In July 2025, the Financial Accounting Standards Board (FASB) rolled out a targeted update to simplify how reporting entities estimate credit losses on accounts receivable and contract assets tied to revenue transactions under Topic 606 Revenue from Contracts with Customers. The move is aimed at cutting complexity and cost without sacrificing the quality of financial reporting. Accounting Standards Update 2025-05 (ASU 2025-05 or the Update) is effective for annual reporting periods beginning after Dec. 15, 2025, and interim reporting periods within those annual reporting periods. Early adoption is permitted in both interim and annual reporting periods in which financial statements have not yet been issued or made available for issuance.

Two key changes that simplify credit loss estimation

The Update introduces two practical options for entities dealing with current accounts receivable and contract assets arising from transactions accounted for under Topic 606, including those acquired in a business combination:

• Practical expedient for all entities: A reporting entity that elects this practical expedient will assume that current conditions at the balance sheet date remain unchanged for the life of the asset when developing point estimates of expected credit losses. However, this election should not result in static estimates – a reporting entity that elects it will continue to adjust its historical loss information based on then-current conditions. 

Takeaway: This practical expedient should simplify an electing entity’s credit loss estimation for current accounts receivable and contract assets arising from contracts with customers. 

• Accounting policy election for non-public entities: Reporting entities other than public business entities that elect the above practical expedient to assume current conditions get an extra break. Those reporting entities may also make an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses on current accounts receivable and contract assets arising from contracts with customers. 

Takeaway: A reporting entity that makes this accounting policy election will avoid recognizing credit losses on current accounts receivable and contract assets outstanding as of the balance sheet date that are subsequently collected in full. Furthermore, reporting entities that use an aging schedule for estimating credit losses and make this accounting policy election are permitted to update historical loss information based on collection activity after the balance sheet date. A reporting entity need not assess preferability when making this accounting policy election. 

Reason for the changes

If the practical expedient is not elected and the accounting policy election is not made, a reporting entity assesses historical data and adjusts it for expected changes in economic conditions, which may involve tracking indicators like delinquency rates, commodity prices, and employment trends. Stakeholders have indicated that performing such an assessment can be costly, complex, and generally does not move the needle much for credit loss estimates. In addition, estimating credit losses without electing the practical expedient and making the accounting policy election could result in a reporting entity recognizing credit losses on current accounts receivable that are collected on or before the date on which the financial statements become available to be issued.

Less complexity, more clarity

By allowing reporting entities to skip forecasting and allowing non-public reporting entities to consider post-balance-sheet collections, the FASB aims to deliver more relevant information to investors while lightening the load for financial statement preparers. The Update is expected to improve decision-making and reduce unnecessary documentation for assets that don’t stick around long enough to be affected by economic swings.

Bottom line

The Update is a win for efficiency. Electing the amendments therein makes credit loss estimation for current accounts receivable and contract assets simpler. For investors and analysts, it should result in cleaner, more intuitive financial statements.