For a long time, the income statement has let companies keep their secrets. COGS is one number. SG&A is another. What’s inside them, the mix of labor, materials, depreciation, and everything else, stays inside them. Analysts could guess at the composition, and buyers can build models around it. But nobody outside the building actually knows.
But that is now ending. A FASB standard called ASU 2024-03, the Disaggregation of Income Statement Expenses (people are calling it DISE), will require companies to break those broad expense lines into their natural components in a footnote table.
Several of the Big Four have described it as the most significant income-statement disclosure change in a generation.
It also creates an important ERP issue. The data DISE requires is data most ERP systems were never really set up to produce.
What DISE requires
DISE doesn’t change what you recognize or how you measure it. It changes the amount of detail behind those numbers.
Now expense captions on the income statement have to be disaggregated into required natural categories in a footnote. There are five major categories:
- Purchases of inventory
- Employee compensation
- Depreciation
- Amortization of intangibles
- DD&A.
Companies will also have to disclose total selling expenses separately.
Public business entities will need to comply for annual periods beginning after December 15, 2026. Private companies aren’t currently required to comply. FASB referred that question to the Private Company Council.
As such, private companies might think that means this isn’t relevant to them.
Why DISE matters for private companies too
Any company being prepped for an IPO or a sale to a public acquirer will need to get ahead of this. It also might apply to any private portfolio company whose financials get folded into an SEC filing.
In other words, DISE matters for any company looking at an exit path. While you’re technically exempt leading up to it, it’s likely you’ll owe a disclosure as part of that transaction. And you won’t have the data to produce it.
DISE is a systems problem
Most charts of accounts were designed for functional reporting. Things like COGS, SG&A, R&D.
But DISE demands natural expense reporting. And functional reporting tools don’t typically allow for it. Once a cost gets capitalized into inventory, or gets reclassified, or gets pushed through an allocation, its natural identity gets stripped out. The labor that went into a finished good is just “inventory” now.
Getting that level of detail back out, by category, every reporting period, isn’t something you can do with a journal entry. A few questions that make this painfully clear:
- Can your system report raw-material purchases separately from conversion costs at the period level?
- Is your labor allocated across COGS, SG&A, and R&D tracked granularly enough to disaggregate cleanly, including any overhead costs?
- Is depreciation on manufacturing assets separated from depreciation on office equipment, caption by caption?
- Is amortization of acquired intangibles tracked separately from goodwill?
- Can the system isolate selling expenses from the rest of SG&A?
- Are overhead absorption accounts defined so that over- and under-absorption is easy to spot? Whatever your inventory valuation method, indirect costs have to be calculated and measured as part of manufacturing cost. And resulting variances must be analyzed. If the variances continue, it is an indication that your cost basis is incorrect. I.E. Number of workers, number of pieces per hour. If these estimates are not close, your Product Costs may be under or overvalued.
- Do purchased items carry all of their landed costs: freight, duty, handling, internal costs?
What this hopefully makes obvious: to really understand COGS at the product level, each element of cost has to be defined and measurable. And for most mid-market manufacturers, the honest answer to many (most?) of those questions will be no.
Why This Matters for PE
If you’re a PE-backed organization, this is particularly important. It has implications on how a potential deal ultimately gets priced.
Add-backs now carry a lot of weight in sale processes. S&P Global reported in February 2026 that add-backs represent roughly 29% of management-adjusted EBITDA in the average process, and that only about 8% of companies exceed their pre-close management EBITDA projections in year one.
Buyers know both of those numbers. They already treat adjusted EBITDA with suspicion. And DISE gives them a tool to scrutinize those numbers a lot more closely.
When compensation, depreciation, and amortization are disclosed by natural category, it gets a lot harder to bury recurring costs inside a broad SG&A line, or to dress recurring labor up as one-time restructuring. The footnote will give a potential buyer’s diligence team a map of exactly where to dig.
There’s a second-order effect too. We’ve written before about how a messy close can be a red flag in diligence. It signals system risk (in the form of an outdated ERP setup among other things) and a stretched management team.
And buyers price system risk. In a Deloitte survey, PE respondents said they’d expect a portfolio company’s valuation to drop 10 to 20% if its ERP is outdated. DISE requires the same data that drives the close to be reported with new precision, and will shine a bright light on any weaknesses you have here.
Perhaps you’re thinking, “we’ll just have the accounting team map it at year-end” or “we’ll bridge it in Excel.” While that might get you through a friendly year-end, it probably will be insufficient in a diligence process. Every manual step in a process and every un-audibable layer will represent risk, and therefore a discount in valuation.
What to Actually Do
So what should you do, given all this? The fix is:
- Capture natural expense categories…
- At the moment the transaction is booked…
- With allocation rules defined well enough that it never has to be reconstructed.
It’s probably smart to start with a gap assessment. Take the five required categories. For each one, ask yourself whether the system a) produces it natively, b) produces it with manual work, or c) doesn’t produce it at all.
This doesn’t have to be super complicated. It could look like a one-page readiness matrix, with categories down the side and native/manual/gap across the top, reviewed jointly by your controller and your ERP team.
From there, you’ll need to redesign accounting dimensions, cost-center structure, and allocation rules so natural expense detail is captured when the transaction happens. And make sure it’s detailed enough so you can react quickly when something needs to change.
In the Infor ERP environments we work in, this comes down to how the accounting string and its dimensions were designed at implementation. Decisions someone made years ago about dimension structure determine whether natural expense detail exists in the system or has to be reconstructed by hand.
Why You Need an ERP Team to Help
All of this implies that you have someone to manage this process. And while the controller owns the disclosure itself, the natural expense capture lives in your system configuration and allocation logic. And keeping it aligned every period is ongoing systems work.
It’s probably wise to start this process sooner than later. Chart-of-accounts redesign is slow, unglamorous work. And it touches on allocation logic that has been built up over years. If you have any plans to transact (i.e. you’re PE backed or aspire to be), you want to start early and do it deliberately. If you wait you’ll have to do it anyway – just during diligence, and likely at the cost of a valuation hit.
