On December 3, 2024, the Financial Accounting Standards Board (FASB) proposed updated guidance aimed at reducing the complexity and cost of measuring credit losses for private companies and certain not-for-profit entities. If approved, the updated guidance would offer a practical expedient and an accounting policy election, making financial reporting simpler and more transparent for smaller entities.
Need for change
Proposed Accounting Standards Update (ASU) No. 2024-ED900, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses for Accounts Receivable and Contract Assets for Private Companies and Certain Not-for-Profit Entities, addresses challenges with the current expected credit loss (CECL) model under existing guidance. The current rules are seen as overly complex and burdensome for smaller organizations. (See “Overview of existing credit loss reporting rules” below.)
Stakeholders noted that the CECL model requires significant effort to analyze and document macroeconomic data, which often has minimal impact on short-term accounts receivable. By simplifying credit loss estimation, the FASB’s proposal aims to strike a balance between reducing the compliance burden and maintaining transparency for financial statement users.
Key provisions
Under the proposed updates, private companies and most not-for-profit entities could elect to assume that current economic conditions as of the balance sheet date persist throughout the forecast period. This approach eliminates the need for complex macroeconomic forecasts.
Furthermore, entities opting for this practical expedient would also be allowed to consider collections after the balance sheet date when estimating expected credit losses. This enables businesses to use real-time data, reducing the documentation burden.
It’s important to note that the proposal specifically applies to current accounts receivable and contract assets arising from revenue transactions. This targeted scope would simplify financial reporting without sacrificing financial statement accuracy. If approved, the updated guidance would apply to private companies and not-for-profit entities, excluding those that have issued, or are conduit bond obligors for, securities traded, listed or quoted on an exchange or an over-the-counter market.
Good news for affected entities
The amendment strives to reduce the time and resources required to estimate credit losses for short-term receivables for private companies and most nonprofits. Key benefits would include:
Cost reduction. Smaller organizations will no longer need to integrate complex macroeconomic analyses into their credit loss calculations.
Improved clarity. By focusing on real-time collections, financial statements will become easier to prepare and understand.
Enhanced transparency. Simplified reporting will provide more useful decision-making information for investors and lenders.
To stay ahead of these changes, private businesses and nonprofits may want to evaluate their existing methods for estimating credit losses and identify areas where the proposal could reduce complexity.
For more information
Understanding and implementing new accounting standards can be challenging, but you don’t have to do it alone. The FASB is currently reviewing public comments it received on the updated credit loss guidance through January 17, 2025. In the meantime, discuss the proposal’s impact with your financial team and external auditors. Your accountant can help you stay atop the latest developments and implement any necessary adjustments to your organization’s financial reporting processes.
Sidebar: Overview of existing credit loss reporting guidance
Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, requires an entity to estimate an allowance for credit losses (ACL) on financial assets based on current expected credit losses (CECL) at each reporting date. Under prior accounting rules, a credit loss wasn’t recognized until it was probable the loss had been incurred, regardless of whether an expectation of credit loss existed beforehand.
Under CECL methodology, the initial ACL is a measurement of total expected credit losses over the asset’s contractual life. The estimate is based on historical information, current conditions, and reasonable and supportable forecasts. The ACL is remeasured at each reporting period and is presented as a contra-asset account. The net amount reported on the balance sheet equals the amount expected to be collected.
The updated guidance was designed to be scalable for entities of all sizes. While banks and other financial institutions tend to hold more financial assets within the scope of CECL, nonfinancial entities with financial instruments, such as trade accounts receivables and contract assets, also must apply the CECL model under the current rules.
Subsequently, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments — Credit Losses. This update removed potential implementation hurdles before companies adopted ASU 2016-13.
Calendar-year-end SEC filers (typically larger public companies) were required to implement the updated guidance on credit losses in 2021. Calendar-year private entities and smaller reporting companies had until 2023 to implement the changes.
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