FASB Issues Updated Guidance on ASC Topic 326: Measurement of Credit Losses

In response to feedback from private company stakeholders, the Financial Accounting Standards Board (FASB) issued updated guidance on the measurement of credit losses for accounts receivable and contract assets. The Accounting Standards Update (ASU) 2025-05 introduces optional relief for companies facing challenges applying Financial Instruments—Credit Losses (ASC Topic 326). Here’s a breakdown of what changed.

ASC Topic 326: Background

Topic 326 introduced a major shift in how companies recognize credit losses on financial instruments, moving from an incurred loss model to a current expected credit loss (CECL) model. The CECL model requires entities to estimate expected credit losses over the life of a financial asset upon its initial recognition. Losses are recognized earlier than under prior guidance, using a broader range of information, including forward-looking data, rather than solely past events or current conditions.

Before ASC Topic 326, businesses typically only recorded credit loss or bad debt expenses when they believed they had been incurred. Topic 326 prompted users to record losses on financial assets as soon as they record those assets on their books, based on what they expect to receive. Therefore, if 1% of a business’s annual revenue historically results in bad debt expense, and the company anticipates future losses to be similar, they’d record the credit loss expense when recording the revenue, resulting in an earlier reduction to trade receivables.

Stakeholders, particularly private companies, found it costly and complex to develop forecasts for expected credit losses. Additionally, financial statement users found it burdensome (and pointless) to estimate losses on receivables that had been collected before the issuance of the financial statements.

For example, suppose ABC Company billed its client in July. As of December 31, the client hadn’t paid. Unsure of its collectability, ABC Company included 50% of the receivable in its current expected credit losses. The client ultimately paid the bill in February, which was prior to the issuance of ABC Company’s December 31 financial statements. Under Topic 326 as originally written, ABC Company should not adjust its allowance for credit losses to account for the payment because it included a portion of the receivable in its initial analysis as a potential credit loss. Even if ABC Company’s financial statements had not yet been issued, Topic 326 noted that the company could not use information that came to its attention after it had made the initial analysis.

ASU 2025-05 Updates to Topic 326

In response to stakeholder feedback, the FASB issued ASU 2025-05, which introduces two optional simplifications that certain companies may utilize:

1. Practical expedient: Entities may elect a practical expedient that allows them to assume current conditions as of the balance sheet date will persist through the reasonable and supportable forecast period for eligible assets.
2. Accounting policy election: Private companies may elect an accounting policy that allows them to consider post-balance-sheet collection activity when estimating expected credit losses for current accounts receivable and contract assets.

The accounting policy election and practical expedient apply to estimates of current contract asset balances and expected credit losses on transactions accounted for under ASC Topic 606 on revenue from contracts with customers. Under ASU 2025-05, private companies can incorporate information that becomes available after their initial analysis directly into their financial statements, rather than applying the changes prospectively. The practical expedient simplifies the analysis to not consider subsequently collected receivables in the analysis.

Impact of ASU 2025-05

The FASB is continuing to refine its guidance as it relates to CECL, particularly regarding seasoned loan receivables. If you have any questions about how the updated guidance may affect your business, please use the form below to contact us today.