Clarity for Credit Losses

How ASU 2025-05 provides relief for accounts receivable and contract assets under CECL.

By Jaclyn Veno, CPA

In July 2025, the Financial Accounting Standards Board (FASB) issued ASU 2025-05 — Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets. This update represents an important step in simplifying the application of the current expected credit loss (CECL) model. The new amendments are widely viewed as a practical and welcome response to the challenges preparers have faced since CECL became effective.

The CECL model, introduced in Topic 326 in 2016, was one of the most significant changes to financial reporting in decades. Its goal was to improve transparency by requiring entities to estimate expected credit losses using a forward-looking approach rather than relying solely on incurred loss data. While this new framework worked reasonably well for long-term financial instruments, such as loans, it created a disproportionate burden for accounts receivable and contract assets. Preparers, especially private companies and nonprofits, had to build models and gather macroeconomic data for balances that would often be resolved within a matter of weeks.

The Private Company Council (PCC) was instrumental in raising these concerns. The PCC, which advises the FASB on issues affecting private company reporting, consistently emphasized that the costs of applying CECL to short-term receivables far outweighed the benefits. They pointed out that by the time financial statements were available to be issued, receivables were typically collected, making forward-looking forecasts unnecessary. Their advocacy set the stage for ASU 2025-05.

The new standard introduces two major updates. First, it provides a practical expedient that allows entities to assume that the current conditions at the balance sheet date will persist throughout the forecast period. This eliminates the need to prepare complex, forward-looking macroeconomic forecasts for accounts receivable. In practice, entities can now base their estimates on information available at year-end without extrapolating future scenarios that are unlikely to affect short-term receivables.

Second, the ASU establishes a new accounting policy election available to all entities, except public business entities. Under this election, entities may consider subsequent cash collections occurring between the balance sheet date and the date the financial statements are issued when estimating expected credit losses. In effect, if an entity collects cash on receivables after year-end but before the issuance of financial statements, it may reflect that fact in its CECL estimate. For many preparers, this aligns the accounting with the economic reality: if cash is in hand, there is no longer uncertainty about collectability.

ASU 2025-05 also has disclosure requirements. Entities must disclose annually whether they have applied the practical expedient and the accounting policy election. In addition, for those taking the policy election, entities must disclose the date through which subsequent cash collections were evaluated.

One of the more notable aspects of ASU 2025-05 is the evolution of its scope. When the exposure draft was issued in December 2024, the provisions were limited to private companies and nonprofits that were not conduit bond obligors. However, during deliberations, the FASB reconsidered this limitation. In the final ASU, the Board expanded the scope of the practical expedient to all entities, including public companies. This was an important change, as it recognized that the challenges of forecasting credit losses for short-term receivables were not confined to private companies. Public companies will also benefit from the ability to avoid unnecessary forecasting. The accounting policy election, while not extended to public business entities, was made available to all other entities, including nonprofits that are conduit bond obligors. The amendments further clarify that the relief applies to current accounts receivable and contract assets acquired in business combinations.

The effective date for the amendments is for interim and annual periods beginning after Dec. 15, 2025, with early adoption permitted for financial statements that have not yet been issued. Public business entities that wish to elect the practical expedient must do so in the first interim or annual period in which the amendments are effective. Other entities have more flexibility and may elect the expedient and, if eligible, the accounting policy election, in any period after the effective date.

Taken together, these changes represent meaningful relief for preparers. By eliminating unnecessary forecasting and permitting the use of subsequent collection information, ASU 2025-05 strikes an appropriate balance between cost and benefit. The FASB and the PCC have demonstrated responsiveness to the concerns of private companies and nonprofits, while offering public companies the opportunity to simplify their processes.

Ultimately, ASU 2025-05 makes the CECL model more workable for entities of all sizes. It streamlines the processes of accounts receivable and contract assets, reduces cost and complexity, and helps ensure that financial reporting remains both transparent and efficient. Preparers and auditors alike should take time to understand the new options available under this standard, as they will likely prove to be a welcome source of relief in the years ahead.

Jaclyn Veno, CPA, is learning & development specialist at Galasso Learning Solutions. She is also a licensed CPA and holds both a bachelor’s and a master’s degree in accounting from Clemson University. Before joining Galasso Learning Solutions, she was an auditor for two top-10 CPA firms. Jaclyn has extensive experience developing both staff and interns, including the onboarding of overseas staff.