20 Aug FASB Simplifies Credit Loss Accounting for Nonprofits
In July 2025, the Financial Accounting Standards Board (FASB) issued ASU 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets. This update is especially helpful for nonprofits, as it simplifies how organizations measure allowances for credit losses, an area that has historically been both time-consuming and complex.
Why the Change Was Needed
Under the previous guidance (ASC 326), organizations were required to consider a wide range of data when estimating credit losses. This included not only historical information, but also forward-looking forecasts tied to economic factors like unemployment rates or real estate values. For many nonprofits, this was a burdensome process that often had little impact on short-term receivables.
Additionally, nonprofits couldn’t take into account collections that occurred after the balance sheet date, even if receivables had already been paid by the time financial statements were issued. This created extra work without necessarily improving the accuracy of financial reporting.
What’s Changing
The new ASU introduces two key changes designed to make the process easier:
- New Practical Expedient for All Entities
Organizations can now assume that current conditions as of the balance sheet date will remain the same for the remaining life of current accounts receivable and contract assets. This eliminates the need to build complex forecasts for short-term balances. - Accounting Policy Election for Private Companies & Nonprofits
Private companies and qualifying nonprofits can make a policy election to consider collection activity after the balance sheet date when estimating expected credit losses. In other words, if receivables are collected before the financial statements are issued, that information can now be factored in.
Effective Date
The new guidance is effective for annual reporting periods beginning after December 15, 2025. Early adoption is permitted, and the guidance is applied prospectively (meaning no restatement of prior periods is required).
What This Means for Nonprofits
For nonprofits, this change means less administrative burden and a more practical approach to measuring credit losses on receivables. If your organization has ever struggled with the forecasting requirements or the inability to consider subsequent collections, ASU 2025-05 should provide some welcome relief.
At Blackman & Sloop, we’ll continue to monitor how this update is being applied and help our nonprofit clients navigate the transition. If you have questions about how ASU 2025-05 may impact your financial reporting, our team is here to help!