Navigating ASU 2025-05: Simplifying Credit Loss Estimates for Private Entities

1. Introduction

In July 2025, the Financial Accounting Standards Board (FASB) introduced Accounting Standards Update (ASU) 2025-05, offering a new approach for measuring credit losses on accounts receivable and contract assets. This development responds to the costly burden placed on private and smaller organizations by existing credit loss standards. ASU 2025-05 aims to simplify compliance, reduce forecasting complexity, and accommodate the inherent short-term nature of many receivables. Ultimately, this is a welcomed departure from the intensive methods previously demanded under ASC Topic 326: Financial Instruments—Credit Losses.

1.1 Background on the CECL Model

Before the introduction of Current Expected Credit Losses (CECL), most businesses followed an incurred loss approach: they recorded a bad debt expense only when evidence of a potential loss emerged. CECL dramatically changed that framework by introducing forward-looking estimates, requiring entities to consider expected losses from the time the receivable was recognized. While the goal was to produce more timely and transparent reporting, stakeholders—especially those in the private sector—found that gathering future-oriented economic data was both expensive and time-consuming.

1.2 Why the FASB Introduced ASU 2025-05

The FASB received extensive feedback that private businesses were bearing disproportionate costs under CECL. Many short-term receivables are collected quickly, rendering extensive forecasting of long-term economic changes less relevant. Moreover, companies often found themselves compelled to re-estimate credit losses for receivables that had, in fact, been collected before the financial statements were finalized. Recognizing these inefficiencies, the FASB set out to fine-tune the guidance, focusing on minimizing the burden surrounding expected credit losses for short-term assets, specifically for accounts receivable and contract assets that arise under ASC 606 (Revenue from Contracts with Customers).

2. Key Pain Points Addressed by ASU 2025-05

Private entities frequently raised concerns about the complexity of creating robust credit loss forecasts. For businesses with relatively short operating cycles, it sometimes seemed excessive to compile macroeconomic data far beyond the relevant timeframe. These companies also cited the impracticality of maintaining a sophisticated economic model for a customer portfolio when many outstanding invoices are settled within weeks or months. Additionally, many private businesses questioned the overall value to financial statement users of applying intricate models to receivables that are resolved soon after year-end. By streamlining estimation processes, ASU 2025-05 seeks to make reporting more relevant and less burdensome.

3. Main Provisions of ASU 2025-05

The core of ASU 2025-05 revolves around two critical relief measures. Both measures focus on relieving companies of forecasting obligations that do not necessarily improve the transparency or usefulness of the financial statements.

3.1 Practical Expedient

The practical expedient allows companies to assume that conditions evident at the balance sheet date remain unchanged over the forecast period. Essentially, rather than layering economic projections onto often short-term receivables, an entity can use current conditions as a baseline for the entire period. This simplification helps businesses avoid building or maintaining complex forecasting models that go beyond their normal operating cycles, or that fail to provide significant additional insight for short-lived assets.

3.2 Accounting Policy Election for Non-Public Entities

ASU 2025-05 offers an optional accounting policy specifically for private (non-public) business entities. Under this policy, if a receivable is collected after the balance sheet date but before finalizing the financial statements, the company can adjust its expected credit losses to reflect the collection. This addresses one of the biggest pain points under the standard CECL approach, where later information about a previously assumed loss could not always be factored into the financial statements.

4. Scope and Applicability

These new provisions concentrate on current accounts receivable and contract assets under ASC 606. Entities need to ensure their receivables indeed qualify as current, either within one year or within the span of their normal operating cycle if that exceeds 12 months. Notably, the standard excludes other types of financial assets—such as loan receivables or investment securities—that carry different risk characteristics and remain within the broader field of CECL guidance under ASC Topic 326.

Both public and non-public entities may opt for the practical expedient, but only non-public companies can adopt the accounting policy election to include collected amounts after the balance sheet date in their credit loss assessment. This limitation underscores the FASB’s recognition that private companies face more considerable resource constraints than many publicly traded entities.

5. Implementation Considerations

ASU 2025-05 includes several guidelines about how and when to deploy the new relief options. The guidance is to be implemented prospectively. In other words, earlier financial statements require no retroactive changes. If a business decides that the new approach aligns with its goals, it can either wait until the official effective date—annual periods beginning after December 15, 2025—or adopt the changes early if that best suits its circumstances.

Among other items, entities choosing the policy election must outline the cutoff date through which they consider subsequent cash collections. These disclosures should be transparent and help users understand how management estimated credit losses by referencing post-balance-sheet events.

6. Implications for Private Entities

Private entities stand to benefit most from ASU 2025-05. By eliminating the need for deep economic forecasting, the new guidance offers measurable cost savings, improved efficiency, and clearer alignment between actual collections and recognized losses. Rather than devoting time and talent to build detailed future projections, resources can be reallocated to strategic tasks, such as improving operational processes or nurturing client relationships.

Under the new rules, if an invoice initially viewed as high-risk is ultimately paid soon after year-end, the private business may reflect that payment in its reported credit losses (provided it hasn’t yet issued its financial statements). This crucial change avoids the problem of reporting a potentially misleading loss estimate, only to have it materially change in a matter of weeks or even days.

7. Potential Challenges and Best Practices

While ASU 2025-05 streamlines the reporting requirements, it’s still essential to document any processes and assumptions thoroughly. Businesses will want to ensure they’ve identified which receivables properly qualify as current assets and applied the new relief measures only to these balances. They must also maintain strong controls and processes around subsequent events to ensure no material changes to collectability are overlooked. Thorough training and internal communication of new policies bolster consistency and accuracy across financial reporting channels.

“Implementation of ASU 2025-05 is an opportunity for management teams to refine their internal processes for credit monitoring and better align financial reporting with real-time business practices.” — Tony Smith, Partner

8. Next Steps

As the effective date nears, private companies should review their existing credit loss methodologies and the composition of their receivables and contract assets. Mapping out how and when invoices typically get paid can shed light on whether the practical expedient or the new accounting policy election (or both) will reduce the complexity of reporting. Establishing formal policies, revising internal controls where necessary, and assembling robust documentation around one’s approach will set the stage for a seamless transition. For those wishing to adopt early, making these changes as soon as the business case is compelling can realize immediate benefits in terms of simplified compliance.

9. How GreerWalker Can Help

At GreerWalker, we specialize in delivering assurance services exclusively to owner-managed businesses, helping you meet financial reporting requirements without overburdening your resources. Our professionals bring technical experience and practical insight to help you interpret new regulatory updates, like ASU 2025-05, and integrate them effectively into your organization. Whether you are looking for a comprehensive audit, reviewing financial statements, conducting a risk assessment, or seeking guidance on forecasting and reporting issues, our Assurance Services team can help.

We aim to deliver high-quality and efficient audits, financial reporting, and risk management advice with a personal touch. Our commitment to innovation includes leveraging data analytics, cloud-based client portals, and secure data transmission. As you consider whether and how to implement the ASU 2025-05 changes, we can provide expert insight and assistance so you can focus on managing your day-to-day business operations with confidence. Our approach is collaborative, hands-on, and tailored to your specific needs, eliminating unnecessary complexity and allowing you to maintain a clear financial perspective.

Conclusion

ASU 2025-05 offers private entities a new means of addressing long-standing challenges with credit loss reporting. By introducing a practical expedient and an optional accounting policy election, the update ensures that short-term opportunities and realities receive appropriate consideration in financial statements—particularly if receivables are ultimately collected before the close of the reporting period. Private organizations can benefit from easier compliance, more accurate representation of profitability, and a more efficient allocation of resources. Staying abreast of this guidance and understanding how it may apply to your organization is a vital step in refining your financial reporting practices for the future.

• Tony Smith, Partner — tony.smith@greerwalker.com. Tony leads GreerWalker’s Assurance practice and specializes in risk management and compliance consulting for both private and large publicly owned corporations. He brings decades of experience and a reputation for delivering pragmatic, actionable solutions to complex issues.