Measuring credit losses on current accounts receivable & current contract assets

The FASB recently issued ASU 2025-05, Measurement of Credit Losses for Accounts Receivable and Contract Assets (Financial Instruments – Credit Losses (Topic 326), to simplify how entities measure credit losses on current accounts receivable and current contract assets. The amendments provide a practical expedient that allows all entities to assume that conditions at the balance-sheet date will remain unchanged for an asset’s remaining life when estimating credit losses on current accounts receivable and current contract assets arising from transactions under ASC 606.

In addition, entities other than public business entities that apply the expedient may also make an accounting policy election to consider subsequent collection activity occurring after the balance-sheet date in estimating expected credit losses on these assets.

Scope

The guidance applies only to accounts receivables and contract assets that meet both of the following criteria:

• They arise from transactions accounted for under the revenue guidance in ASC 606 by the reporting entity or acquiree. This includes such assets acquired in a transaction accounted for under ASC 805 on business combinations or recognized through the consolidation of a variable interest entity that is not a business.
• They are classified as current assets as of the balance-sheet date. When determining whether these assets qualify as current, entities should use a one-year period unless an entity’s operating cycle exceeds 12 months, in which case, the longer operating cycle period is used.

Practical expedient

Under ASC 326-20, entities estimating expected credit loss must adjust historical loss experience for current conditions and reasonable and supportable forecasts if those differ from historical conditions.

The amendments in ASU 2025‑05 introduce a practical expedient for all qualifying assets that allows entities to assume that current conditions at the balance-sheet date remain unchanged for the remaining life of an asset when estimating credit losses on current accounts receivable and current contract assets. Entities electing this expedient will therefore adjust historical loss experience only to reflect current conditions, without the need to incorporate forward‑looking forecasts.

However, entities still need to consider if adjustments to historical loss experience are necessary to capture both (1) differences between current conditions and those conditions existing during the period when historical loss experience is measured, and (2) asset-specific differences.

For example, say that an entity elects to apply the practical expedient to determine the historical loss experience for a pool of similar current accounts receivable and current contract assets over a historical period during which the unemployment rate was 5 percent. Currently, the unemployment rate is 8 percent. In this scenario, the entity would (1) adjust the historical loss experience to reflect the increase in the unemployment rate (that is, the current condition), and then (2) presume that the 8 percent unemployment rate remains constant throughout the remaining life of the current accounts receivable and contract assets.