ASU 2025-05: Simplified Credit Loss Estimates for Receivables and Contract Assets

Since the introduction of the current expected credit loss (CECL) model under ASC 326, companies have had to estimate expected credit losses not only for loans, but also for trade receivables and contract assets arising from revenue contracts. For short-term balances, the requirement to develop reasonable and supportable forecasts of future economic conditions has often been seen as disproportionate.

With ASU 2025-05, issued on July 30, 2025, the Financial Accounting Standards Board (FASB) has simplified this.

What ASU 2025-05 Changes

Practical expedient for all entities

When estimating expected credit losses for current accounts receivable and current contract assets arising from transactions under ASC 606, entities may assume that current conditions as of the balance sheet date do not change over the remaining life of the asset.

In other words: for these short-term balances, companies no longer need to develop forecasts of future economic conditions. Current conditions can be used as the basis.

Additional policy election for non-public business entities

Entities other than public business entities that use the practical expedient may also elect to consider cash collections received after the balance sheet date when estimating expected credit losses.

Scope

The expedient applies to:

• current accounts receivable, and

• current contract assets,

that arise from transactions accounted for under ASC 606.

It does not apply to non-current balances or to receivables outside the scope of ASC 606.

Disclosure Requirements

Entities must disclose:

• whether they have elected the practical expedient,

• whether they have applied the additional policy election (if applicable), and

• if the policy election is applied, the date through which subsequent cash collections were evaluated.

Effective Date and Transition

• Effective for annual reporting periods beginning after December 15, 2025, including interim periods within those years. For calendar-year companies, this means fiscal year 2026.

• Early adoption is permitted.

• Transition is prospective.

Why This Matters for Revenue Accounting

Contract assets arise when revenue has been recognized but the right to consideration is not yet unconditional – a frequent situation in multi-element arrangements, milestone billing, and bundled equipment and service contracts. Under SAP Revenue Accounting and Reporting, contract asset balances are calculated at contract level and posted at period end.

These balances are subject to credit loss requirements. ASU 2025-05 makes the related estimate easier, but it does not remove the need for:

• reliable contract asset balances by customer and contract,

• a clear split between current and non-current balances,

• documentation of the chosen expedient and policy elections.

What Companies Should Do

• Decide whether to apply the practical expedient and, if eligible, the policy election.

• Review how current and non-current receivables and contract assets are identified in the system.

• Update the accounting policy and disclosure templates.

• Align the credit loss process with the period-end close of revenue accounting.

Related Articles

• ASU 2025-04: Share-Based Consideration Payable to Customers (effective 2027)

• High-Volume Receivables: Payment Processing and Clearing in FI-CA

• Billing vs. Revenue: Why Invoices Don't Equal Revenue

The Bottom Line

ASU 2025-05 is a welcome simplification for companies reporting under US GAAP. It reduces the effort for estimating credit losses on short-term receivables and contract assets – but it still relies on accurate, well-structured contract balances from revenue accounting.

Questions about contract assets and receivables in SAP? Talk to our experts.