ASU 2025-05 – Improvements to Guidance on Measurement of Credit Losses – A Simplified Path
Accounting Standards Update (ASU) 2025-05 – Measurement of Credit Losses for Accounts Receivable and Contract Assets, issued in July 2025, introduces a practical expedient and accounting policy election under Topic 326: Financial Instruments—Credit Losses, specifically tailored to ease the burden for entities when estimating credit losses for accounts receivable and contract assets.
Simplified Estimation of Credit Losses
All entities can now adopt a practical expedient that allows them to estimate credit losses without complex forecasting models for current accounts receivables and current contract assets under ASC 606 (Revenue from Contracts with Customers).
Main Provisions
- Practical Expedient: All entities may assume that current conditions as of the balance sheet date do not change for the remaining life of the asset.
- Accounting Policy Election: Entities that are not a public business entity may consider collection activity after the balance sheet date when estimating expected credit losses. Not-for-profit entities and employee benefit plans do not meet the definition of a public business entity; and therefore, not-for-profit entities and employee benefit plans may elect this accounting policy, as well as all other entities that do not meet the definition of a public business entity.
The above provisions are only applicable to current accounts receivables and current contract assets accounted for under ASC 606. To determine if an accounts receivable or contract assets is considered a current asset, a one-year period should be used, unless the entity’s operating cycle exceeds 12 months, in which case the operating cycle should be used to determine if the accounts receivable or contract asset is a current asset.
The above provisions do not apply to other types of receivables, such as short-term loan receivables, insurance premiums receivables, employer contributions receivables for employee benefit plans, and other short-term assets because they have different risks.
Definition of a Public Business Entity
A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity. An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.
- It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
- It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
- It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
- It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
- It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
Disclosure Requirements
- Entities need to disclose that it has elected the accounting election and/or the practical expedient.
- For entities that have elected the accounting policy, the date through which subsequent cash collections were considered must be disclosed.
Effective Date and Prospective Application
The guidance is effective for annual periods beginning after December 15, 2025, and interim periods within those reporting periods, with early adoption permitted for both interim and annual reporting periods, in which financial statements have not yet been issued or made available for issuance. It must be applied prospectively, meaning prior periods remain unchanged.
The Benefits of ASU 2025-05
- Reduced Cost and Complexity: The update responds to concerns that gathering macroeconomic data (like unemployment rates or property values) for short-term assets was costly and often immaterial to the final estimate.
- Accounting Policy Election: All entities can elect the practical expedient and entities other than public business entities can elect the accounting policy election. Adopting this simplified approach results in streamlining financial reporting and reducing documentation requirements.
Why It Matters
This update is a direct response to feedback from nonprofit stakeholders, the Private Company Council (PCC), and public companies aiming to make compliance with CECL (Current Expected Credit Loss) more manageable for organizations that typically deal with short-term receivables and have limited resources.
This ASU could affect how you handle receivables. Are you drafting a policy memo or updating your financial statement notes to reflect this change? Contact Withum’s Assurance and Accounting Services Team for help.
Author: Matthew Keadle, CPA | [email protected]