The Financial Accounting Standards Board issued new optional guidance on Wednesday regarding the measurement of credit losses for accounts receivable and contract assets.
The FASB and the Private Company Council, the group that advises the U.S. standard-setting board on private company accounting matters, took on this project to address challenges with applying the guidance in Topic 326, Financial Instruments—Credit Losses (CECL), to current accounts receivable and current contract assets arising from revenue transactions accounted for under Topic 606, Revenue from Contracts with Customers.
- Related article: FASB Targets Credit Losses for Accounts Receivable, Contract Assets in Proposed ASU
The Accounting Standards Update, which was issued on July 30, states:
Stakeholders indicated that identifying, analyzing, and documenting macroeconomic data (such as unemployment rates and property values, among others) as part of developing reasonable and supportable forecasts when estimating expected credit losses for these balances under Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, can be costly and complex and generally does not have a material effect on the estimate of expected credit losses for short-term assets.
In addition, stakeholders observed that estimating 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 can require significant effort and documentation and can result in recording expected credit losses for amounts that have been subsequently collected. As such, stakeholders noted that the ability to consider collection activity after the balance sheet date when estimating expected credit losses would provide investors and other financial statement users with decision-useful information while significantly reducing complexity for preparers.
To address this feedback, the FASB said the amendments in the ASU provide:
- Practical expedient: In developing reasonable and supportable forecasts as part of estimating expected credit losses, all entities may elect a practical expedient that assumes that current conditions as of the balance sheet date do not change for the remaining life of the asset.
- Accounting policy election: An entity other than a public business entity that elects the practical expedient is permitted to make an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses.
The amendments in the ASU are expected to reduce the time and effort necessary to estimate credit losses for current accounts receivable and current contract assets while continuing to provide decision-useful information to investors and other financial statement users, the FASB said.
An entity that elects the practical expedient and the accounting policy election, if applicable, should apply the amendments prospectively, the guidance states.
The amendments will be effective for annual reporting periods beginning after Dec. 15, 2025, and interim reporting periods within those annual reporting periods. Early adoption is permitted in both interim and annual reporting periods in which financial statements haven’t yet been issued or made available for issuance.
An entity other than a public business entity that elects the practical expedient and, if applicable, the accounting policy election after the effective date wouldn’t need to perform a preferability assessment, the FASB said.
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