In July 2025, the FASB issued an Accounting Standards Update (ASU) providing optional elections related to measurement of credit losses arising from current trade receivables and contract assets derived from revenue recognized under ASC 606 Revenue from Contracts with Customers. This is a modification of the previously issued guidance for calculating current expected credit losses (CECL) adopted a few years ago.
Understanding ASU 2025-05: Why This Update Matters
The ASU 2025-05 addresses current challenges encountered when applying CECL, including the use of supportable forecasts, and the ability to consider subsequent collections when developing the allowance for credit losses. Certain provisions of the ASU are only applicable to non-public entities. The ASU is effective for annual reporting periods beginning after December 15, 2025 (so, calendar 2026), however early adoption is permitted. The adoption of the provisions of the ASU is optional to eligible entities and may be adopted independently of each other.
A Closer Look at the New Practical Expedient
One of the provisions of the new ASU allows for the election of a practical expedient that assumes that current conditions as of the balance sheet date do not change for the remaining life of the assets, effectively eliminating the need to develop reasonable and supportable forecasts when analyzing expected credit losses related to current accounts receivable and current contract asset balances. The analysis of macroeconomic data was found to be costly and complex and did not have a material effect on the estimate of expected credit losses.
How the Update Reduces CECL Complexity
The practical expedient reduces the need to review future conditions and reduces complexity and documentation in a CECL model. The reporting entity will disclose that they have adopted the practical expedient in the footnotes to the financial statements.
New Accounting Policy Election Available
If this practical expedient is adopted, non-public business entities (including conduit bond obligors) may also elect a potentially preferred accounting policy which allows these non-public entities to utilize subsequent cash receipts when developing an estimate of current expected credit losses.
Considerations Before Electing Subsequent Collections
The accounting policy election available to non-public entities allows the consideration of collection activity after the balance sheet date but before the financial statements are issued when evaluating a CECL allowance. The disclosure requirements of this policy require the reporting entity to disclose the date through which they have considered subsequent collection activity. Depending on the timing of year-end close, year-end financial statement issuance requirements, and the revenue collection cycle, adoption of this policy may create timing issues causing a delayed close, or incomplete collection information as of the selected date.
Should You Adopt Early? Key Takeaways
The practical expedient related to eliminating the use of supportable forecasts seems to be an election that makes sense to adopt early, as allowed. It is important to consider your year-end close timing, revenue cycle and current practices when determining if the accounting policy election allowing the use of collection activity after year-end provides value to your organization.
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This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
