The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets (ASU 2025-05 or the ASU). ASU 2025-05 introduces a practical expedient and, for entities other than public business entities, an accounting policy election to simplify the application of Topic 326, Financial Instruments—Credit Losses (Topic 326), to current accounts receivable and current contract assets arising from revenue transactions accounted for under Topic 606, Revenue from Contracts with Customers (Topic 606).
Background
The ASU introduces targeted relief to reduce complexity and cost when estimating expected credit losses for current accounts receivable and current contract assets arising from revenue transactions accounted for under Topic 606. ASU 2025-05 addresses stakeholder concerns raised through the Private Company Council regarding the application of Topic 326 to certain short-term assets.
Current guidance requires entities to incorporate macroeconomic forecasts into the determination of expected credit loss estimates. Stakeholders noted that the cost of doing so for certain short-term assets can be costly and complex and often does not materially affect expected credit loss estimates.
Stakeholders also noted that estimating expected credit losses for certain short-term assets that were collected before the financial statements were available for issuance can require significant effort and documentation. In some cases, this results in recording credit losses for amounts that have already been collected.
Allowing entities to consider post-balance collection activity when estimating expected credit losses would reduce complexity for financial statement preparers while providing financial statement users with decision-useful information.
Main provisions
ASU 2025-05 provides the following relief when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606, including those acquired in a business combination under Topic 805, Business Combinations:
- Practical expedient (available to all entities): Allows an entity to assume that current conditions as of the balance sheet date remain unchanged over the remaining life of an asset in developing reasonable and supportable forecasts as part of estimating expected credit losses. This removes the requirement to incorporate macroeconomic forecasts for assets within the scope of the ASU.
- Accounting policy election (available to entities other than public business entities): Provided that the practical expedient is elected, this policy election permits eligible entities to consider post-balance sheet collection activity when estimating expected credit losses.
Effective date and transition
The amendments in the ASU are effective for annual periods beginning after December 15, 2025, including interim periods within those annual periods. Early adoption is permitted in both interim and annual reporting periods in which financial statements have not yet been issued or made available for issuance. If an entity adopts the amendments in ASU 2025-05 in an interim reporting period, it must apply the amendments as of the beginning of the annual reporting period that includes that interim reporting period.
Entities should apply the amendments prospectively. For entities other than public business entities, no preferability assessment is required when adopting the practical expedient and, if applicable, the accounting policy election after the effective date.
