FASB Simplifies Credit Losses for Accounts Receivable and Contract Assets

Accounting for credit losses has required companies to peer into the economic fog, projecting how shifts in employment, inflation, or policy might affect a customer’s ability to pay. In July, the Financial Accounting Standards Board issued Accounting Standards Update 2025-05, offering a way to sidestep some of that guesswork—at least for accounts receivable and contract assets.

The new update applies to current accounts receivable and contract assets tied to revenue transactions under ASC Topic 606. It introduces a practical expedient that lets companies assume today’s economic conditions will hold steady over the short life of these assets. That means no need to model inflation or market volatility, just a return to the familiar rhythm of historical collection trends. For non-public entities, the update goes a step further, allowing them to refine estimates by factoring in actual collections received after the balance sheet date but before the financial statements are available to be issued.

The standard takes effect for fiscal years beginning after December 15, 2025. Early adoption is allowed, though only prospectively.

Focus on Facts, Not Forecasts

Estimating credit losses under the current expected credit loss (CECL) model has often required organizations to project forward-looking economic conditions introducing both complexity and judgment. ASU 2025-05 offers a more grounded approach. With the new practical expedient, entities may elect to assume that conditions at the balance sheet date will remain unchanged over the short life of current accounts receivables and contract assets.

This subtle shift has meaningful implications. By leaning on historical trends rather than speculative forecasts, organizations may simplify their models and reduce complexity. For many, especially nonprofit entities less affected by economic swings, this approach may more accurately reflect the realities of collection experience.

Non-public entities that adopt the practical expedient may also elect a second measure: the ability to consider subsequent cash collections when estimating expected losses. If a balance is collected between the balance sheet date and the issuance of the financial statements, it may be excluded from the allowance. This flexibility further aligns estimates with actual experience, narrowing the gap between accounting and operations.

Review Your Readiness

While the update offers welcome relief from some of the more burdensome aspects of CECL, adopting the practical expedient and accounting policy election requires planning. Entities must disclose their elections and, for non-public entities using the subsequent collection approach, the date through which collections were evaluated.

The update applies prospectively and takes effect for fiscal years beginning after December 15, 2025—calendar year 2026 for most. Early adoption is permitted, but entities cannot apply the change retroactively. If adopted early, it must be implemented from the start of an open fiscal year.

AAFCPAs encourages clients to review their readiness, including whether systems can support the new disclosure requirements. In many cases, the practical expedient may reduce the time spent analyzing macroeconomic inputs that, especially for short-term assets, often carry limited predictive power. For most, the result may be both simpler and more reliable financial reporting.

How We Help

AAFCPAs helps clients apply ASU 2025-05 efficiently, whether they manage accounting internally or through our outsourced solutions. Our audit and assurance professionals advise on the election and documentation of the practical expedient and accounting policy option, ensuring compliance without adding unnecessary complexity.

For clients using AAFCPAs for outsourced accounting or CFO advisory, our team integrates the update into your monthly close, prepares supporting documentation, and keeps financial statements audit-ready. We help streamline adoption, so you can focus on operations with confidence in your reporting.

These insights were contributed by Matthew Hutt, CPA, CGMA, Partner.

Questions? Reach out to our authors directly or your AAFCPAs partner.

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