FASB Simplifies Credit Loss Estimates With ASU 2025-05

On July 30, 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2025-05, Measurement of Credit Losses for Accounts Receivable and Contract Assets. This update aims to simplify how companies estimate expected credit losses for accounts receivable and contract assets. Feedback provided included concerns surrounding the costly and time-consuming aspects of applying CECL.

Who would be affected?

This amendment affects entities that apply the practical expedient, as well as entities – other than public business entities – that apply the accounting policy election when estimating credit losses on current accounts receivable and/or current contract assets arising from transactions under Topic 606, Revenue from Contracts with Customers. Importantly, ASU 2025-05 is narrow in scope and does not apply to loan receivables or investment securities, as these fall outside the scope of Topic 606.

What are the main provisions?

• Provide a practical expedient to use in developing reasonable and supportable forecasts. The practical expedient allows an entity to assume that current conditions as of the balance sheet date will persist throughout the forecast period. Instead of trying to predict how economic conditions might change in the future, an entity will be able to use the current conditions for their credit loss calculations. This practical expedient is available to all entities.
• Provide an accounting policy election for entities, other than public business entities, that elect to use the practical expedient. If collection occurs following the balance sheet date, but before the finalization of the financial statements, the entity can use that information in their estimation of expected credit losses.

 Timeline

• Election of the practical expedient and account policy election should be accounted for prospectively on the financial statements.
• The update is effective for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods – early adoption is permitted.

Explore what ASU 2025-05 means for your financial reporting and contact our team today.