Nonprofits and private companies have long faced challenges when estimating credit losses for short-term assets, especially accounts receivable and contract assets. These challenges stem from requirements under FASB ASC 326, which demands consideration of past events, current conditions, and future forecasts—including complex macroeconomic data.
To address these concerns, the FASB issued ASU 2025-05 in July 2025, aiming to simplify credit loss measurement without compromising the quality of financial reporting. The update responds to feedback from both the Private Company Council (PCC) and the Not-for-Profit Advisory Council (NAC), which highlighted the cost and complexity of existing standards.
What’s Changing and Who’s Impacted?
ASU 2025-05 introduces two key changes designed to ease the burden on preparers of financial statements:
1. New Practical Expedient for All Entities
Any organization—public or private—may now elect a practical expedient when estimating expected credit losses for current accounts receivable and contract assets. This expedient assumes that current conditions as of the balance sheet date will remain unchanged for the life of the asset.
This change allows organizations to avoid complex forecasting, particularly when those forecasts have minimal impact on credit loss estimates for short-term assets.
2. New Accounting Policy Election for Private Companies and Certain Nonprofits
Private companies and nonprofit entities (excluding those with publicly traded debt) may elect an accounting policy that allows them to consider collections made after the statement of financial position date when estimating credit losses.
This policy recognizes that many organizations already track collection activity in real time—and that this data provides more meaningful insight than hypothetical forecasts for short-term receivables.
Practical Considerations for Nonprofits
- Who qualifies? Nonprofits that are not conduit bond obligors or do not have securities that are traded, listed, or quoted on an exchange or OTC market may apply the policy election.
- No preferability assessment required: Unlike other changes in accounting principle, this election does not require an evaluation of whether the method is preferable under ASC 250.
- NAC’s involvement: This update reflects the NAC’s growing influence in shaping guidance that reflects practical realities in nonprofit accounting.
Effective Date and Transition
- Effective for annual periods beginning after December 15, 2025, including interim periods within those years.
- Early adoption is allowed, provided financial statements have not yet been issued or made available for issuance.
- Prospective application only—no need to restate prior periods.
Why This Matters
By reducing the reliance on macroeconomic forecasting and allowing for practical data usage, ASU 2025-05 makes credit loss accounting more cost-effective and reflective of how nonprofits and private companies manage receivables in real time.
For nonprofits and financial managers, these changes mark a welcome shift toward simplification, especially for those with limited resources and rapidly changing operational environments.
