Measurement of credit losses for accounts receivable and contract assets simplified

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets.

The amendments intend to simplify the application of Topic 326, Financial Instruments — Credit Losses, to current accounts receivable and current contract assets arising from transactions accounted for under Topic 606, Revenue from Contracts with Customers.

Background

In accordance with Topic 326, the measurement of expected credit losses should be based on relevant available information about past events and historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

An entity should assess relevant historical loss data for similar assets and adjust the data to account for current conditions and reasonable and supportable forecasts.

To do so, the entity should compare conditions that existed during the historical period to its current conditions and future expectations and adjust the historical data accordingly.

Current Generally Accepted Accounting Principles (GAAP) doesn’t allow entities to consider collection activity after the balance sheet date when developing its estimate of expected credit losses.

Amended guidance

The FASB received feedback indicating the evaluation of macroeconomic data as part of developing reasonable and supportable forecasts can be costly and complex and generally doesn’t have a material effect on the estimate of expected credit losses for short-term assets.

In addition, stakeholders observed that estimating expected credit losses for assets that are collected before the financial statement are available to be issued can require significant effort and can result in recording expected credit losses for amounts that are subsequently collected.

To address this feedback, the amendments provide all entities with a practical expedient and entities other than public business entities with an accounting policy election when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606.

Scope

The practical expedient and accounting policy election apply to current accounts receivable and current contract assets arising from transactions accounted for under Topic 606.

This includes current accounts receivable and current contract assets acquired in a transaction accounted for under Topic 805, Business Combinations, or recognized through the consolidation of a variable interest entity that isn’t a business in accordance with Topic 810, Consolidations, that arose from transactions that the acquiree or variable interest entity accounted for under Topic 606.

The practical expedient and accounting policy election should be applied consistently to all current accounts receivable and current contract assets.

The term current should be applied consistently with the guidance in Topic 210, Balance Sheet.

Practical expedient

In developing reasonable and supportable forecasts as part of estimating expected credit losses for current accounts receivable and current contract assets, all entities may elect a practical expedient that assumes that current conditions as of the balance sheet date don’t change for the remaining life of the asset.

When the practical expedient is applied, an entity should continue to adjust historical loss information to reflect current conditions, as necessary. However, an entity wouldn’t be required to identify, analyze, and document macroeconomic data as part of developing a reasonable and supportable forecast when estimating expected credit losses.

Accounting policy election

Entities other than public business entities that elect the above practical expedient are also permitted to make an accounting policy election to consider collection activity after the balance sheet date but before the financial statements are available to be issued when estimating expected credit losses.

An entity that applies both the practical expedient and the accounting policy election shouldn’t record a credit loss allowance for current accounts receivable or current contract asset balances collected before the financial statements are available to be issued. Any remaining uncollected amounts should be evaluated using the practical expedient.

Disclosure

An entity is required to disclose whether it has elected the practical expedient and, if applicable, whether it has also applied the accounting policy election. An entity that elects the accounting policy election is required to disclose the date through which it has considered subsequent cash collections.

Effective dates

The amendments are effective for annual reporting periods, including interim reporting periods within annual reporting periods, beginning after Dec. 15, 2025.

Early adoption is permitted in both interim and annual reporting periods in which financial statements haven’t yet been issued or made available for issuance.

Transition requirements

The amendments should be applied prospectively.

An entity other than a public business entity that applies the practical expedient and accounting policy election after the effective date wouldn’t need to perform a preferability assessment in accordance with Topic 250, Accounting Changes and Error Corrections.