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. The update is designed to simplify how organizations apply the current expected credit loss (CECL) model to short-term receivables.
For not-for-profit (NFP) organizations, this change can significantly reduce the cost and complexity of estimating credit losses on receivables arising from revenue transactions.
Background: Why This Matters for NFPs
Under ASC 326 (CECL), organizations must estimate expected credit losses by considering:
- Historical loss experience
- Current conditions
- Reasonable and supportable forecasts for future economic conditions
For many NFPs, especially those with straightforward receivable portfolios (e.g., program service fees, tuition, membership dues, government reimbursements), preparing forward-looking economic forecasts has been burdensome relative to the risk involved.
Stakeholder feedback indicated that the forecasting requirement often added complexity without meaningfully improving the quality of reported information for short-term receivables.
ASU 2025-05 addresses that concern.
What ASU 2025-05 Changes
Practical Expedient — Available to All Entities (Including NFPs)
NFPs may elect a practical expedient when measuring expected credit losses on:
- Current accounts receivable
- Current contract assets
- Arising from revenue transactions under ASC 606
Under this expedient:
The organization may assume that economic conditions at the balance sheet date remain unchanged over the remaining life of the receivable or contract asset.
This eliminates the need to develop and document future economic forecasts for short-term receivables.
For many NFPs, this means:
- No macroeconomic modeling
- No forward-looking economic adjustments beyond current conditions
- Simpler CECL documentation
The organization still considers historical loss experience and current conditions — but without projecting economic scenarios.
Additional Relief for Non-Public Entities (Applies to NFPs)
Because not-for-profit organizations are not public business entities, they may also elect an accounting policy option (if they use the practical expedient) to:
- Consider actual cash collections received after year-end but before the financial statements are available to be issued.
If a receivable outstanding at year-end is collected shortly after, the organization does not need to record an allowance for that portion.
For many NFPs with strong post-year-end collections, this can significantly reduce the allowance for credit losses and better reflect actual outcomes.
Scope Considerations for NFPs
The guidance applies only to:
- Current receivables and contract assets
- Arising from ASC 606 revenue transactions
It does not apply to:
- Contributions receivable accounted for under ASC 958-605
- Long-term receivables
- Loans or other financial assets outside revenue transactions
NFPs must continue applying existing CECL guidance to those other financial assets.
Effective Date and Transition
ASU 2025-05 is effective for annual reporting periods beginning after December 15, 2025.
Early adoption is permitted.
The standard is applied prospectively, meaning:
- No restatement of prior years
- The change affects estimates going forward
Practical Impact on Not-for-Profit Organizations
For many NFPs, the update will:
- Reduce time spent documenting economic forecasts
- Simplify audit discussions around CECL methodology
- Potentially reduce recorded allowances when strong subsequent collections exist
- Lower compliance costs
The biggest impact will likely be seen by:
- Healthcare NFPs with patient receivables
- Educational institutions with tuition receivables
- Social service organizations billing government agencies
- Membership-based nonprofits
Disclosure Requirements
If an NFP elects:
- The practical expedient → it must disclose that election.
- The subsequent collections policy must disclose the date through which collections were considered.
Documentation of the accounting policy decision will be important for consistency year over year.
Conclusion
ASU 2025-05 represents targeted relief for not-for-profit organizations applying CECL to short-term receivables. By eliminating the requirement to forecast future economic conditions and permitting consideration of post-year-end collections, the FASB has made credit loss accounting more practical and cost-effective for NFP preparers.
For many NFPs, this will shift CECL from a complex modeling exercise to a more straightforward historical-and-current-conditions assessment — better aligned with the risk profile of typical nonprofit receivables.
Have questions about how ASU 2025-05 could affect your organization? Contact the Calibre team to discuss your specific facts and circumstances.
Article Prepared By:
Lila Leno, CPA | Partner
