FASB issues standard that improves measurement of credit losses for accounts receivable and contract assets

FASB has issued an Accounting Standards Update (ASU) that improves guidance on the measurement of credit losses for accounts receivable and contract assets. 

The new guidance, which is optional, addresses challenges faced by stakeholders when applying Topic 326, Financial Instruments—Credit Losses, to current accounts receivable and current contract assets arising from transactions accounted for under Topic 606, Revenue from Contracts with Customers. The Private Company Council (PCC) initiated standard-setting activity in response to feedback from private company stakeholders. 

These challenges included the cost and complexity of developing a reasonable and supportable forecast when estimating expected credit losses and the significant effort to estimate and record expected credit losses for current accounts receivable and current contract assets that were collected before the date that the financial statements were available to be issued. 

To address this feedback, the amendments in the ASU provide (1) all entities with a practical expedient to assume that current conditions as of the balance sheet date do not change for the remaining life of the assets and (2) entities other than public business entities with an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606. 

The amendments in the ASU are expected to reduce the time and effort necessary to estimate credit losses for current accounts receivable and current contract assets, while continuing to provide decision-useful information to investors and other financial statement users.