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As indicated in Figure FSP 3-1, S-X 5-03 requires registrants to separately identify certain operating expense line items if they are material. In practice, many reporting entities will separately identify selling, general, and administrative costs (SG&A) as a single line item, but other operating costs may be separately identified in a manner that differs from the named line items prescribed by S-X 5-03. This section discusses many of the common operating expenses that reporting entities may separately identify in the income statement. This assessment will depend on materiality, and what is deemed to be most useful to a reporting entity’s financial statement users.
The SG&A line item frequently includes the sum of all direct and indirect selling expenses, as well as all general and administrative expenses of the reporting entity. SG&A expenses include salaries of employees (excluding those related to product manufacturing or capitalized labor), depreciation (excluding those related to product manufacturing), bad debt expense, advertising expenses, rent expense (excluding those related to product manufacturing), and any other costs of selling product or administrating the business.

3.6.1 Advertising expense

Advertising costs are generally presented as part of selling, general, and administrative (SG&A) expenses in a reporting entity’s income statement. As discussed in ASC 720-35-25-1, a reporting entity can elect an accounting policy to either expense advertising costs the first time the advertising takes place or expense them as they are incurred. The accounting policy selected from these two alternatives must be applied consistently to similar kinds of advertising activities. ASC 720-35-50-1 requires that disclosures include, at a minimum:
  • The accounting policy selected for reporting advertising, indicating whether such costs are expensed as incurred, or the first time the advertising takes place
  • The total amount charged to advertising expense for each period an income statement is presented

3.6.2 Provision for doubtful accounts and notes (ASC 326)

The presentation and disclosure requirements of ASC 326, Financial Instruments—Credit Losses are discussed in LI 12. See FSP 3.6.2A for the related disclosure requirements prior to adoption of ASC 326.

3.6.2A Provision for doubtful accounts and notes (ASC 310) before adoption of ASC 326

Provision for doubtful accounts and notes is the current period expense associated with losses from normal credit sales (See FSP 8 for balance sheet disclosure requirements).
These provisions are generally grouped within SG&A. However, if they are material, they should be presented separately on the face of the income statement as an operating expense. Although the SEC requires a rollforward of the doubtful accounts and notes to be included in the filing as part of the Regulation S-X, Rule 12-09 “valuation and qualifying accounts” schedule (Schedule II), some reporting entities include such disclosures as part of the footnotes to the financial statements.

3.6.2.1A Bad debt expense (ASC 310) before adoption of ASC 326

Reporting entities may have flexibility as to how they present bad debt expense (i.e., expense associated with changes in the provision for receivables). ASC 310-10-45-5 provides classification guidance for reporting entities that apply a present value of expected future cash flows technique.

Excerpt from ASC 310-10-45-5

The change in present value from one reporting period to the next may result not only from the passage of time but also from changes in estimates of the timing or amount of expected future cash flows. A creditor that measures impairment based on the present value of expected future cash flows is permitted to report the entire change in present value as bad-debt expense. Alternatively, a creditor may report the change in present value attributable to the passage of time as interest income.

ASC 310 also requires reporting entities that choose the latter alternative to disclose the amount of interest income that represents the change in present value of cash flows attributable to the passage of time.

3.6.2.2A Impaired loans (ASC 310) prior to the adoption of ASC 326

ASC 310 provides guidance on how reporting entities should present changes in the market price of an impaired loan or in the fair value of the collateral of an impaired collateral-dependent loan.

ASC 310-10-45-6

The observable market price of an impaired loan or the fair value of the collateral of an impaired collateral-dependent loan may change from one reporting period to the next. Changes in observable market prices or the fair value of the collateral shall be reported as bad-debt expense or a reduction in bad-debt expense.

3.6.3 Depreciation and amortization of long-lived assets

Total depreciation and amortization of long-lived assets is required to be disclosed in a reporting entity’s financial statements. Many reporting entities choose to disclose this information as one or more lines in the statements of operations and of cash flows.
When depreciation and amortization is classified in the statement of operations depends on the related asset’s function. For example, the depreciation of a manufacturer’s factory and production equipment would likely be considered fixed overhead and capitalized as part of inventory costs, while the depreciation of corporate headquarters would typically be considered part of general and administrative expense. ASC 730-10-25-2 states that depreciation of capitalized equipment or facilities that are acquired or constructed for research and development activities should be considered research and development costs. See FSP 3.6.4 for considerations related to intangible assets and goodwill.
Not all depreciation of manufacturing productive assets can be absorbed into inventory. The allocation of indirect costs (e.g., fixed production overheads) should be based on normal capacity, which is defined in ASC 330-10-30-3.

Excerpt from ASC 330-10-30-3

Normal capacity refers to a range of production levels. Normal capacity is the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Some variation in production levels from period to period is expected and establishes the range of normal capacity.

The reporting entity should apply judgment in determining whether a production level is within the range of normal capacity considering various business- and industry-specific factors. Any unallocated fixed cost overheads, including depreciation expense, are considered period costs and should be charged to earnings in the current period.
Some reporting entities choose to report all depreciation and amortization directly charged to earnings as a separate line item in the statement of operations rather than include it in the related line items by function (e.g., cost of sales, selling and marketing, general and administrative). When some or all of the depreciation and amortization related to the manufacturing of products or the services provided by a reporting entity are excluded from the cost of sales line item, SAB Topic 11.B, Depreciation And Depletion Excluded From Cost Of Sales (codified in ASC 220-10-S99-8) provides guidance that the description of the line item should reflect this exclusion (e.g., “Cost of sales (exclusive of items shown separately below)” or “Cost of sales (exclusive of depreciation shown separately below)”).
See FSP 8 for disclosures required for property, plant, and equipment and other long-lived assets, including the requirements related to depreciation and amortization.
New guidance
Amortization expense may result from lease transactions that are accounted for under ASC 842. The amortization of a right-of-use asset should be presented in accordance with ASC 842-20-45-4 and may differ depending on whether the lease is a finance lease or an operating lease. The requirements of ASC 842 are covered in PwC’s Leases guide.

3.6.4 Amortization of intangibles

Like the depreciation or amortization of tangible long-lived assets, the amortization of intangibles may be included in operating expenses or cost of sales, depending on the use of the asset.
For example, a reporting entity that provides security monitoring services may have an acquired customer-relationship intangible asset. Classification of amortization of the intangible asset in selling, general, and administrative expense may be most consistent with the nature of the asset because the intangible asset is not typically associated with providing the service to customers. On the other hand, a reporting entity may have a patent intangible asset that is used in the production of its products. In this case, classification of the amortization for the patent in costs of sales (or as an inventory cost that is eventually recorded as cost of sales) may be most consistent with the nature of the asset. If not included in cost of sales, the reporting entity should follow the guidance in SAB Topic 11.B (as discussed in FSP 3.6.3.
See FSP 8 for presentation and disclosure requirements for intangibles.

3.6.4.1 Amortization of favorable and unfavorable contracts (intangibles)

We generally believe the subsequent amortization of a favorable or unfavorable revenue contract should be recognized within the income statement as contra-revenue or revenue, respectively.
See BCG 4.3.3.5 for further discussion on the initial recognition and measurement of acquired contracts in a business combination.

3.6.5 Impairment of long-lived assets and goodwill

Impairments of long-lived assets may be included within operating income based on the function of the associated asset or presented separately in the income statement. The aggregate amount of goodwill impairment losses should be presented as a separate line item on the income statement within continuing operations unless a goodwill impairment is associated with a discontinued operation. See FSP 8 for presentation and disclosure requirements for impairments related to long-lived assets and goodwill.

3.6.6 Gains or losses on sales of businesses

Some reporting entities present gains or losses resulting from sales of businesses (that do not qualify as discontinued operations) within operating income in a “two-step” income statement, in accordance with ASC 360-10-45-5. Others report such items as non-operating gains or losses. The SEC has accepted both approaches. In a “one-step” income statement format, gains or losses from the sale of businesses (that do not qualify as discontinued operations) should be reported as “other general expenses.”
The approach selected should be applied consistently. Any material item should be presented separately on the face of the income statement or in the footnotes, regardless of whether it is classified as operating or non-operating.

3.6.7 Research and development expense

Many reporting entities, especially those in certain industries (e.g., biotechnology), incur significant research and development expenses. ASC 730 requires reporting entities to expense research and development costs as they are incurred. It also requires certain disclosures, as discussed in ASC 730-10-50-1.

Excerpt from ASC 730-10-50-1

Disclosure shall be made in the financial statements of the total research and development costs charged to expense in each period for which an income statement is presented. Such disclosure shall include research and development costs incurred for a computer software product to be sold, leased, or otherwise marketed.

Impairment of in-process research and development costs initially capitalized as part of a business combination should also be classified in the research and development expense line.
ASC 730 requires disclosure of research and development arrangements that are accounted for as a contract to perform research and development for others.

ASC 730-20-50-1

An entity that under the provisions of this Subtopic accounts for its obligation under a research and development arrangement as a contract to perform research and development for others shall disclose both of the following:
a. The terms of significant arrangements under the research and development arrangement (including royalty arrangements, purchase provisions, license agreements, and commitments to provide additional funding) as of the date of each balance sheet presented
b. The amount of compensation earned and costs incurred under such contracts for each period for which an income statement is presented.

Reporting entities that receive reimbursements of research and development expenses from another party may question whether those reimbursements should be treated as revenue or an offset to expense. The SEC staff has acknowledged that, in some cases, a reporting entity may be able to support more than one conclusion based on the existing accounting literature. Reporting entities should evaluate the facts and circumstances of each arrangement, apply reasonable judgment consistently, and disclose the method of accounting used as well as the reason(s) that the chosen method is appropriate.
ASC 730 does not require any specific disclosure regarding research and development arrangements that are accounted for as liabilities. Although other accounting literature may require additional disclosure for such obligations (e.g., ASC 440 and ASC 850), we believe that, at a minimum, a reporting entity should disclose when the obligation is to be repaid and the interest rate used in recording the liability. Additionally, the amounts of, and accounting for, any loans or advances by the reporting entity to other parties (including to any partnerships formed in connection with the research and development arrangement) should be disclosed.

3.6.8 Collaborative arrangements

Certain research and development transactions may be structured as collaborative arrangements subject to the guidance in ASC 808, Collaborative Arrangements.
Reporting entities should evaluate payments related to collaborative arrangements based on the nature and contractual terms of the arrangement as well as the nature of the reporting entity’s business operations. If there is other guidance that is applicable to payments in collaborative arrangements, reporting entities should follow that guidance (e.g., guidance on customer payments in ASC 606-10) for determining the income statement classification. If the payments are not in the scope of other guidance, or if there is no appropriate analogy, reporting entities should make a consistently-applied accounting policy election, and should consider disclosure of that policy election.
Reporting entities are required to disclose the following information about collaborative agreements in the scope of ASC 808.

ASC 808-10-50-1

In the period in which a collaborative arrangement is entered into (which may be an interim period) and all annual periods thereafter, a participant to a collaborative arrangement shall disclose all of the following:
  1. Information about the nature and purpose of its collaborative arrangements
  2. Its rights and obligations under the collaborative arrangements
  3. The accounting policy for collaborative arrangements in accordance with Topic 235
  4. The income statement classification and amounts attributable to transactions arising from the collaborative arrangement between participants for each period an income statement is presented.
Information related to individually significant collaborative arrangements shall be disclosed separately.

3.6.8.1 Collaborative arrangements with partners outside the scope of ASC 606

ASC 808 precludes entities from presenting transactions with collaborative partners outside the scope of ASC 606 with revenue that is subject to ASC 606; however, ASC 808 does not prescribe any specific presentation for these transactions. Similar to the underlying accounting framework, ASC 808 permits entities to present transactions based on analogy to other authoritative guidance, or a reasonable, rational, and consistently applied policy election, if there is no appropriate analogy. We believe there will be instances when it will be acceptable to present transactions in the scope of ASC 808 as revenue; however, these amounts cannot be included with revenue in the scope of ASC 606. Refer to RR 2.4.1 for further discussion about collaborative arrangements.

3.6.9 Restructuring expense

ASC 420-10-S99-2 (SAB Topic 5.P, Restructuring Charges) requires reporting entities to present restructuring charges as a component of income from continuing operations, separately disclosed if material. Reporting entities are also permitted to separately present, in income from continuing operations, exit or disposal activities covered by ASC 420, Exit or Disposal Cost Obligations, that are not discontinued operations. For more detail on presentation and disclosure of restructuring expenses, see FSP 11.

3.6.10 Nonmonetary transactions

Reporting entities that engage in nonmonetary transactions are required by ASC 845 to disclose the nature of the transaction, the basis of accounting for the assets transferred, and any gain or loss recognized on the transfer. To the extent a reporting entity generates operating revenue from nonmonetary transactions, it should disclose the amount of gross operating revenue recognized as a result of the transaction. Finally, reporting entities should disclose the amount of revenue and costs (or gains and losses) associated with inventory exchanges recognized at fair value.

3.6.11 Gains or losses on involuntary conversions

The classification of insurance proceeds in the income statement depends on the nature of the insurance claim. ASC 410-30-45-4 requires credits arising from recoveries of environmental losses to be classified in the same line items as the related loss. ASC 220-30-45-1 indicates that reporting entities have a choice in how to classify business interruption insurance recoveries as long as the classification is not contrary to other US GAAP. However, classification guidance is not provided for many other types of claims (including involuntary conversions). Judgment should be applied to determine what presentation is most meaningful. Once a recovery meets the requisite recognition threshold (see FSP 23.5), it should be recognized in the income statement. The proceeds should not be recorded as a reduction of the cost to rebuild or replace the insured asset.

3.6.12 Foreign currency transaction gains/losses

Foreign currency transaction gains/losses result from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated. See FSP 21.3.1 for discussion of presentation and disclosure considerations related to foreign currency.

3.6.13 Other general expenses

S-X 5-03 requires reporting entities to include items not normally included under the caption “selling, general, and administrative expenses” under the caption “other general expenses.” Any material items are required to be separately stated (e.g., transaction costs related to business combinations).

3.6.14 Gains or losses from sale of long-lived assets

ASC 360-10-45-5

A gain or loss recognized on the sale of a long-lived asset (disposal group) that is not a discontinued operation shall be included in income from continuing operations before income taxes in the income statement of a business entity.  If a subtotal such as income from operations in presented, it shall include the amounts of those gains or losses.

In certain circumstances, S-X 5-03(6) indicates other material items should be presented as “other general expenses.” See FSP 8 for further presentation and disclosure guidance on long-lived assets and FSP 3.6.6 for further information on gains or losses on the sale of a business.

3.6.15 Consideration received from a vendor

ASC 705-20 addresses accounting by a customer (including a reseller) for certain consideration received from a vendor (e.g., supplier or manufacturer). The consideration received could be cash, a credit, or some other form of incentive (e.g., a coupon or voucher) that reduces the amount owed. The accounting model in ASC 705-20 largely mirrors the model in ASC 606 for vendors that make payments to customers (see RR 4) in that consideration received from a vendor is generally accounted for as a reduction of the purchase price of the goods or services acquired from the vendor. Consideration that is contingent upon meeting a milestone, such as a cumulative level of purchases, is recognized when the amounts are probable and can be reasonably estimated based on a systematic and rational allocation to the underlying transactions.
ASC 705-20 describes three exceptions to that general model:
  • Consideration received in exchange for a distinct good or service
  • Reimbursement of costs incurred by the reporting entity to sell the vendor’s products
  • Reimbursement of sales incentives offered by the vendor to end customers
In less common situations, a payment may be unrelated to the customer-vendor relationship (e.g., the resolution of a separate commercial dispute) and subject to other guidance, such as the guidance for contingent gains (see FSP 23.5.)
Distinct good or service
If payments are received in exchange for a distinct good or service that the reporting entity transfers to the vendor, the reporting entity should recognize the payment as revenue, assuming the goods or services are an output of the reporting entity’s ordinary activities. In other words, the reporting entity should account for the sale the same way it accounts for sales to other customers. The assessment of whether a good or service is distinct is a two-pronged test: the good or service must be both (1) capable of being distinct and (2) separately identifiable. See RR 3.4.
If the amount of consideration received from the vendor exceeds the standalone selling price of the distinct good or service that the reporting entity transfers to the vendor, the reporting entity should account for the excess amount pursuant to the general principle for vendor consideration (i.e., as a reduction of the purchase price of the goods or services acquired from the vendor). See RR 5 for guidance on the determination of the standalone selling price.
Reimbursement of costs
A reporting entity may report reimbursement of costs incurred to sell the vendor’s products (e.g., cooperative advertising) as a reduction of that cost in its income statement. However, the consideration must be for reimbursement of specific, incremental, identifiable costs incurred by the reporting entity to sell the vendor's products. If the amount of consideration received from the vendor exceeds the costs being reimbursed, the reporting entity should account for the excess amount as a reduction of the purchase price of the goods or services acquired from the vendor.
Reimbursement of sales incentives
In some cases, a vendor provides consideration to resellers to reimburse them for sales incentives (e.g., rebates or coupons) offered to end customers to stimulate consumer demand for the vendor’s products. The reseller may in turn reduce the price paid by the end consumer at the point of sale and will later receive reimbursement from the vendor. In other scenarios, the end customer may interact directly with the vendor to claim sales incentives for products purchased from a reseller (e.g., mail-in rebate). In both scenarios, the reseller generally has no control over which consumers receive or choose to apply these incentives. Effectively, the reseller is acting as the vendor’s agent when it provides the incentives to end consumers. Therefore, the reseller should recognize reimbursements for vendor’s sales incentives that meet the criteria in ASC 705-20-25-7 as revenue.

ASC 705-20-25-7

For purposes of this guidance, the phrase vendor's sales incentive offered directly to consumers is limited to a vendor's incentive that meets all the following criteria:

  1. The incentive can be tendered by a consumer at resellers that accept manufacturer’s incentives in partial payment of the price charged by the reseller for the vendor's product.
  2. The reseller receives a direct reimbursement from the vendor (or a clearinghouse authorized by the vendor) based on the face amount of the incentive.
  3. Terms of reimbursement to the reseller for the vendor's sales incentive offered to the consumer must not be influenced by or negotiated in conjunction with any other incentive arrangements between the vendor and the reseller but, rather, may be determined only by the terms of the incentive offered to consumers.
  4. The reseller is subject to an agency relationship with the vendor, whether expressed or implied, in the sales incentive transaction between the vendor and the consumer.

If the criteria in ASC 705-20-25-7 are not met, the reseller should account for the consideration as a reduction of the purchase price of the goods or services acquired from the vendor.
Example FSP 3-1, Example FSP 3-2, and Example FSP 3-3 illustrate the accounting for consideration received from a vendor.
EXAMPLE FSP 3-1
Consideration received from a vendor – no distinct good or service provided
FSP Corp enters into a supply contract with Water Company to purchase water bottles for $100,000. Water Company provides FSP Corp with $10,000 to ensure that its products receive prominent placement on store shelves (that is, it pays a slotting fee).
How should FSP Corp account for the $10,000 payment from Water Company?
Analysis
FSP Corp should recognize the consideration received as a reduction of the purchase price of the water bottles because it has not provided a distinct good or service to Water Company in exchange for this fee. Also, the consideration is not a reimbursement of specific, incremental, and identifiable costs incurred by FSP Corp to sell the vendor’s products. Assuming the water bottles are initially held in inventory by FSP Corp prior to their eventual sale, the cost of the inventory would be reduced by $10,000 on a per unit basis such that cost of sales will be reduced when recognized in FSP Corp’s income statement.
EXAMPLE FSP 3-2
Cooperative advertising – costs are specific, incremental, and identifiable
FSP Corp enters into a supplier agreement with Toy Company to purchase toys to sell through its website. Toy Company has also committed to reimburse 50% of FSP Corp’s advertising costs related to toys purchased from Toy Company. FSP Corp will contract directly with the advertising agencies and pay for the total cost of the campaign. FSP Corp is required to provide Toy Company with the associated proof of payment for advertisements that feature Toy Company’s products. FSP Corp’s expenses for these advertisements are $2,000, and it expects to receive $1,000 from Toy Company.
How should the advertising costs reimbursed by Toy Company be recorded by FSP Corp?
Analysis
FSP Corp would likely conclude in this fact pattern that the reimbursement relates to specific, incremental, and identifiable costs incurred in selling Toy Company’s products. FSP Corp should therefore recognize the $1,000 received from Toy Company as a reduction of advertising costs in its income statement.
EXAMPLE FSP 3-3
Cooperative advertising – costs are not specific, incremental, and identifiable
FSP Corp enters into a supplier agreement with Toy Company to purchase board games to sell through its website. The agreement also includes payment of an advertising allowance of $1,000 to FSP Corp by Toy Company. FSP Corp has discretion over the use of the allowance, and it is not required to provide Toy Company with supporting documentation of how the allowance was utilized.
How should the $1,000 advertising allowance be recorded by FSP Corp?
Analysis
FSP Corp would likely conclude in this fact pattern that the reimbursement does not relate to specific, incremental, and identifiable costs incurred in selling Toy Company’s products. FSP Corp should therefore recognize $1,000 as a reduction of the cost of its purchases from Toy Company and, using a systematic and rational allocation approach, recognize a corresponding reduction in costs of sales when the related products are sold.

3.6.16 Unusual or infrequently occurring items

ASC 220-20 provides guidance on the presentation of unusual or infrequently occurring items on the income statement.

ASC 220-20-45-1

A material event or transaction that an entity considers to be of an unusual nature or of a type that indicates infrequency of occurrence or both shall be reported as a separate component of income from continuing operations. The nature and financial effects of each event or transaction shall be presented as a separate component of income from continuing operations or, alternatively, disclosed in notes to financial statements. Gains or losses of a similar nature that are not individually material shall be aggregated. Such items shall not be reported on the face of the income statement net of income taxes. Similarly, the EPS effects of those items shall not be presented on the face of the income statement.

The definitions of “unusual nature” and “infrequency of occurrence” are included in the FASB Codification Master Glossary. “Unusual nature” means that the event possesses a high degree of abnormality and is clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the company. “Infrequent” means that the event should not be reasonably expected to recur in the foreseeable future. Both of those characteristics are, therefore, highly dependent on the environment in which a company operates.
Disclosure of “unusual” amounts, net of applicable income taxes, and their earnings per share effect, net of applicable income taxes, is permissible only in the footnotes. Such footnote disclosure may be desirable for items that affect the comparability of income statements between periods. Reporting entities should not separately disclose the earnings per share effect of inconsequential items and items clearly of an operating nature (e.g., weather-related events, strikes, or start-up expenses).
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