FASB Proposes Guidance on the Measurement of Credit Losses for Certain Entities
Overview
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.
Background
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.
Main Provisions
As stated in the proposal, the amendments would add the
following:
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Practical expedient. In developing reasonable and supportable forecasts, an entity may elect a practical expedient that assumes that current conditions as of the balance sheet date persist throughout the forecast period.
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Accounting policy election. An entity that elects the practical expedient would be eligible to make an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses.
The proposed ASU also provides examples of how an entity would estimate expected
credit losses upon applying (1) the practical expedient only and (2) both the
practical expedient and the accounting policy election.
Disclosure
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.
Proposed Effective Date and Transition
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.
Contacts
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Jonathan Howard
Audit & Assurance
Partner
Deloitte &
Touche LLP
+1 203 761
3235
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Andrew Pidgeon
Audit & Assurance
Partner
Deloitte &
Touche LLP
+1 415 783
6426
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Chris Knudson
Audit & Assurance
Manager
Deloitte & Touche LLP
+1 312 486 4712
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Footnotes
1
FASB Proposed Accounting Standards Update (ASU),
Measurement of Credit Losses for Accounts Receivable and Contract
Assets for Private Companies and Certain Not-for-Profit
Entities.
2
FASB Accounting Standards Codification (ASC) Topic 326,
Financial Instruments — Credit Losses.
3
The proposed ASU specifies that such entities would
exclude “not-for-profit entities that have issued, or are conduit bond
obligors for, securities that are traded, listed, or quoted on an
exchange or an over-the-counter market.”
4
FASB Accounting Standards Codification Topic 606,
Revenue From Contracts With Customers.