Businesses Prodded to Reveal More Expense Details to Investors

Dayana Jones

Walmart Inc.’s financial reports list expenses of hundreds-of-billions-of-dollars in two broad categories, leaving investors to hunt elsewhere for everything from the wages paid to employ its army of associates, to the mammoth quarterly costs of freight and fuel.

The world’s largest brick-and-mortar retailer is hardly an outlier: More than a quarter of the S&P 500’s top 100 businesses group all their expenses into three or fewer line items, with a single broad expense bucket—like “administrative costs”—covering everything from payroll to supplier costs to advertising. And almost half of the top 100 companies mash all their expenses into four or fewer categories, according to a Bloomberg Tax analysis.

That leaves stockholders, would-be investors, and money managers playing detective or relying on assumptions when analyzing a company’s health and making investment decisions—including for the retirement accounts of millions of Americans.

“For those of us that look at hundreds of companies, it makes it truly like going out and assembling loaves of bread from an entire field of bread crumbs,” said Stephanie Wissink, managing director at Jefferies Financial Group. “Don’t give us the crumbs; give us the loaf. Provide us what we need to make decisions.”

US accounting rulemakers are listening. As inflation, a tightening labor market, and surging fuel costs jack up expenses, the Financial Accounting Standards Board is in the early stages of writing rules to make companies offer more insight into their biggest costs. The board on Wednesday plansto discuss its research so far and plot next moves.

Early discussions indicate that the details would be broken out in company income statements, rather than listing catch-all expenses as broadly as Walmart’s sole categories: “Operating, Selling, General and Administrative Expenses,” and “Cost of Sales.” Walmart did not return requests for comment.

If crafted right, the effort could give investors more clues in quarterly and annual financial statements about how companies make and spend their money, some analysts say.

“Put yourself in investor shoes,” said Todd Castagno, head of global valuation at Morgan Stanley’s research division. “You think costs will increase because of inflation and you open your favorite retailer or consumer company’s 10-Q or 10-K and you have no idea what labor costs” are.

Living in the Financials

Many companies provide details about things like marketing expenses, legal costs, and customer product warranties in their financial statement footnotes. Others offer important nuggets via earnings calls or during investor day conferences. But the information isn’t always in the same place or at the same level of detail from company to company.

Investing is a game of comparisons. What changes from quarter-to-quarter or year-to-year versus how a company compares to its competitors is how analyst do their jobs.

“Our job is to hunt through these things; all we do is live in the financials,” said Mark Hamel, principal at Assay Research LLC. “I will always want more.”

What the “more” is will be a challenge for the accounting rulemakers. It can’t write a rule saying every company has to break out fuel costs because it isn’t a material item for every company. It could, in theory, force companies to highlight labor costs since every company needs people. Businesses are likely to push back on anything that comes across as being forced to reveal sensitive or competitive information.

Logistics could be a challenge, too, particularly for large, multinational companies trying to correctly label and present their expenses, some business representatives told FASB at a meeting in June.

“It’s very hard because it’s only as good as your folks around the world categorize those expenses,” said Lara Long, chief accounting officer at Agco Corp., a maker of tractors and other farm equipment, at a meeting of FASB’s main advisory panel.

Banks, however, report plenty of expenses that nonfinancial institutions do not. That’s because they have to. US Securities and Exchange Commission regulations require financial institutions to report any expense that makes up more than 1% of total interest income and other income.

Take JPMorgan Chase & Co. The megabank reports separate line items for compensation, technology expenses, marketing, professional and outside services, occupancy, and “other” costs.

Contrast that with Home Depot Inc., which lists three separate expense lines but, like many retailers, puts items as diverse as compensation and benefits, store occupancy and operating costs, insurance expenses, advertising costs, credit card processing fees, and “other administrative costs,” into a single catch-all category. In its footnotes, it breaks out advertising costs and highlights how they change from period to period. Home Depot in a statement said it would follow any potential changes to accounting rules.

Some companies voluntarily break down extra details. United Parcel Service Inc. offers seven expense lines, separately highlighting compensation and benefits, repairs and maintenance, depreciation and amortization; purchased transportation; fuel; other occupancy; and other expenses. In its footnotes, it explains the makeup of “other expenses,” which includes lost package claims and vehicle rentals.

The Coca-Cola Co. only breaks out two line items on its income statement—selling, and general and administrative costs and “other operating charges.” But it voluntarily provides a table in its financial statement breaking out what goes into SG&A and how the costs—such as selling and distribution expenses—add up from quarter to quarter.

Reality Check

FASB is in the early stages of discussions on the topic and hasn’t made any formal decisions. It also hasn’t decided whether to craft requirements based on an overarching principle or to spell out exactly what companies would need to provide.

Whatever the board does, it also won’t be a substitute for analysts or investors reading a financial statement package in its entirety, said David Trainer, CEO of New Constructs, a research firm.

“Nothing they’re going to do is going to absolve anyone from the need to analyze footnotes and do due diligence,” he said. “There’s no way around it.”

https://news.bloombergtax.com/financial-accounting/businesses-prodded-to-reveal-more-expense-details-to-investors