Prepare for DISE

by Chris Bolash and Lana Greene

The effective date for the disaggregation of income statement expenses (DISE) standard¹ is approaching. Are you ready?

The DISE standard will require public companies to disclose more detailed expense information on an annual and interim basis. Companies will have to disaggregate functional expense line items (e.g., cost of sales; selling, general and administrative; research and development) within continuing operations into DISE tables in the footnotes. The DISE tables will break out how much of each functional expense line item is comprised of natural expenses. Required expense categories include:

1. Purchases of inventory
2. Employee compensation
3. Depreciation
4. Intangible asset amortization
5. Depreciation, depletion and amortization (DD&A) or other depletion expense

The DISE tables will also include other specified expenses, gains and losses as applicable.² Additionally, DISE will require that companies define “selling expenses” and disclose that definition annually.

DISE is a disclosure-only standard that does not affect the recognition or measurement of any income statement expenses, nor will it require a change to line items presented on the face of the income statement.

The DISE standard is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. In other words, a public company with a calendar year-end is first required to include DISE disclosures in its 2027 Annual Report on Form 10-K issued in early 2028, and interim periods beginning in 2028. While early adoption is permitted, many companies who have started their implementation process have decided not to adopt the standard early because implementing DISE is a data-intensive exercise that may require significant time from personnel sitting in Securities and Exchange Commission (SEC) reporting, information technology, controllership and other teams. Many companies are learning that the data required to comply with the standard is not readily available and system updates may be required. For similar reasons, while the standard can be adopted prospectively or retrospectively, many companies have decided to adopt DISE prospectively.

Who will be impacted the most?

All public companies across industries will be impacted by DISE. Preparers have consistently identified the compilation of underlying financial data as a key implementation challenge. Companies with multiple functional income statement expense line items; diverse lines of business; global operations; decentralized processes; or disparate IT systems are likely to face more challenges than highly centralized companies with only domestic operations and one global enterprise resource planning (ERP) system, for example. In particular, companies with significant manufacturing operations, complex cost structures and highly integrated product and service offerings may face additional challenges. Companies in aerospace and defense, oil and gas, construction, manufacturing and consumer products industries have all identified challenges in gathering and disaggregating the required data.

What are key operational challenges?

ERP systems

Companies have observed that implementing DISE, while not conceptually challenging, may require significant adjustments to how they operate and manage data. Some companies have one ERP system while others maintain numerous ERP systems. Acquisitions, global operations, available data management resources, existing system capabilities and other strategic decisions can all impact the volume of ERP systems a company may maintain. Maintaining multiple ERP systems may result in inconsistent data tracking that can require significant reconciliation efforts to generate the data needed for DISE compliance, but that was not historically required.

Cost pools

Cost centers that pool and allocate expenses to line items can obscure underlying data that was not previously necessary to retain. For example, an allocation may only identify the functional expense line item to which it relates, e.g., research and development, but it may not have sufficient detail to know what natural expenses categories, e.g., compensation, depreciation are included within it. This challenge is particularly evident when companies manufacture their inventory, engage in significant related-party or intercompany transactions or have highly integrated product and service offerings.

Purchases of inventory

Defining “purchases of inventory” represents an additional complexity of the DISE standard. The standard is clear that purchases of inventory should include only amounts that are within the scope of Topic 330 or an Industry Subtopic in Topic 330; however, the purchases of inventory line would not include all inventoriable costs under Topic 330. Many companies are spending significant time to determine exactly what amounts should be included in the purchases of inventory line. For example, amounts like capitalized external inbound freight costs, sales taxes and tariffs, and vendor rebates may be acceptable to include in the purchases of inventory line.

Companies are devoting significant effort to select the method to disaggregate income statement expense line items that contain purchases of inventory under Topic 330. The DISE standard provides two acceptable bases to disaggregate these line items: the cost-incurred basis and the expense-incurred basis. The selected method must be applied consistently across all categories for expense line items that contain purchases of inventory. Many companies today are not tracking how much of cost of products sold, for example, is comprised of inventory purchases, employee compensation, depreciation and intangible asset amortization. Cost pooling, intercompany transactions and standard costing are areas that can create additional complexity in disaggregating cost of sales line items.

Resourcing

Many companies report that identifying the right people within their organizations to understand what granular data is available in the current state and performing a gap analysis against the future state under DISE takes longer than expected. Updating data management policies, data compilation and reconciliation processes, and employee education may be time-consuming exercises for many companies. Companies are utilizing prior-year data to assess current system capabilities and available information to identify what changes need to be made to policies, processes, systems and controls to comply with the DISE standard. Such “dry runs” and the required updates to processes, policies and controls that come out of them often take more time than initially planned.

What should companies be thinking about now?

Data maintenance

Companies may consider developing data policies to require more consistent and detailed tagging of certain expense types to make compiling relevant expense information more streamlined. Proper data maintenance may assist with obtaining complete data sets at a consolidated level, tracking natural expense data across decentralized systems and identifying each required category required for disclosure. Companies may also look to reduce manual reconciliations to more easily maintain consistent, repeatable and auditable data.

Estimates and approximations

Companies should also consider that the DISE standard permits the use of “estimates or other methods that produce a reasonable approximation of the amounts required to be disclosed.”³ DISE requirements were not intended to be produced entirely by transaction-level data, and estimation strategies may be applied to appropriately disaggregate expense line items. Companies should identify where estimates may be required, consider how to make those estimates repeatable and discuss estimation approaches with their auditors.

Materiality

Companies should keep in mind that the DISE standard is subject to materiality provisions included in Topic 105, which states that “the provisions of the Codification need not be applied to immaterial items.”⁴ For example, if a company has previously concluded that a disclosure is not required because it is not material, the DISE standard will not affect that determination.

Conclusion

While the DISE standard aims to meet investors’ needs for more granular expense information, it may also present operational challenges for preparers. Careful planning and resourcing will likely be needed to complete a gap assessment of the current state vs. the future state and to implement any adjustments that will be required to policies, processes, systems and controls. Companies should identify where they may choose to apply estimates and discuss those estimation approaches with their auditors. The DISE standard can offer an opportunity for companies to refine their financial reporting processes and deliver more meaningful insights to stakeholders. Focusing on DISE now can help companies successfully implement the new standard.

For further DISE insights, explore our resources: EY Financial Reporting Developments - Disaggregation of income statement expenses | EY - Diving deeper: What to know about the FASB’s DISE standard.

The views reflected in this article are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

Chris Bolash is a Partner at Ernst & Young LLP and the EY DISE Technical Accounting Advisory Leader for Financial Accounting Advisory Services (FAAS). Lana Greene is a FAAS managing director at Ernst & Young LLP.

 

¹ACCOUNTING STANDARDS UPDATE 2024-03—Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.

² The specified expenses, gains and losses to be included in the DISE tables are provided in paragraphs 220-40-50-21 through 50-22 of ASU 2024-03.

³ ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses paragraph 220-40-55-2.

⁴ Accounting Standards Codification paragraph 105-10-05-6.