ASC 326 Updates: Impact on Private Companies

In July 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-05, amending the guidance for measuring credit losses on accounts receivable and contract assets under Accounting Standards Codification (ASC) 326, Financial Instruments—Credit Losses.

The update, based on stakeholder feedback, simplifies application of the current expected credit loss (CECL) model under ASC 326 for private companies. 

ASU 2025-05 introduces a practical expedient and an accounting policy election for private companies to reduce the complexity and cost associated with applying the CECL model to accounts receivable and contract assets arising from transactions accounted for under ASC 606 (Revenue from Contracts with Customers) in the following ways:

All companies, including private and not-for-profit entities, can now elect a practical expedient when estimating expected credit losses for current accounts receivable and contract assets arising from revenue transactions (ASC 606).

What does this mean?
Instead of forecasting future economic conditions (like unemployment rates or property values), you can simply assume that the conditions at the balance sheet date will persist for the life of the asset. This greatly simplifies the calculation and documentation process.

If you are a private company (not a public business entity) and you elect the practical expedient, you may also choose an accounting policy that allows you to consider collections received after the balance sheet date but before your financial statements are issued.

Why is this important?

Many private companies issue financial statements after most receivables have already been collected. Under this election, you don’t have to record a credit loss allowance for amounts collected before the financial statements are finalized. This makes your allowance more relevant and reduces unnecessary work.

It is important to note that ASU 2025-05 does not change the disclosure requirements under Topic 326. Additionally, the ASU does not scope out other financial assets held at amortized cost that may be applicable to private companies, including held-to-maturity debt securities and notes receivable.

ASU 2025-05 offers several benefits for privately held companies:

Less complexity: No need for sophisticated forecasting models or macroeconomic analysis for short-term receivables.

Cost savings: Reduced documentation and calculation effort.

More relevant financials: Your allowance for credit losses will better reflect actual collections, making your financial statements more useful for stakeholders.

ASC 326, also known as Financial Instruments—Credit Losses (Topic 326), was established by the FASB in response to the financial crisis of 2008. The crisis highlighted significant weaknesses in the existing accounting standards for credit losses, which were based on an “incurred loss” model that only recognized credit losses when it was probable that a loss had been incurred (often resulting in delayed recognition of credit losses).

The primary objective of ASC 326 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments. By requiring entities to estimate and recognize expected credit losses at the time of asset recognition, and update these estimates at each reporting date, ASC 326 aims to enhance the transparency and reliability of financial reporting.

Under the existing ASC 326, all entities, including private companies, must measure expected credit losses on financial assets, including trade receivables and contract assets measured at amortized cost. The CECL model mandates that entities estimate lifetime expected credit losses at the time of asset recognition and update these estimates at each reporting date. This involves considering historical loss data, current conditions, and reasonable and supportable forecasts.

For trade receivables and contract assets, companies must pool assets with similar risk characteristics and apply a forward-looking approach to estimate credit losses. This can be complex and resource-intensive, particularly for private companies that may not have the same resources as public entities.

Legacy Generally Accepted Accounting Principles in the United States (GAAP) required companies, at each reporting date, to estimate an allowance for uncollectible accounts on their trade receivables using historical losses adjusted for current conditions. ASC 326 added an additional layer to this calculation by including reasonable and supportable forecasts in the estimate.

Many privately held companies have found that the time and effort required to prepare forecasts and measure expected credit losses did not justify the benefits, particularly when the impact on the allowance for credit losses is minimal. In addition, under Topic 326, companies are not permitted to consider collections received after the balance sheet date when developing their estimate of expected credit losses.

In actuality, many private companies issue their financial statements after the majority of trade receivable balances have been collected, and more relevant information is available regarding the collectability of outstanding balances.

The effective date of this ASU is fiscal years beginning after December 15, 2025, including interim periods within those fiscal years. Early adoption would be permitted, allowing entities to benefit from the simplified requirements as soon as they are ready to implement them. An entity that elects the practical expedient and accounting policy election would apply them prospectively.

If you elect the practical expedient (and, if applicable, the accounting policy election), you must disclose this election in your financial statements.

Private entities must also disclose the date through which they considered subsequent collection activity

Contact us to learn more about how we can assist your company in adapting to these new standards and optimizing your financial reporting processes.