FASB issues credit losses standard for accounts receivable, contract assets

The Financial Accounting Standards Board published an accounting standards update Wednesday with optional guidance on the measurement of credit losses for accounts receivable and contract assets.

The optional guidance deals with some of the challenges confronted by FASB’s stakeholders when applying FASB’s credit losses standard, Topic 326, Financial Instruments—Credit Losses, to current accounts receivable and current contract assets arising from transactions accounted for under Topic 606, Revenue from Contracts with Customers, also known as the revenue recognition standard. Members of the Private Company Council, which advises FASB, began doing standard-setting activity in response to feedback from private company stakeholders.

The challenges included the cost and complexity of developing a reasonable, supportable forecast when businesses were estimating their expected credit losses and the significant effort needed to estimate and record expected credit losses for current accounts receivable and current contract assets that were collected before the date that the financial statements were available to be issued.

In response to the feedback received from stakeholders, the amendments in the update provide (1) all entities with a practical expedient to assume that current conditions as of the balance sheet date don’t change for the remaining life of the assets, and (2) entities other than public business entities with an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606.

FASB predicts the amendments in the ASU will reduce the time and effort needed to estimate credit losses for current accounts receivable and current contract assets, while continuing to offer decision-useful information to investors and other users of financial statements. 

The amendments will take effect for annual reporting periods starting after Dec. 15, 2025, and interim reporting periods within those annual periods. Early adoption is allowed for both interim and annual reporting periods, but only if the financial statements haven’t yet been issued or made available for issuance.