Simplified Credit Loss Guidance Introduced in Latest Accounting Standards Update

Since the introduction of ASC 326, Financial Instruments – Credit Losses, many stakeholders — especially those from private companies — have offered feedback. Specifically, they note that the use of macroeconomic forecasting to estimate expected credit losses introduces unnecessary complexity and cost, with limited relevance to current receivables and contract assets that may be collected before financial statements are issued. Additionally, the level of effort and documentation required does not appear to align with the informational needs of financial statement users.

In response to this feedback, the FASB issued Accounting Standards Update (ASU) 2025-05, Measurement of Credit Losses for Accounts Receivable and Contract Assets, on July 30, 2025. Here’s what you need to know about this update.

Main Provisions of ASU 2025-05

This ASU amends ASC 326 to simplify the estimation of credit losses for current accounts receivable and contract asset balances arising from transactions accounted for under ASC 606, Revenue from Contracts with Customers. The amendment also applies to balances acquired in a transaction accounted for in accordance with ASC 805, Business Combinations.

The update provides:

1. A practical expedient, available to all entities, to assume that current conditions as of the balance sheet date will not change for the remaining life of the asset when developing reasonable and supportable forecasts when estimating credit losses.
2. An accounting policy election, available to entities other than public business entities (including employee benefit plans and not-for-profit entities) that elect the practical expedient, to consider collection activity after the balance sheet date but before the entity’s financial statements are available to be issued (or before any alternative date selected by the entity that is after the balance sheet date but before the financial statements are available to be issued) when estimating credit losses.
3. An example illustrating how to apply the practical expedient and accounting policy election.

Practice Note: Receivables arising from topics other than ASC 606 are not included in the scope of this amendment.

Additional Considerations

An entity that adopts the practical expedient is required to continue to adjust historical loss information to reflect current conditions to the extent that historical loss information does not reflect current conditions. For example, if an entity identifies an individual customer is in financial distress, losses should be estimated for that customer even if that information has not yet impacted the historical experience.

When the accounting policy election is made, an entity records no credit loss allowance for balances that have been collected before the selected evaluation date. It is then required to evaluate any remaining uncollected amounts as of the selected evaluation date using the practical expedient with the delinquency status of the uncollected amounts being as of the evaluation date. If the entity uses an aging schedule to estimate credit losses, historical loss rates may, but are not required to, be updated for collection activity through the evaluation date selected by the entity.

The amendments of this ASU require an entity to disclose that it has elected the practical expedient or both the practical expedient and the accounting policy election, including the date through which it has considered subsequent collection activity. If the evaluation date changes in future periods, no preferability analysis is needed, as ASC 326-20-30-10H clarifies that such a change is not considered a change in accounting principle.

Effective Date and Transition

The amendments of ASU 2025-05 are effective for annual periods beginning after December 15, 2025, and interim periods within those annual periods.

Early adoption is permitted for interim and annual financial statements that have not yet been issued (or made available for issuance). All amendments should be applied prospectively to estimates of expected credit losses on current accounts receivable and current contract asset balances arising from transactions accounted for under Topic 606 performed after the date of adoption.

Next Steps for ASU 2025-05

Staying informed about changes from this and other ASUs can help you make informed decisions about optional elections and remain aligned with evolving accounting guidance.

Eide Bailly’s team of audit and assurance professionals can help you adapt to new standards as they arise, so you can streamline financial processes, reduce the risk of errors, and make informed decisions.