FASB Targets Credit Losses for Accounts Receivable, Contract Assets in Proposed ASU

The Financial Accounting Standards Board (FASB) published a proposed Accounting Standards Update (ASU) on Dec. 3 that addresses the measurement of credit losses for accounts receivable and contract assets for private companies and certain not-for-profit entities.

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.

Private companies and not-for-profit entities have indicated that estimating expected credit losses for these balances can be costly and complex. Specifically, stakeholders noted that identifying, analyzing, and documenting macroeconomic data as part of developing reasonable and supportable forecasts is challenging, and generally doesn’t have a material effect on the allowance for shorter-term receivables, according to the FASB.

In addition, stakeholders observed that estimating expected credit losses for current accounts receivable and current contract assets requires significant effort and documentation, even for assets that are collected before the issuance date of the financial statements. The ability to consider collections after the balance sheet date in estimating expected credit losses would significantly reduce complexity for preparers while still providing investors and other financial statement users with decision-useful information, the FASB said.

To address this feedback, the amendments in the proposed ASU introduce a practical expedient and an accounting policy election for private companies and certain not-for-profit entities related to the application of CECL to current accounts receivable and current contract assets arising from revenue transactions.

The proposed ASU states:

The current credit loss guidance in Topic 326 requires that an entity consider available information that is relevant to assessing the collectibility of cash flows when developing an estimate of expected credit losses. The historical credit loss experience of financial assets with similar risk characteristics generally provides a basis for an entity’s assessment of expected credit losses. However, an entity is required to consider adjustments to that information to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. Those adjustments may be qualitative in nature and should reflect changes related to relevant data (such as changes in unemployment rates, property values, commodity values, delinquency, or other factors that are associated with credit losses on the financial asset or in the group of financial assets) during the forecast period. In addition, under Topic 326, an entity is not permitted to consider collections received after the balance sheet date when developing its estimate of expected credit losses.

The amendments in this proposed Update would provide private companies and certain not-for-profit entities with a practical expedient and an accounting policy election when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606.

1. Practical expedient. In developing reasonable and supportable forecasts, an entity may elect a practical expedient that assumes that current conditions as of the balance sheet date persist throughout the forecast period.

2. Accounting policy election. An entity that elects the practical expedient would be eligible to make an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses.

The proposed amendments are expected to reduce the time and effort necessary to analyze and estimate credit losses for current accounts receivable and current contract assets without reducing the decision usefulness of this information for investors and other financial statement users.

Stakeholder comments on the proposed ASU should be submitted to the FASB by Jan. 17, 2025.