Relief for Expected Credit Loss Complexity: Understanding FASB ASU 2025-05

ARTICLE | October 31, 2025

In July 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-05, an amendment to Topic 326 on credit losses that was effective for private companies in 2023. This update responds to concerns raised by private company stakeholders and others about the cost and complexity of estimating expected credit losses on current accounts receivable and contract assets. The new guidance introduces a practical expedient and an optional accounting policy election that aims to simplify the application of the current expected credit loss (CECL) model for certain short-term financial assets.

This article outlines the key provisions of ASU 2025-05, its scope, and what it means for financial statement preparers.

Why the Update Was Issued

The CECL model under ASC 326 requires entities to estimate expected credit losses using a forward-looking approach that incorporates historical loss experience, current conditions, and reasonable and supportable forecasts. While this model enhances transparency, it has proven burdensome for short-term assets like trade receivables and contract assets arising from revenue transactions under ASC 606.

Stakeholders noted that the effort to gather and analyze macroeconomic data often does not materially affect the credit loss estimate for these assets. In many cases, the assets are collected shortly after the balance sheet date, making the forecasting exercise disproportionately complex relative to the benefit.

ASU 2025-05 addresses these concerns by offering two key forms of relief: a practical expedient and an accounting policy election.

Practical Expedient: A Simpler Forecasting Approach

The practical expedient is available to all entities and applies to current accounts receivable and current contract assets arising from transactions under ASC 606. It allows entities to assume that current conditions as of the balance sheet date remain unchanged for the remaining life of the asset. This means entities are not required to develop forward-looking forecasts for these assets, which can significantly reduce the time and effort involved in estimating credit losses.

To apply the expedient, the assets must be classified as current. Generally, this means they are expected to be realized within one year, unless the entity’s operating cycle is longer. The expedient must be applied consistently across all qualifying assets.

Importantly, entities must still adjust historical loss experience to reflect current conditions if those conditions differ from the historical period. For example, if unemployment rates, delinquency, or other factors associated with credit losses have risen since the historical data was collected, an adjustment may still be necessary.

Accounting Policy Election: Considering Post-Balance Sheet Collections

Entities other than public business entities that elect the practical expedient may also choose to adopt an accounting policy that allows them to consider subsequent collection activity when estimating expected credit losses. This election enables preparers to reflect actual cash collections that occur after the balance sheet date but before the financial statements are issued (or made available for issuance).

This approach can be particularly helpful for entities with short collection cycles. For example, if a significant portion of receivables is collected shortly after year-end, the allowance for credit losses on those balances may be reduced or eliminated, resulting in a more accurate and timely reflection of credit risk.

Entities that adopt this policy must apply it consistently and disclose the date through which subsequent collections were considered. This transparency helps users of financial statements understand the basis for the credit loss estimates.

It is also important to note that the accounting policy election is not available on its own; it must be elected in conjunction with the practical expedient.

Scope and Applicability

The amendments apply only to current accounts receivable and current contract assets that arise from revenue transactions under ASC 606. This includes such assets acquired in a business combination.  The practical expedient and accounting policy election are not available for other types of financial assets, such as loans or insurance premium receivables.

Effective Dates and Transition

ASU 2025-05 is effective for all entities for fiscal years beginning after December 15, 2025, including interim periods within those fiscal years. The amendments are to be applied prospectively, and early adoption is permitted for financial statements that have not yet been issued or made available for issuance.

Disclosure Requirements

Entities must disclose whether they have elected to apply the practical expedient and, if applicable, the accounting policy election. For those using the accounting policy election, the disclosure must also include the date through which subsequent cash collections were evaluated.

These disclosures are intended to provide clarity and comparability for financial statement users, ensuring that the simplifications do not come at the expense of transparency.

Final Thoughts

ASU 2025-05 offers practical relief for organizations dealing with the complexity of estimating expected credit losses on short-term assets. By simplifying requirements and allowing for the consideration of post-balance-sheet collections, the update helps streamline financial reporting and close processes. As with any new standard, it is important to assess how these changes fit your organization’s needs and to apply them consistently with clear disclosures.

If you have questions about implementing ASU 2025-05 or want to discuss how these changes may affect your reporting, Insero’s team is available to help you navigate the transition.