FASB Simplifies Credit Losses for Accounts Receivable and Contract Assets

The FASB’s update reduces credit loss estimation burdens for certain current assets.

In under a minute

• The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2025-05, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets,” which addresses complexities in applying the current expected credit losses (CECL) model.
• ASU 2025-05 provides a practical expedient for all entities that permits them to assume that current conditions will not change when estimating expected credit losses on certain current assets. It also permits an entity other than a public business entity that elects the practical expedient to consider collection activity after the balance sheet date when estimating credit losses.
• The ASU is effective for all entities for annual reporting periods after Dec. 15, 2025, including related interim periods. Early adoption is permitted.

Subscribe to Take Into Account knowledge hub

Background

Current guidance in Topic 326 requires entities to consider historical, current, and forecasted information to estimate credit losses. Specifically, entities must develop reasonable and supportable forecasts reflecting management’s expectations of whether credit loss conditions will change in the future. In addition, under current guidance, entities don’t consider collection activity that occurs after the balance sheet date.

Private companies have said identifying, analyzing, and documenting the macroeconomic data underlying these required forecasts for current assets is complex and usually doesn’t materially affect estimated credit losses.

Private company stakeholders also have said estimating credit losses for current accounts receivable and contract assets can be costly. They also observed that such estimates can require CECL provisions for current receivables that exist at the balance sheet date but that are collected before financial statements are available for issuance.

Considering this feedback from private companies, which had noted their desire to reduce preparer complexity and improve the decision-usefulness of information disclosed under the CECL model, the Private Company Council initiated a project leading to the issuance of ASU 2025-05.

Key details

Practical expedient

The ASU provides a practical expedient available to all entities that permits an entity to assume that conditions at the balance sheet date don’t change for the remaining life of current accounts receivable and current contract assets arising from transactions accounted for under Topic 606, “Revenue From Contracts With Customers.” The practical expedient applies to both originated assets and those acquired in a business combination or recognized by consolidation of a variable interest entity that is not a business.

Entities that elect the practical expedient must apply it consistently to all eligible current assets within the ASU’s scope. The ASU requires an entity to use a one-year period for determining what assets are current unless its operating cycle exceeds 12 months.

Crowe observation: Because the ASU explicitly requires the current status of an asset to be determined using a one-year period (or operating cycle, if it exceeds 12 months), an asset’s collection or past due status is not relevant in making this determination.

Under the practical expedient, entities continue to use both historical and current information when developing CECL expectations. For example, an entity that, in the current period, has broadened its credit policies to lend to lower-quality customers would consider that information when determining whether to adjust historical loss information at the balance sheet date.

Accounting policy

Under ASU 2025-05, an entity other than a public business entity (including employee benefit plans and all not-for-profit entities) that elects the practical expedient also may elect a new accounting policy. If elected, the policy allows an entity to consider collection activity after the balance sheet date but before financial statements are available to be issued when estimating expected credit losses. The reported allowance for credit losses on amounts collected during this period would be zero.

In lieu of using the date that financial statements are available to be issued, the ASU permits entities to select any date after the balance sheet date but before financial statements are available to be issued. Entities also may change this date, and the ASU says such a change is not a change in accounting principle under Topic 250, “Accounting Changes and Error Correction.”

The accounting policy also prescribes the sequence an entity must use for estimating expected credit losses on current receivables. First, the entity must consider collections after the balance sheet date but before financial statements are available to be issued. Then, it must evaluate remaining uncollected amounts as of the date financial statements are available to be issued, based on the “delinquency status” of those uncollected balances as of that date.

The ASU permits, but does not require, entities that use aging schedules to update historical credit loss rates as of the date selected to consider subsequent collection activity. Various illustrations of applying the practical expedient and accounting policy are provided in Accounting Standards Codification 326-20-55-40A through 55-Q.

Crowe observation: Entities that elect to apply the accounting policy will need to perform their assessment of expected credit losses on affected current assets at a date closer to the issuance of the financial statements than under current guidance. Entities that elect the accounting policy should consider revising their internal processes and controls to account for the time and effort necessary to determine amounts collected after the balance sheet date and to assess the remaining uncollected assets based on the delinquency status as of the date selected to consider subsequent collections.

Disclosure

An entity must disclose if it has elected the practical expedient or, if applicable, the practical expedient and accounting policy. For annual reporting periods, entities applying the accounting policy election must also disclose the date through which they have considered subsequent collection activity.

Effective date and transition

ASU 2025-05 is effective for all entities for annual reporting periods after Dec. 15, 2025, including interim periods. Early adoption is permitted in both interim and annual periods in which financial statements have not yet been made available for issuance. If adoption takes place in an interim period, an entity must apply the new guidance as of the beginning of the annual period that includes the interim period.

Entities must adopt ASU 2025-05 prospectively for estimates of expected credit losses for affected assets after the date of adoption.

An entity other than a public business entity that elects to apply the practical expedient and, if applicable, the accounting policy election after the effective date does not need to perform a preferability assessment under Topic 250. That is, it may make the elections without justifying them as preferable alternative accounting principles.

FASB materials reprinted with permission. Copyright 2025 by Financial Accounting Foundation, Norwalk, Connecticut. Copyright 1974-1980 by American Institute of Certified Public Accountants.