CECL for Private Companies: ASC 326, Trade Receivables and ASU 2025-05

When the current expected credit loss model (CECL) arrived, most of the attention went to banks. But ASC 326 applies to every entity that reports under US GAAP and holds financial assets measured at amortized cost, which includes the trade receivables of most private operating companies. For these entities the model changed how the allowance must be supported and documented.

This guide covers how ASC 326-20 applies to private non-financial companies, common estimation methods, the 2025 simplification for current receivables and contract assets in ASU 2025-05, and how auditors test the allowance. It paraphrases the Codification and auditing standards.

What CECL changed

Before CECL, entities generally recognized credit losses under an incurred loss model: a loss was recorded when it was probable that it had been incurred. CECL replaced that with an expected loss model. At each reporting date, the entity estimates the credit losses expected over the contractual life of the asset and records an allowance, even when the risk of loss is remote, unless an exception applies.

For private companies, ASC 326 became effective for fiscal years beginning after December 15, 2022, so calendar-year private companies adopted it in 2023.

What is in scope for a non-financial company?

ASC 326-20 applies to financial assets measured at amortized cost. For a typical private operating company, that includes:

• trade receivables arising from ASC 606 revenue transactions
• contract assets under ASC 606
• notes receivable and loans to customers, franchisees or employees
• net investments in leases for lessors under sales-type and direct financing leases
• held-to-maturity debt securities
• off-balance-sheet credit exposures such as certain financial guarantees

Some items are outside scope, including receivables arising from operating leases (accounted for under ASC 842) and loans and receivables between entities under common control. Available-for-sale debt securities follow a separate model in ASC 326-30.

Estimating the allowance

ASC 326 does not prescribe a method. It requires the estimate to reflect relevant information about past events, current conditions, and reasonable and supportable forecasts that affect collectibility. For periods beyond the forecast horizon, the entity reverts to historical loss information.

Pooling

Assets are evaluated on a collective (pool) basis when they share similar risk characteristics, for example by customer type, industry, geography, size or credit rating. Assets that do not share risk characteristics with a pool, such as a large customer in bankruptcy, are evaluated individually.

Common methods for trade receivables

• Aging schedule (provision matrix). Apply loss rates to receivables in each aging bucket, based on historical write-offs and adjusted for current conditions and forecasts. This is a widely used method for private companies and was often used before CECL; what changed is the need to support the rates and adjustments.
• Loss-rate method. Apply a historical loss rate, derived from write-offs as a percentage of sales or receivables over a lookback period, to the current balance, then adjust.
• Roll-rate or migration methods, which track how balances move through aging buckets to write-off.
• Probability of default and loss given default, more common in lending than in trade receivables.

Adjusting for current conditions and forecasts

Historical rates must be adjusted when current conditions or forecasts differ from the period the history came from. Typical qualitative factors include changes in customer concentration, industry conditions, credit policy, collection practices, unemployment or other economic indicators relevant to customers. Document what was considered, even when the conclusion is that no adjustment is needed.

Zero allowance

An allowance can be zero only when the expected loss is zero, for example where historical losses are negligible and there is support that this will continue, or for assets with explicit government guarantees. Simply having had no write-offs in a short history is generally not enough on its own.

ASU 2025-05: the simplification for current receivables and contract assets

In July 2025 the FASB issued ASU 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets. It responds to feedback that developing forecasts for short-term receivables was costly and added little.

The practical expedient (all entities)

All entities may elect a practical expedient for current accounts receivable and current contract assets arising from transactions accounted for under ASC 606. Under the expedient, when developing reasonable and supportable forecasts as part of estimating expected credit losses, the entity may assume that current conditions as of the balance sheet date do not change for the remaining life of the asset. In other words, the entity does not need to build a macroeconomic forecast for these short-term assets.

The accounting policy election (entities other than public business entities)

Entities other than public business entities that elect the practical expedient may also make an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses. This lets a private company use cash collected after year-end, up to the date the financial statements are available to be issued (or an earlier date it selects after the balance sheet date), in its estimate for receivables that existed at the balance sheet date. Balances collected by that date carry no allowance; the remaining uncollected balances are then evaluated under the practical expedient based on their status at that date. Entities that make this election disclose, in annual periods, the date through which subsequent collections were considered.

Scope limits

The relief is limited to current receivables and contract assets arising from ASC 606 transactions. It does not cover long-term receivables, notes receivable, net investments in leases or receivables from other types of transactions.

Effective date and transition

The amendments are applied prospectively. They are effective for all entities for fiscal years beginning after December 15, 2025, and interim periods within those fiscal years, so a calendar-year private company applies them in its 2026 financial statements. Early adoption is permitted for financial statements not yet issued or made available for issuance; an entity that adopts in an interim period applies the amendments from the beginning of that annual period. An entity that elects the expedient, and the policy election if applicable, discloses that fact.

What it means in practice

For many private companies, the expedient and election formalize what preparers and auditors already did informally: rely on current aging and subsequent collections. They do not remove the need for an allowance, for pooling, or for considering current conditions such as a customer's deterioration at year-end. They do reduce the work of documenting forecast adjustments for short-term trade receivables.

How auditors test the allowance

The allowance for credit losses is an accounting estimate, so AU-C 540 applies, alongside risk assessment under AU-C 315. The auditor assesses inherent risk considering estimation uncertainty, complexity and subjectivity, and susceptibility to management bias, and designs responses accordingly.

AU-C 540 allows one or a combination of three approaches:

1. Obtain evidence from events occurring up to the report date

Test subsequent cash receipts for balances outstanding at year-end. This is often the most efficient evidence for trade receivables in a private company and fits naturally with the ASU 2025-05 policy election where the entity has made it. Be careful to distinguish collections on year-end balances from collections on new sales, and to consider credit memos issued after year-end.

2. Test how management made the estimate

• Method: is it appropriate for the receivables and consistent with prior periods? Has a change been justified?
• Data: test the accuracy and completeness of the aging report, including whether invoices are aged correctly, and of the historical write-off data used to compute loss rates. Data produced by the entity needs the same scrutiny as any other evidence.
• Significant assumptions: evaluate pooling, lookback periods, loss rates by bucket and qualitative adjustments. Are they consistent with what the auditor knows about the business and economic conditions?
• Practical expedient and election: if the client adopted ASU 2025-05, confirm the expedient was applied only to eligible assets and that the policy election and disclosure are appropriate.

3. Develop an auditor's point estimate or range

For example, apply the auditor's own loss rates to the aging, or estimate expected losses from subsequent collections and specific customer information. Compare the result to management's estimate. A difference outside a reasonable range is a judgmental misstatement under AU-C 450.

Other procedures

• Confirmations of receivables under AU-C 505, which provide evidence about existence rather than valuation.
• Specific review of large, past-due or disputed balances and customers in financial difficulty, including inquiries of credit and collections staff and review of correspondence.
• Retrospective review of last year's allowance against actual outcomes, which helps evaluate management's estimation process and possible bias.
• Disclosure testing: the allowance policy, rollforward of the allowance where required, credit quality information where applicable, and, where relevant, the ASU 2025-05 election and evaluation date.

Materiality and sampling

Materiality under AU-C 320 sets the scale for the evaluation; the materiality calculator can help. When subsequent receipts or aging accuracy are tested on a sample basis, design the sample under AU-C 530.

Common problems in practice

• Allowance computed as a flat percentage with no link to history or current conditions.
• Aging reports not tested for accuracy, so the "over 90 days" bucket is understated.
• No consideration of contract assets, notes receivable or lessor receivables.
• Qualitative factors listed but never quantified or concluded on.
• Subsequent receipts testing that counts payments on new invoices as collections of year-end balances.
• ASU 2025-05 applied to long-term or non-ASC 606 receivables.

Frequently asked questions

Does CECL apply to private companies that are not banks?

Yes. ASC 326 applies to all entities reporting under US GAAP that hold financial assets measured at amortized cost, including trade receivables and contract assets of private operating companies. It has been effective for private companies since fiscal years beginning after December 15, 2022.

What does the ASU 2025-05 practical expedient do?

It lets any entity assume that conditions at the balance sheet date do not change over the remaining life of current accounts receivable and current contract assets from ASC 606 transactions, so it does not have to develop a separate forecast for them.

Can a private company use subsequent collections in its CECL estimate?

Under ASU 2025-05, an entity other than a public business entity that elects the practical expedient may also elect, as an accounting policy, to consider collection activity after the balance sheet date when estimating expected credit losses on those current assets, with disclosure of the evaluation date.

Is an aging schedule acceptable under CECL?

Yes. An aging schedule is an acceptable method under ASC 326 if loss rates are supported by historical information and adjusted for current conditions and, unless the practical expedient applies, reasonable and supportable forecasts.

Sources

• FASB ASC 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost; ASC 326-30, Available-for-Sale Debt Securities
• FASB ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2019-10 (effective dates; private entities fiscal years beginning after December 15, 2022)
• FASB ASU 2025-05, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets (issued July 2025; effective for fiscal years beginning after December 15, 2025)
• AICPA, AU-C Section 540, Auditing Accounting Estimates and Related Disclosures
• AICPA, AU-C Section 505, External Confirmations
• AICPA, AU-C Sections 315, 320, 450 and 530

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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error