FASB Update Simplifies Credit Loss Calculations for Receivables

What Happened
In July 2025, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2025-05, which tweaks how businesses estimate credit losses on short-term accounts receivable and contract assets. The change, an update to Topic 326 on Credit Losses, responds to complaints that the prior model (the CECL standard) was too complex and time-consuming for short-term trade receivables that usually get collected fast. 

Why It Matters
Under the old rules, even small companies had to consider forward-looking forecasts like unemployment rates or property values when estimating potential losses on receivables. For most short-term invoices, that extra work rarely changed the final number, but it added hours of unnecessary analysis, auditor questions and documentation. The new update simplifies this process and makes estimating credit losses much more practical.

What’s Changing
ASU 2025-05 introduces two key relief options:

A Practical Expedient (for everyone): You can now assume current economic conditions will stay the same for the remaining life of your receivables. No need to model future economic changes for short-term invoices.

An Accounting Policy Election (for private companies & nonprofits): You can also factor in collections that happen after year-end but before the financial statements are issued. That means if a customer pays in January for a December receivable, you don’t need to book a bad-debt reserve for it.
 

When It Applies
The new guidance is effective for fiscal years beginning after December 15, 2025, but early adoption is allowed. It applies prospectively. So you’ll use it going forward without restating prior periods. 

Practical Takeaways for Businesses
For accountants and finance leaders, this ASU means less paperwork and more focus on what actually matters, tracking collections and maintaining clean receivable aging. Private companies should review their bad-debt policies to see if they want to elect the post-balance-sheet collection option. Start documenting your policy choices now so you’re ready for year-end 2025.

Bottom line: this is a welcome simplification for businesses that have struggled to make CECL work for day-to-day receivables.