FASB Vote Brings Public Companies into Fold for Simplified Credit Loss Accounting

The FASB voted on March 26, 2025, to adopt a proposal that will simplify the way companies account for potential losses on customer payments, with a portion applying to all companies and offering public companies a simplified accounting approach.

The board voted to expand the scope of a practical expedient under Proposed Accounting Standard Update (ASU) No. 2024-ED900, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets for Private Companies and Certain Not-for-Profit Entities, allowing public companies to also apply it along with private companies and thereby avoiding unnecessary discrepancies.

This practical expedient simplifies the estimation of credit losses by enabling companies to assume that current conditions will persist through the forecast period.

The FASB also established an effective date for the practical expedient, requiring public companies to adopt it for interim and annual periods beginning after December 15, 2025, although early adoption is permitted for any unissued financial statements.

"I really view this as an asset-specific issue," FASB Vice Chair Hillary Salo said. "I think it would be remiss to say that, or to imply that there's a different level of support that's necessary from a public company than for a private company with regards to this issue."

Policy Election for Non-PBEs Only

The proposal was released last year to solicit public comment on changes to address challenges faced by private companies and certain not-for-profit entities when applying the guidance in Topic 326, Financial Instruments-Credit Losses. The amendments will introduce a practical expedient and a related accounting policy election into U.S. GAAP specifically for current accounts receivable and current contract assets arising from transactions under Topic 606, Revenue from Contracts with Customers.

The board drew a distinction between the practical expedient and the accounting policy election, which permits entities to consider subsequent cash collections after the balance sheet date when estimating credit losses-this election will be limited to non-public business entities (non-PBEs) and will not be available to public companies.

The amendments are expected to simplify and improve financial reporting for short-term receivables, providing greater clarity and consistency for companies and investors alike.

"I do think this is an interesting time to address these issues because of the uncertainty, significant uncertainty about the economic outlook right now," FASB member Frederick Cannon said. "And I would say that while I certainly agree with this direction that we're going for trade AR, I think…that there really isn't a need to do or document a macroeconomic forecast for many short-term assets."

Benefits Justify Costs

In line with the Private Company Council's (PCC) recommendations, the board allowed private companies and not-for-profits to apply the changes prospectively and adopt them early. The decision was shaped by feedback on the proposal, including suggestions to expand the scope to include assets acquired in business combinations, which the board endorsed.

Overall, the board concluded that the expected benefits of the amendments justify the costs and gave permission to proceed with drafting a final accounting standards update. FASB member Susan Cosper praised the PCC's role in advancing the project, saying "I think we've gotten to a good place... it's more harmonious with the overall model."

A final standard will be issued this year.

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