US accounting rules to get simpler for private companies on customer debt, contract assets

The Private Company Council (PCC), a group that works with the FASB to amend accounting rules for privately held companies, on March 6, 2025, affirmed a board proposal that will make it easier for businesses to account for money they are owed by customers.

The proposal, Accounting Standards 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, was released last year for public comment to align the accounting rules for short-term accounts receivables and contract assets. Short-term receivables refer to amounts owed by customers for goods or services sold, typically payable within a year or less.

The amendments should apply to assets that arise from everyday business transactions, such as sales and services, and include assets that are acquired when one company buys another, according to PCC discussions. The changes would provide businesses with a more straightforward way to estimate the amount of money they are likely to lose due to customers not paying their debts.

PCC decisions are subject to the FASB's endorsement, which is expected to come at a future meeting. If approved, the amendments are expected to be issued as U.S. GAAP this year, providing cost savings and reducing complexity in an area that accountants said often requires the analysis of macroeconomic data that does not materially affect short-term assets.

Simpler method to estimate money owed

According to PCC discussions, the guidance is expected to simplify the accounting process for money owed to businesses by their customers. For example, companies will be able to use a simpler method to estimate the amount of money they are likely to lose due to customer non-payment. This method, called a "practical expedient," will allow businesses to assume that current economic conditions will continue into the future, rather than having to make complex predictions about future economic conditions.

Private companies will also be able to choose to consider payments they receive from customers after the end of the accounting period when estimating their expected credit losses. This will give them a more accurate picture of their financial situation and will help to reduce the complexity and cost of accounting for these types of assets.

The PCC has also recommended that businesses disclose certain information about how they are accounting for money they are owed. This will include information about the method they are using to estimate expected credit losses and the date up to which they are considering payments from customers.

This increased transparency will help to give financial statement users, such as investors and lenders, a better understanding of a business's financial situation.

Effective date

The PCC voted by a 8 to 4 majority that the changes should take effect prospectively for accounting periods beginning after Dec. 15, 2025. However, businesses would be allowed to adopt the new rules early, if they choose to do so.

Alternatively, some PCC members suggested that the final update should be effective immediately upon issuance, with the option for early adoption. They agreed with FASB staff that setting a specific effective date could be confusing, given that the changes would be applied prospectively without requiring companies to evaluate which accounting method works best for their specific situation.

Specific rules impacted

In terms of specific accounting rules, the proposal addresses the application of Topic 326, Financial Instruments-Credit Losses, to certain assets, such as accounts receivable and contract assets. It was developed in response to concerns that estimating credit losses for these assets can be costly and complex under Topic 606, Revenue from Contracts with Customers.

For in-depth analysis of the FASB's guidance for credit losses, please see Catalyst: US GAAP-Financial Instruments-Impairment, also on Checkpoint.

For in-depth analysis of the FASB's revenue recognition standard, please see Catalyst: US GAAP - Revenue Recognition, also on Checkpoint.

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