FASB Simplifies Credit Loss Accounting with ASU 2025-05

In July 2025, the Financial Accounting Standards Board (FASB) issued amendments to the credit loss guidance to streamline how companies estimate expected credit losses for current accounts receivable and contract assets. The update, ASU 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, provides practical options to address common challenges encountered when applying the guidance. 

The amendments introduce two key provisions:

• A practical expedient, available to all companies, that assumes economic conditions as of the balance sheet date will not change for the remaining life of the asset when forecasting expected credit losses on current accounts receivable and contract assets. 
• An accounting policy election, available to nonpublic companies that use the practical expedient, to consider actual cash collections that occur after the balance sheet date but before the financial statements are issued when estimating credit losses.

The update offers welcome relief for companies by making the process of estimating credit losses more manageable without sacrificing the quality of financial reporting. 

Practical Expedient for Credit Loss Forecasting

The core of the update is a practical expedient, available to all companies, that simplifies the forecasting process for current assets. 

The current expected credit loss (CECL) model requires companies to consider historical data, current economic conditions and reasonable and supportable forecasts in estimating expected credit losses. The FASB received feedback from stakeholders that collecting forecasting data for current accounts receivable and contract assets increases the time and effort to apply the CECL model and does not generally have a material effect on estimating expected credit losses for these short-term assets.

Under the practical expedient, companies can assume that current conditions as of the balance sheet date will remain unchanged for the remaining life of current accounts receivable and contract assets. Shifting the focus to current conditions is expected to decrease the time it takes to estimate expected credit losses for these current assets.  

Current receivables and contract assets acquired in a business combination or recognized through consolidating a variable interest entity are included in the scope of the practical expedient guidance.

Accounting Policy Election for Nonpublic Companies

Nonpublic companies that elect the practical expedient above have an additional option to make an accounting policy election to consider subsequent cash collection activity in their estimates for expected credit losses. The policy election allows companies to measure expected credit losses using a straightforward, two-step process:

1. Consider subsequent cash collections. No credit loss allowance should be recorded for balances collected before the financial statements are available to be issued. These balances are considered to have zero credit loss, as their collectability has been proven.

2. Estimate credit loss on remaining balances. Evaluate credit loss on uncollected amounts using the practical expedient. The evaluation should be based on the historical performance and delinquency status of the balances at the financial statement issuance date.

The accounting policy election allows companies to use hindsight to their advantage by considering actual subsequent collection activity to arrive at a more accurate estimate of collectibility as of the reporting date.

New CECL Disclosure Requirements

Companies are required to disclose the practical expedient if it is elected and if so, whether it has also applied the accounting policy election. Companies that use the accounting policy election must disclose the date through which subsequent cash collection activity was considered in the CECL analysis.

Effective Date and Transition

ASU-2025-05 is effective for fiscal years beginning after December 15, 2025, and for interim periods within those periods and early adoption is permitted. The guidance is required to be applied prospectively. If a nonpublic company elects to adopt the practical expedient and/or accounting policy election after the effective date, it will not need to perform a preferability assessment.

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