FASB Proposes Guidance on the Measurement of Credit Losses for Certain Entities (December 10, 2024)

On December 3, 2024, the FASB issued a proposed ASU1 that would amend ASC 3262 to permit private companies and certain not-for-profit entities3 to elect a practical expedient and accounting policy related to their estimation of expected credit losses for current accounts receivable and current contract assets that arise from transactions accounted for under ASC 606.4 The Board developed the proposed guidance in conjunction with the Private Company Council (PCC) to address concerns from stakeholders that estimating expected credit losses can be costly and complex for such transactions. The FASB is seeking feedback on whether, among other questions, the scope of the proposed ASU should be expanded to include additional entities, such as public business entities or all not-for-profit entities, or additional assets. Comments on the proposal are due by January 17, 2025.

Under the current guidance in ASC 326-20, when an entity estimates expected credit losses, it must consider available information that is relevant to its assessment of the collectibility of cash flows, including historical losses, current economic conditions, and reasonable and supportable forecasts. An entity may need to adjust its historical losses to estimate expected credit losses if historical conditions differed from current conditions or from reasonable and supportable forecasts. In addition, when developing its estimate of expected credit losses, an entity currently does not consider collections received after the balance sheet date.

As stated in the proposal, the amendments would add the following:

An entity would be required to disclose whether it has elected to use the practical expedient and if, so, whether it has also applied the accounting policy election.

The proposed guidance would be applied prospectively, and the FASB and PCC will determine the effective date after considering stakeholder feedback. Early adoption would be permitted.