Many businesses have been struggling with the reporting requirements for credit losses under U.S. Generally Accepted Accounting Principles (GAAP). In response to concerns about the cost and complexity of these requirements, the Financial Accounting Standards Board (FASB) recently published updated guidance. Here’s what you should know.
Existing credit loss guidance
Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, requires an entity to estimate an allowance for credit losses (ACL) on financial assets based on current expected credit losses (CECL) at each reporting date. (Under prior accounting rules, a credit loss wasn’t recognized until it was probable the loss had been incurred, regardless of whether an expectation of credit loss existed beforehand.)
Under CECL methodology, the initial ACL measures total expected credit losses over the asset’s contractual life. The estimate is based on historical information, current conditions, and reasonable and supportable forecasts. The ACL is remeasured at each reporting period and presented as a contra-asset account. The net amount reported on the balance sheet equals the amount expected to be collected.
The guidance was designed to be scalable for entities of all sizes. While banks and other financial institutions tend to hold more financial assets within the scope of CECL, nonfinancial entities with financial instruments, such as trade accounts receivable and contract assets, also must apply the CECL model under ASU 2016-13.
Calendar-year-end U.S. Securities and Exchange Commission filers (typically larger public companies) were required to implement the guidance on credit losses in 2021. Calendar-year private entities and smaller reporting companies had to implement the changes by 2023.
Stakeholder feedback
The Private Company Council (PCC), the primary advisory body to the FASB on private company matters, solicited public comments about concerns related to the credit loss accounting rules. Many stakeholders told the PCC that ASU 2016-13 was overly complex and burdensome.
In particular, the CECL model requires significant effort to analyze and document macroeconomic data (such as unemployment rates and property values) that has little impact on short-term assets. In some cases, the model was even causing companies to record expected credit losses for amounts that were eventually collected. In addition, additional guidance that removed certain implementation hurdles — ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments — Credit Losses — didn’t provide sufficient relief. Based on this feedback, the PCC recommended that the FASB simplify the accounting rules for measuring expected credit losses.
Recent changes
On July 30, 2025, the FASB issued ASU 2025-05, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets. The guidance, which is optional, applies only when companies estimate ACLs for current accounts receivable and current contract assets from transactions accounted for under Topic 606, Revenue from Contracts with Customers.
It includes two key simplification measures:
1. An accounting policy election that allows private entities to consider collection activity after the balance sheet date, and
2. A practical expedient that allows all entities to assume that current conditions as of the balance sheet date won’t change for the remaining life of the assets.
The updated guidance is effective for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods. Early adoption is permitted.
Welcome relief
Companies generally are welcoming the FASB’s simplified options for reporting expected credit losses on accounts receivable and contract assets. Many are expected to take advantage of the option to adopt them early. Contact your Hood & Strong advisors for more information.
