The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to address the challenges faced when applying the guidance in Topic 326, Financial Instruments—Credit Losses.
Specifically, the ASU applies to current accounts receivable and current contract assets arising from transactions under Topic 606, Revenue from Contracts with Customers.
The amendments will be effective for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods. Early adoption is permitted. Entities that elect the practical expedient and accounting policy election after the effective date will not need to perform a preferability assessment, as is typically required by ASC 2510-45-2, to determine if the accounting method is preferable to the existing policies and elections chosen by the entity.
Background:
Stakeholders were concerned that identifying, analyzing, and documenting macroeconomic data required by Topic 326, such as unemployment rates and property values, can be costly and complex when estimating expected credit losses for these balances. They noted that this effort generally does not have a material effect on the estimate of expected credit losses for short-term assets. Additionally, stakeholders observed that estimating expected credit losses for current accounts receivable and contract assets collected before the financial statements are issued can require significant effort and documentation, potentially resulting in recording expected credit losses for amounts that have been subsequently collected. Stakeholders suggested that considering collection activity after the balance sheet date would provide more useful information to investors and reduce complexity for preparers.
ASU Overview:
To address this stakeholder feedback, the amendments introduce a practical expedient for all entities and an accounting policy election for non-public business entities related to applying Subtopic 326-20 to current accounts receivable and contract assets arising from transactions under Topic 606.
The amendments affect the estimation of expected credit losses on current accounts receivable and contract assets arising from transactions under Topic 606, including those acquired in transactions under Topic 805, Business Combinations. The practical expedient may be applied by all entities, while the accounting policy election may be applied by entities other than public business entities.
The main provisions of the amendment include the following:
- Practical Expedient: All entities may elect a practical expedient which assumes that current conditions as of the balance sheet date do not change for the remaining life of the asset when developing reasonable and supportable forecasts for estimating expected credit losses.
- Accounting Policy Election: Entities other than public business entities that elect the practical expedient may make an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses.
These amendments differ from current Generally Accepted Accounting Principles (GAAP) by allowing entities to consider collection activity after the balance sheet date and by providing a practical expedient for developing forecasts. The practical expedient permits all reporting entities to assume no change in balance sheet date market, industry and other applicable conditions in building forecasts used to estimate these current assets. This adaptation is expected to provide decision-useful information to investors while reducing the time and effort needed to analyze and estimate credit losses for current accounts receivable and contract assets.
How Can Schneider Downs Help?
If you or your organization has a need for assistance in interpreting or applying the above Accounting Standards Update, please reach out to Nick D. Lombardo, CPA or any other member of the Schneider Downs’ Accounting Advisory Services team.
