practice regarding what is presented as noncash expenses (that is, those that are added back to net income in the operating section of the cash flow statement), and she questioned whether some of the items currently included in this section should be considered noncash. The member explained that the depreciation and amortization of the noncash line item on the statement of cash flows is often used in her firm’s EBITDA (earnings before interest, taxes, depreciation, and amortization) calculation and including varying items in this line item makes for an inconsistent metric that is widely used in analysis. Another IAC member explained that the statement of cash flows is not useful for investors that analyze financial institutions. Specifically, he explained that certain changes could increase its relevance to those investors, such as adjusting the definition of operating activities for financial institutions or removing the financial assets from the statement of cash flows and including them in a supplemental schedule.
- IAC Emerging Issues and Trends: IAC members discussed complexities arising from the growth in new business models, specifically platform business models that create value by facilitating exchanges between groups that utilize the platform (such as ride-hailing services and food delivery companies). One IAC member explained that there are challenges identifying the customer under the accounting guidance in those circumstances, which affects how certain items, such as incentives offered, are presented (a contra-revenue versus an expense). IAC members also noted that recent standard-setting activities, such as proposed guidance for accounting for deferred revenue in a business combination (Proposed Accounting Standards Update, Business Combinations Topic 805: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers) and final guidance on convertible debt (Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity), have been well received by investors.
Investor Advisory Committee Meeting Recaps are provided for those interested in following the activities of the Investor Advisory Committee. More details on the Investor Advisory Committee’s input on the FASB’s projects can be found within the meeting minutes, which will be published on the FASB website in the coming weeks.