ASU 2025-05, Financial Instruments: Credit Losses (Topic 326), Measurement of Credit Losses for Accounts Receivable and Contract Assets, was issued by the FASB on July 30, 2025. It cuts the work of estimating expected credit losses on the short-term trade balances that most private companies carry. It adds one practical expedient open to every entity and one accounting policy election open to entities that are not public business entities.
The standard changes how ASC 326-20, the current expected credit loss (CECL) model, is applied to a narrow class of balances. It does not exempt anyone from CECL. This page explains the scope, the two options, the effective date and what the auditor looks for.
This page paraphrases the ASU. Read ASU 2025-05 on the FASB website for the full text.
What is in scope?
The ASU applies to current accounts receivable and current contract assets that arise from revenue transactions accounted for under ASC 606. It also covers such assets acquired in a business combination, or acquired through consolidation of a variable interest entity that is not a business, if the acquiree or the VIE accounted for them under ASC 606.
The scope is deliberately narrow. Long-term receivables, loans and other financial assets stay under the full CECL measurement approach. For the model itself see CECL under ASC 326 for private companies.
What does the practical expedient do?
All entities may use the practical expedient. It lets the entity assume that current conditions at the balance sheet date do not change for the remaining life of the asset. In ordinary CECL work the entity has to consider reasonable and supportable forecasts of future conditions beyond the balance sheet date. Trade receivables turn over in weeks, so the forecast adds effort and little accuracy. The expedient removes the forecast step for these balances: the loss estimate rests on historical loss information adjusted to conditions at the reporting date.
What does the accounting policy election do?
An entity that is not a public business entity may elect to consider cash collection activity after the balance sheet date when estimating expected credit losses on the in-scope assets. An entity may make this election only if it also elects the practical expedient.
The practical effect is that a private company with a December 31 year-end and an April issuance date can look at January through April collections on December 31 receivables and use that information, instead of estimating losses on the whole balance as if nothing after year-end were known.
When is it effective?
The ASU is effective for all entities for annual reporting periods beginning after December 15, 2025, and interim periods within those annual periods. Early adoption is permitted for financial statements not yet issued or made available for issuance.
| Year-end | Annual period begins | First required |
|---|---|---|
| December 31, 2026, calendar-year entity | January 1, 2026 | Yes, first required year |
| June 30, 2026 | July 1, 2025 | Not required, early adoption allowed |
| June 30, 2027 | July 1, 2026 | Yes |
How is it applied?
Adoption is prospective. The amendments apply to estimates of expected credit losses on in-scope balances, with the guidance covering transactions performed after the adoption date. An entity that is not a public business entity and that elects the expedient or the policy after the effective date is not required to justify that the new approach is preferable.
An illustration
Illustrative numbers only. A private company has $1,000,000 of trade receivables at year-end and uses an aging-based loss-rate matrix.
| Bucket | Balance | Loss rate | Allowance |
|---|---|---|---|
| Current | $700,000 | 0.5% | $3,500 |
| 1 to 30 days past due | $200,000 | 2.0% | $4,000 |
| 31 to 60 days past due | $70,000 | 5.0% | $3,500 |
| Over 60 days past due | $30,000 | 15.0% | $4,500 |
| Total | $1,000,000 | $15,500 |
Without the policy election the company applies the matrix to the year-end balances. Under the election the company can consider collections received before the statements are issued. Suppose $60,000 of the 31 to 60 day bucket was collected afterward. The company might evaluate the remaining $10,000 in that bucket rather than $70,000, so $10,000 x 5.0% = $500 instead of $3,500, which lowers the total allowance to $12,500. How the loss rate is adjusted when collections are counted is a judgment, because a historical rate that already reflects eventual collections would double count them. The file needs the reasoning.
What do auditors look for?
Practice observations built from how the options work, not requirements of the ASU:
- Election documented. The expedient and the election are accounting policy choices. The policy note and the working file should say which were elected and from what date.
- Scope boundaries. Are non-current receivables, notes and unbilled amounts that are not ASC 606 contract assets left under the full model?
- Subsequent receipts support. If the policy election is used, trace post-year-end cash to the specific invoices and the bank statement, and confirm the cutoff date used. The accounts receivable aging and allowance workpaper can hold the roll.
- Loss rates tested. The historical loss information still needs to be relevant and complete. See allowance for credit losses and the CECL loss rate calculator.
- No double counting of collections in the loss rate and in the election.
Frequently asked questions
Does ASU 2025-05 eliminate CECL for trade receivables?
No. It simplifies how the CECL estimate is built for current receivables and contract assets. Entities still record an allowance for expected credit losses.
Can a public company use the practical expedient?
Yes. The expedient is available to all entities. The policy election about post-balance-sheet collections is available only to entities that are not public business entities.
Can a private company elect only the collections policy?
No. The policy election is permitted only if the entity also elects the practical expedient.
Is the ASU effective for calendar 2026 statements?
Yes. It is effective for annual periods beginning after December 15, 2025, so a calendar-year entity applies it in its December 31, 2026 financial statements, or earlier if it adopts early.
Sources
- FASB, ASU 2025-05, Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets (July 2025): fasb.org
- KPMG Financial Reporting View, "FASB issues ASU on simplified credit loss guidance" (2025)
- Deloitte DART, "FASB amends guidance on the measurement of credit losses for accounts receivable and contract assets" (2025)
- KPMG, ASU effective dates table (2026 edition)
Related
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