In July 2025, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2025-05, Measurement of Credit Losses for Accounts Receivable and Contract Assets. This update modifies Topic 326, Financial Instruments—Credit Losses and introduces a practical expedient and an accounting policy election to streamline how companies estimate expected credit losses related to current accounts receivable and current contract assets. Other types of receivables, including short-term loan receivables, employer contributions receivable relating to employee benefit plans, and other short-term assets are not within the scope of ASU 2025-05.
The amendments in this ASU provide:
A 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.
An 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 accounting policy election can only be made if the practical expedient is elected as well.
The amendments in the ASU should be applied prospectively. Additionally, the ASU is effective for annual reporting periods beginning after December 15, 2025, and early adoption is permitted.
Adopting the current conditions of practical expedient eliminates the requirement for companies to develop reasonable and supportable forecasts for future economic conditions. Rather, companies can assume that current conditions as of the balance sheet date do not change from the remaining life of the current accounts receivable and current contract assets. In practice, if a company has historically experienced a 0.3% loss rate on its current trade receivables, it may now apply that rate without projecting future economic shifts such as changes in unemployment rates, interest rates, local economic conditions, etc.
Private companies, including nonprofits, who adopt the current conditions practical expedient can also adopt the accounting policy election that allows them to consider collection activity after the balance sheet when estimating expected credit losses. If this election is made, companies will exclude current accounts receivable and current contract assets collected after the balance sheet date, but before the financial statements are available to be issued (or an alternative date selected by the company) from their credit loss calculation.
To ensure transparency, companies are required to disclose in the financial statements the adoption of the current conditions practical expedient, or, for private companies and nonprofits, that it has elected both the current conditions practical expedient and subsequent collections accounting policy. The subsequent collections accounting policy disclosure should also include the date through which the company has considered subsequent collection activity.
Overall, ASU 2025-05 provides relief for many entities, particularly privately held companies, by reducing the complexity and subjectivity involved in estimating expected credit losses for current accounts receivable and current contract assets.
If you have questions about how ASU 2025-05 may impact your business or would like assistance implementing the new guidance, please reach out to your Sweeney Conrad contact.