FASB’s Simplified Credit Loss Estimation for Accounts Receivable and Contract Assets

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2025-05, a welcoming update that simplifies credit loss estimation for accounts receivable and contract assets.  

ASU 2025-05 is a game-changer for credit loss estimation for private companies—streamlining reserve calculations and giving new flexibility to use actual collections after period-end. This update means less complexity, more clarity, and greater confidence in credit reserves for businesses of all sizes. 

What is ASU 2025-05?  

ASU 2025-05 addresses challenges in the CECL (Current Expected Credit Losses) model for credit loss estimation.  

The update introduces a practical expedient for all entities, allowing 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 (PBE), that elects the practical expedient to consider collection activity after the balance sheet date when estimating credit losses.  

This FASB project arose from feedback from preparers who believed that the existing method for calculation of reserves was unduly complex. 

Key Changes in Credit Loss Estimation  

Practical Expedient Details  

All entities may elect to assume static economic conditions when estimating credit losses on current receivables, removing the need for forward-looking economic forecasts for assets due within one year or the operating cycle. This must be applied consistently to all applicable receivables. 

Accounting Policy Election for Private Companies  

Private companies and certain not-for-profits can elect to include cash collections received after the balance sheet date in their credit loss estimates, used only alongside the practical expedient, allowing more accurate allowance calculations based on actual collections. Public companies cannot use this election.  

Who is Impacted by ASU 2025-05?  

• Private Companies and most Not-for-Profits: Gain new flexibility in estimating credit losses, especially with the ability to consider post-period collections.  
• Public Companies: Can use the practical expedient but cannot elect the post-period collection option.  

Disclosure and Transition Requirements  

Companies must disclose the use of the expedient and, for private entities, the subsequent collection election and cut-off date for collections considered.  

Transition disclosures about adoption and material effects are also required, while other CECL disclosures remain unchanged. 

Adoption is prospective with no restatement of prior periods; private entities have flexibility to adopt the expedient and cash collection election after the initial effective date without needing to justify why the change in accounting treatment is preferable. 

When Does Reporting for ASU 2025-05 Begin?  

ASU 2025-05 is effective for all entities for annual reporting periods beginning after December 15, 2025, including related interim periods. Early adoption is permitted.  

Ready to Simplify Your Credit Loss Estimation?  

ASU 2025-05 represents a step forward in simplifying credit loss estimation for accounts receivable and contract assets. By reducing complexity and offering new options for private companies, the FASB has responded to industry feedback and made compliance more straightforward for a wide range of entities.  

If you have questions about implementing ASU 2025-05 or want to make sure your organization is prepared for the new FASB standards, contact our accounting professionals today. We’re here to help you navigate the changes, optimize your processes, and stay compliant.