ASC 326 CECL - Simplified Credit Loss Estimates Under ASU 2025-05
Published Oct 19, 2026
By Gilbert Gomez, CPA | Insights
Introduction
Estimating the allowance for uncollectible accounts receivable is a routine part of financial reporting. For many businesses, the process involves reviewing outstanding customer balances, historical collection patterns, and accounts that may present collection difficulties.
However, the Financial Accounting Standards Board's (FASB) Current Expected Credit Losses (CECL) model under Accounting Standards Codification (ASC) 326 introduced additional considerations. In addition to historical experience and current conditions, companies must generally evaluate reasonable and supportable forecasts of future economic conditions when estimating expected credit losses.
For businesses with relatively short collection cycles, developing and documenting these forecasts can create additional work without necessarily producing a materially different estimate.
In July 2025, the FASB issued Accounting Standards Update (ASU) 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets.
The update introduces two optional provisions intended to simplify credit loss accounting while maintaining the underlying requirements of ASC 326.
The amendments are effective for annual reporting periods beginning after December 15, 2025, including calendar-year 2026 financial statements.
Which Businesses Are Affected?
ASU 2025-05 applies within the U.S. Generally Accepted Accounting Principles (GAAP) financial reporting framework. It does not impose a new accounting requirement on every business with outstanding receivables.
Privately held companies may prepare GAAP financial statements to satisfy lending agreements, investor requirements, contractual obligations, or other financial reporting needs. Some businesses voluntarily follow GAAP as part of their internal financial reporting practices.
Companies preparing financial information exclusively on an income tax basis or another special-purpose reporting framework generally are not required to apply the GAAP CECL model.
The update also does not change federal income tax rules governing bad-debt deductions. The recognition of an allowance for expected credit losses under GAAP remains separate from the determination of deductible business bad debts for federal income tax purposes.
For companies already reporting under GAAP, the amendments offer an opportunity to simplify an existing accounting requirement.
Understanding the CECL Requirement
ASC 326 requires companies to recognize an allowance for expected credit losses on certain financial assets, including trade receivables.
Under the CECL model, management generally considers three categories of information when developing an estimate:
- Historical credit loss experience.
- Current economic conditions and customer-specific circumstances.
- Reasonable and supportable forecasts of future conditions affecting collectibility.
Consider a distributor with $1 million in trade receivables, substantially all due within 30 to 90 days.
Management might assess customer payment history, write-offs, overdue balances, and known financial difficulties affecting individual customers. Under the original CECL framework, it must also consider whether reasonably supportable forecasts of future conditions indicate additional collection risks.
The FASB recognized that developing and documenting forecasts for short-term receivables could require disproportionate effort relative to their effect on the resulting estimate.
ASU 2025-05 addresses this issue through two optional provisions.
Practical Expedient: Assuming Current Conditions Remain Unchanged
The first provision introduces a practical expedient available to both public and private entities preparing GAAP financial statements.
For qualifying current accounts receivable and current contract assets arising from transactions accounted for under ASC 606, Revenue from Contracts with Customers, management may assume that conditions existing at the balance sheet date remain unchanged throughout the remaining lives of those assets.
This eliminates the need to develop separate forecasts of changes in economic conditions during the remaining collection period.
For example, assume a manufacturer has $750,000 in accounts receivable at December 31, 2026.
Historically, the company has experienced relatively few credit losses, although several customers currently operate in industries experiencing financial difficulties.
Under the practical expedient, management would continue reviewing historical write-offs, receivables aging, payment patterns, and current customer circumstances.
However, management would not need to forecast whether broader economic conditions will improve or deteriorate during the remaining collection period.
The practical expedient eliminates the need to forecast changes in conditions, not the requirement to evaluate expected credit losses.
If existing conditions or customer-specific circumstances indicate greater collection risk than historical experience suggests, management must still reflect those risks in its estimate.
For example, a customer experiencing significant financial distress may require an individual assessment when its credit risk characteristics are no longer similar to those of other customers in the company's receivables portfolio.
Accounting Policy Election: Considering Subsequent Cash Collections
The second provision offers an additional accounting policy election for entities that are not public business entities.
Private companies electing the practical expedient may also elect to consider cash collections occurring after the balance sheet date, but before the entity's financial statements are available to be issued, when estimating expected credit losses.
This can be particularly useful when substantial portions of outstanding year-end receivables are collected before the annual financial statements are finalized.
Consider the following example.
A privately held service company reports $500,000 in trade receivables at December 31, 2026.
Receivables outstanding at December 31, 2026: $500,000
Collections through January 31, 2027: ($350,000)
Additional collections through February 15, 2027: ($100,000)
Remaining uncollected balance: $50,000
Assume the company's annual financial statements will be available to be issued on March 15, 2027.
If the company elects February 15 as its subsequent-collections evaluation date, it may incorporate the $450,000 collected through that date into its December 31 credit loss estimate.
Under the election, no allowance for credit losses is recorded for the $450,000 of year-end receivables that were subsequently collected through the selected date.
Management must then estimate expected credit losses on the remaining $50,000 using the practical expedient, based on the delinquency status of those balances as of February 15.
The resulting calculation is supported by actual collection activity, reducing estimation work on amounts that have already been received.
The company may select an evaluation date earlier than the date its financial statements are available to be issued, provided that the selected date falls after the balance sheet date.
Additional Flexibility for Aging-Based Estimates
ASU 2025-05 also provides flexibility for private companies using accounts receivable aging schedules to estimate expected credit losses.
Under ASC 326-20-30-10G, companies electing to consider subsequent collections are permitted, but not required, to update their historical credit loss rates for collection activity occurring after the balance sheet date.
This allows management to determine whether incorporating additional collection information would improve the loss rates used to estimate expected credit losses on balances that remain outstanding.
Although updating historical loss rates is optional, management must evaluate the delinquency status of the remaining uncollected receivables as of the selected subsequent-collections evaluation date.
For companies maintaining reliable accounts receivable aging and collection records, these provisions may reduce the effort required to support the year-end allowance calculation.
Scope and Implementation Requirements
The new elections apply to qualifying current accounts receivable and current contract assets arising from transactions accounted for under ASC 606. They do not provide a general exemption from CECL for loans, notes receivable, or other financial assets subject to ASC 326.
For purposes of determining eligibility, assets are classified as current using a one-year period unless the entity's normal operating cycle exceeds 12 months, in which case the longer operating cycle applies.
When elected, the practical expedient and the subsequent-collections accounting policy must be applied consistently to all eligible receivables and contract assets within their scope.
For companies preparing calendar-year 2026 GAAP financial statements, implementation should include reviewing the existing credit loss methodology and evaluating the available elections.
Management should address the following areas:
Accounting policy documentation. Document the elections and the methodology used to estimate expected credit losses on qualifying receivables.
Receivables reporting. Maintain reliable aging reports that identify outstanding balances, payment delinquencies, and accounts requiring individual evaluation.
Subsequent collections. Establish procedures for identifying cash receipts attributable to year-end balances and documenting the selected evaluation date.
Historical loss experience. Determine whether historical loss rates reflect current conditions and whether subsequent collection information supports updating those rates.
Financial statement disclosures. Disclose the applicable elections. In annual financial statements, entities using the subsequent-collections election must also disclose the date through which collection activity was evaluated.
Reliable accounts receivable reconciliations and accurate application of customer payments are particularly important when actual subsequent collections form part of the allowance calculation.
The amendments require prospective application. Entities other than public business entities may initially make the elections after the effective date without performing the accounting principle preferability assessment ordinarily required under ASC 250.
Although management is not necessarily required to make these elections before completing the year-end close, establishing the methodology before financial statements are finalized can improve efficiency and reduce documentation issues.
Final Considerations
ASU 2025-05 provides a targeted simplification of credit loss accounting for companies preparing financial statements under U.S. GAAP.
By permitting management to assume that current conditions remain unchanged over the remaining lives of qualifying receivables, the guidance reduces the forecasting requirements associated with estimating expected credit losses.
For private companies, the additional election to consider subsequent cash collections provides a practical means of supporting year-end estimates with actual payment activity.
These amendments do not eliminate the CECL model or change which companies are required to prepare GAAP financial statements. Management remains responsible for assessing collectibility and maintaining reliable supporting records.
For businesses with established receivables management and financial close procedures, the result may be a more efficient, documented, and supportable approach to measuring expected credit losses.
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References
Financial Accounting Standards Board. (July 2025). Accounting Standards Update No. 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets.
https://storage.fasb.org/ASU%202025-05.pdf
Financial Accounting Standards Board. Accounting Standards Codification Topic 326, Financial Instruments—Credit Losses, particularly ASC 326-20-30-10A through 10H and ASC 326-20-50-12A through 12B.
https://asc.fasb.org/
Disclaimer: This article is provided by GOMEZ CPA for general informational and educational purposes only. It is not intended and should not be construed as tax, accounting, legal, investment, or financial advice. Application of U.S. GAAP requirements depends on an entity's circumstances, financial reporting framework, and applicable contractual obligations.
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