FASB Issues ASU 2025-05, Simplifying Credit Loss Measurement for Current Receivables and Contract Assets
The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2025-05, titled Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, aimed at reducing complexity and cost for entities when estimating expected credit losses on short-term receivables and contract assets subject to ASC 606.
Key Provisions of ASU 2025-05:
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Practical Expedient — Available to all entities, this allows nonprofits to assume that conditions existing at the balance sheet date persist for the remaining life of current accounts receivable and current contract assets, thereby eliminating the need for robust forecasting of future economic conditions.
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Accounting Policy Election — Available to non–public business entities, this optional policy, when elected alongside the practical expedient, permits entities to exclude collections received after the balance sheet date in their estimation of expected credit losses.
Applicability:
ASU 2025-05 applies only to current accounts receivable and current contract assets arising from ASC 606 transactions (typically those realizable within one year, unless the operating cycle is longer).
Effective Date and Adoption:
Effective for annual and interim reporting periods beginning after December 15, 2025, with early adoption permitted.
Implications and Next Steps:
Entities—especially private companies and not-for-profit organizations—stand to gain from reduced estimation burden and lower volatility in allowance calculations. To adopt this standard, entities should:
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Evaluate and elect the practical expedient—and if applicable, the post-period collection election.
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Update accounting policies to reflect these changes and ensure consistent application.
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Enhance internal controls to accurately track post-balance sheet cash collections (if the accounting policy election is used).
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Provide required disclosures, including whether the expedient and election were applied, and the cutoff date for evaluating subsequent cash flows.
