The background on CECL and ASU 2025-05 is in CECL for private companies. This guide is the engagement-level follow-up: what "current" means in practice, what the expedient and the election change in the client's calculation, when each audit year must apply them, and what to test.
FASB issued ASU 2025-05, Measurement of Credit Losses for Accounts Receivable and Contract Assets, in July 2025. It amends ASC 326-20 for one narrow population and gives all entities a practical expedient. Entities other than public business entities get a further accounting policy election.
Scope: what is eligible
The relief applies to current accounts receivable and current contract assets arising from transactions accounted for under ASC 606. Four points define the boundary.
"Current" follows ASC 210. Entities generally use a one-year period, unless the operating cycle is longer than 12 months, in which case the longer period applies.
Only ASC 606 assets qualify. Notes receivable, loans to franchisees or employees, net investments in leases, and receivables from non-revenue transactions are outside the relief, as are long-term receivables.
Acquired assets are included. Eligible receivables and contract assets acquired in a business combination, or recognized when consolidating a variable interest entity that is not a business, qualify as well as originated ones.
Application is consistent. An entity that elects the expedient applies it to all of its eligible assets, not receivable by receivable.
What the practical expedient does
CECL estimates must reflect reasonable and supportable forecasts of conditions over the life of the asset. Under the expedient, an entity may assume that conditions at the balance sheet date do not change for the remaining life of an eligible asset. For a receivable with an average life of 45 days, that removes the need to produce and defend a macroeconomic forecast.
The expedient does not remove the rest of the estimate. The entity still starts with historical loss information and must adjust it for differences between current conditions and the conditions in the historical period, and for characteristics specific to the assets. If the client loosened credit terms in the fourth quarter, took on a new customer segment, or has a major customer in distress, the allowance reflects that. What drops out is the forward-looking layer.
The private-company election: subsequent collections
An entity other than a public business entity that adopts the expedient may also elect, as an accounting policy, to consider collections received after the balance sheet date.
Mechanically:
- The entity picks an evaluation date after the balance sheet date. It can be the date the financial statements are available to be issued or any earlier date it chooses. The date can be changed from period to period without it being a change in accounting principle.
- Balances collected by that date carry no allowance.
- Balances still uncollected are evaluated as of that date.
- An entity that uses an aging schedule may, but does not have to, update its loss rates for the post-balance-sheet collection experience.
An illustration with round numbers. A calendar-year client has $2.0 million of trade receivables at December 31. By its chosen evaluation date of February 20, customers have paid $1.7 million of that balance. The loss rates are applied to the remaining $300,000, which the client evaluates as of February 20. The allowance is computed on $300,000, not $2.0 million. The collected $1.7 million carries nothing.
The allowance rests on what customers actually paid rather than on a year-end forecast.
Timing: which audits apply it
The amendments are effective for fiscal years beginning after December 15, 2025, and interim periods within those years. A calendar-year private company therefore applies them for the first time in its 2026 financial statements, which are audited in early 2027. Early adoption is permitted in any interim or annual period for which financial statements have not yet been issued or made available for issuance. A company that adopts in an interim period applies the amendments from the beginning of that annual year.
Adoption is prospective: it applies to credit loss estimates after the adoption date, so there is no restatement of prior periods. A non-public entity that makes the expedient or the election after the effective date does not need a preferability assessment under ASC 250.
The practical consequence: any financial statements not yet issued may adopt early, and fiscal 2026 audits address the expedient decision during planning, before year-end procedures are designed.
Disclosures
An entity discloses that it has elected the expedient and, if applicable, the policy election. In annual periods, an entity that made the policy election also discloses the date through which it considered subsequent collections. That date is an audit-relevant fact: the auditor needs to test cash receipts through the same date.
How to audit the election
Eligibility. Confirm the assets covered by the expedient are ASC 606 trade receivables and contract assets that are current. Test that no notes receivable, lessor receivables or related-party advances were swept in. Confirm the expedient was applied to all eligible assets.
Evaluation date. Obtain the date the client selected and document that it is after the balance sheet date and not later than when the statements are available to be issued. Confirm it is disclosed.
Subsequent receipts. Test cash receipts from year-end through the evaluation date to bank statements and remittance advice. The common errors are the same as for any subsequent-receipts test: a payment applied to a new invoice but credited to an old one, a credit memo mistaken for cash, a receipt from a related party. Match receipts to specific year-end invoices, not to customer totals.
The uncollected remainder. Evaluate the unpaid balance as of the evaluation date, not year-end. Test the loss rates applied to it. Look for balances that were disputed or promised "next week" and are still open on the evaluation date, because those are the ones that matter.
Historical adjustments. Confirm management considered conditions that differ from the historical period. A conclusion of "no adjustment" is acceptable when the file shows what was considered.
Cutoff and window dressing. Compare collections in the post-year-end window with the same window in prior years. An unusual surge of receipts in the first weeks of January, followed by a return to normal, can indicate year-end billing that was never real or that was reversed later. See revenue recognition audit procedures for cutoff and credit memo testing.
Existence is separate. Subsequent collections are evidence of valuation, and also of existence for the invoices that were paid. Confirmations and other procedures remain the way to address existence for the rest. See accounts receivable aging and the allowance.
Frequently asked questions
Does the expedient apply to all receivables?
No. It applies to current accounts receivable and current contract assets arising from ASC 606 transactions. Notes receivable, net investments in leases and long-term receivables are outside it.
Can a private company use any date for subsequent collections?
Any date after the balance sheet date, up to the date the financial statements are available to be issued, as the entity selects. The entity discloses the date in annual periods and can change it without treating the change as a change in accounting principle.
Is the policy election available to public companies?
No. The election is limited to entities other than public business entities. Public business entities may use the practical expedient.
Is the adoption retrospective?
No. Adoption is prospective, applied to credit loss estimates after the adoption date.
Sources
- 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, including interim periods). Summaries: https://www.crowe.com/insights/take-into-account/fasb-simplifies-credit-losses-for-accounts-receivable-and-contract-assets and https://www.grantthornton.com/insights/articles/audit/2025/snapshot/august/measuring-credit-losses
- KPMG: FASB issues ASU on simplified credit loss guidance: https://kpmg.com/us/en/frv/reference-library/2025/fasb-issues-asu-simplified-credit-loss-guidance.html
- BDO: https://arch.bdo.com/Measurement-of-Credit-Losses-for-Accounts-Receivable-and-Contract-Assets
- AICPA, AU-C Section 540 (SAS 143), Auditing Accounting Estimates and Related Disclosures; effective for periods ending on or after December 15, 2023: https://www.tx.cpa/news/todays-cpa-magazine/current-issue/article/may-june-2024/2024/05/10/cpe--sas-143---new-guidance-on-auditor-s-responsibilities-relating-to-accounting-estimates
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