FASB Amends Guidance on the Measurement of Credit Losses for Accounts Receivable and Contract Assets
Overview
On July 30, 2025, the FASB issued ASU 2025-05,1 which amends ASC 326-202 to provide a practical expedient (for all entities) and an accounting
policy election (for all entities, other than public business entities, that
elect the practical expedient) related to the estimation of expected credit
losses for current accounts receivable and current contract assets that arise
from transactions accounted for under ASC 606.3 The Board developed the new guidance in conjunction with the Private
Company Council to address concerns from stakeholders that estimating expected
credit losses can be costly and complex for such transactions.4
Background
Under the current guidance in ASC 326-20 (i.e., before the adoption of ASU
2025-05), 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 ASU 2025-05, the amendments in the ASU add the following:
- Practical expedient. In developing reasonable and supportable forecasts as part of estimating expected credit losses, all entities may elect a practical expedient that assumes that current conditions as of the balance sheet date do not change for the remaining life of the asset.
- Accounting policy election. An entity other than a public business entity that elects the practical expedient is permitted to make an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses.
The 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
Under ASU 2025-05, an entity is required to disclose whether it has elected to
use the practical expedient and, if so, whether it has also applied the
accounting policy election. An entity that makes the accounting policy election
is required to disclose the date through which subsequent cash collections are
evaluated.
Effective Date and Transition
ASU 2025-05 is effective for annual reporting periods beginning after December
15, 2025, and interim reporting periods within those annual reporting periods,
with early adoption permitted. Entities should apply the new guidance
prospectively.
Contacts
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Andrew Pidgeon
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 415 783
6426
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Jonathan Howard
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 203 761
3235
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Chris Knudson
Audit &
Assurance
Manager
Deloitte &
Touche LLP
+1 312 486
4712
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Footnotes
1
FASB Accounting Standards Update (ASU) No. 2025-05, Measurement of
Credit Losses for Accounts Receivable and Contract Assets.
2
FASB Accounting Standards Codification (ASC) Subtopic 326-20,
Financial Instruments — Credit Losses: Measured at Amortized
Cost.
3
FASB Accounting Standards Codification Topic 606, Revenue From
Contracts With Customers.
4
The proposed ASU on which ASU 2025-05 is based would
have limited eligibility for the practical expedient and accounting
policy election to private companies and certain not-for-profit
entities.