Recently, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-05, which addresses the measurement of credit losses for short-term receivables and contract assets. This update is important for nonprofits because it simplifies how organizations apply the current expected credit loss (CECL) model. Here’s a brief summary of the ASU.
Scaling back complexity
ASU 2025-05 builds on ASU 2016-13 (Topic 326), which introduced the CECL model. Although the original version of that model improved reporting accuracy by requiring nonprofits to estimate credit losses over the life of an asset, it also added complexity for organizations responsible for making those calculations. For instance, under ASC 326, nonprofits were required to include historical loss experience, current conditions and reasonable forecasts of future economic conditions in their credit loss estimations.
ASU 2025-05 allows nonprofits to adopt a “practical expedient” when measuring credit losses. Basically, this election permits you to exclude collections received after the balance sheet date in your estimation of expected credit losses. You’ll still need to account for historical loss experience and current conditions, but you won’t have to project economic scenarios.
If you use the practical expedient, you’re also allowed to make an accounting policy election. Actual cash collections received after the end of the year (or after the balance sheet date, but before financial statements are available) can be excluded. Your nonprofit doesn’t need to record an allowance for receivables that are outstanding at the end of the year if they’re collected shortly thereafter.
Key features
Here’s an example of how ASU 2025-05 updates the CECL model: A community charity provides services on credit to low-income individuals. In the past, it might have had to calculate the potential credit loss for each invoice that goes unpaid. But under ASU 2025-05, the nonprofit can instead:
- Group similar accounts receivable based on shared characteristics such as payment history, and
- Apply a simpler, pooled approach to estimating losses.
The organization will need to disclose that it applied the expedient and accounting policy election, as well as the cutoff date for evaluating subsequent cash flows.
Notable shift
ASU 2025-05 marks a notable shift in how nonprofits account for credit losses. Be sure to update your written accounting policies to help ensure the provisions of the ASU are consistently applied. This ASU is effective for annual reporting periods beginning after December 15, 2025. Contact us with any questions or for help measuring your nonprofit’s credit losses.