Long-Awaited Relief Opportunities for Estimating the Allowance for Credit Losses Issued by FASBAugust 14, 2025

On July 30, 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-05, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, coming to the aid of business entities that had been struggling with implementation issues and related costs since ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, became effective.

Purpose of the Update
This update amends Accounting Standards Codification (ASC) Topic 326 to address stakeholder concerns about the cost and complexity of estimating expected credit losses under the Current Expected Credit Loss (CECL) model for current accounts receivable and contract assets arising from revenue transactions under ASC Topic 606, Revenue from Contracts with Customers, especially for amounts collected after the balance sheet date.

Key Provisions of ASU 2025-05
ASU 2025-05 introduces optional guidance to reduce the effort required to measure credit losses while maintaining decision-useful information for financial statement users. The main provisions include:

• Practical Expedient: All entities may elect a practical expedient that assumes current economic conditions as of the balance sheet date persist throughout the forecast period when estimating expected credit losses. This avoids the use of forward-looking, complex macroeconomic forecasts for short-term assets.

• Accounting Policy Election: Entities other than public business entities (PBEs) can opt to consider collection activity after the balance sheet date, (but before financial statements are available to be issued) when estimating credit losses for current accounts receivable and contract assets. This addresses the burden of documenting losses for assets often collected before the financial statements are issued.

Scope
The guidance applies to current accounts receivable and contract assets from ASC 606 revenue transactions, responding to challenges noted by private companies and certain not-for-profit entities.

Effective Dates and Transition
The amendments are effective for annual reporting periods beginning after December 15, 2025, including interim periods within those years for all entities. Early adoption is permitted for interim or annual periods where financial statements have not yet been issued. Entities electing the practical expedient or accounting policy election should apply the guidance prospectively, with no preferability assessment required for non-PBEs adopting after the effective date.

Impact and Significance
Developed with input from the Private Company Council, ASU 2025-05 alleviates the challenges of applying CECL to short-term receivables, which stakeholders found costly and complex due to the need for detailed forecasts and documentation. By offering a practical expedient and accounting policy election, the update reduces preparer burden while ensuring investors receive relevant credit loss information. Entities, particularly private companies and not-for-profits should evaluate their credit loss estimation processes to leverage these simplifications.

For further details, refer to the full ASU on the FASB website (www.fasb.org ). Consult with your Curchin accounting professionals to ensure compliance and optimize implementation.