ASU 2025-05 and your AR allowance: what changes at the first calendar year-end
ASU 2025-05 lets you skip the forecast and, for private companies, count post-year-end collections in the AR allowance. What to set up before Dec 31.
Part of the accounts receivable and collections guide.
ASU 2025-05 changes your AR allowance only if you elect it. It gives every company a practical expedient for current receivables and contract assets: assume the conditions at the balance sheet date hold for the rest of the asset's life, so no macroeconomic forecast is needed. Private companies that take the expedient can also count collections received after year-end, which sets the allowance on paid invoices to zero. For a calendar-year company, the first annual period in scope is 2026. The work to make either choice defensible has to start before December 31.
Key takeaways
- ASU 2025-05 is effective for all entities for annual periods beginning after December 15, 2025, and interim periods within them. A calendar-year company's first year-end in scope is December 31, 2026.
- The practical expedient removes the forecast, not the judgment. You still adjust historical loss rates for current conditions, such as a customer in financial distress.
- Only entities other than public business entities can elect to consider subsequent collections. The allowance on any year-end balance collected by your chosen date is zero.
- Unpaid balances are re-aged to the date you choose. In our hypothetical example, the allowance falls from $46,500 to $28,100, but it can also rise when the unpaid balances age.
- The evidence is an AR record, not a memo. You need a frozen year-end aging and each later receipt applied to a specific open invoice, with dates.
- Loopfour, the deterministic finance workflow automation platform, builds the workflow that captures that collections evidence as receipts arrive.
What does ASU 2025-05 change?
ASU 2025-05 adds two optional simplifications to how you estimate expected credit losses on current receivables and contract assets under Topic 326. The FASB issued it in July 2025 after private company stakeholders told the Private Company Council that forecasting macroeconomic data for short-term balances was costly and rarely material (ASU 2025-05, Summary).
The two simplifications sit side by side:
| Practical expedient | Accounting policy election | |
|---|---|---|
| Who can elect it | All entities | Entities other than public business entities that also elect the expedient |
| What it does | Assume current conditions at the balance sheet date do not change for the remaining life of the asset | Consider collection activity after the balance sheet date when estimating the allowance |
| Codification | 326-20-30-10C to 30-10D | 326-20-30-10E to 30-10H |
| Disclosure | That you elected it | That you elected it, and in annual periods the date through which you considered collections |
Both apply only to current accounts receivable and current contract assets from ASC 606 transactions. That includes those balances acquired in a business combination. "Current" means one year, or the operating cycle if it is longer than 12 months (326-20-30-10B).
When does ASU 2025-05 take effect?
ASU 2025-05 applies to annual reporting periods beginning after December 15, 2025, and to interim periods within those annual periods. The transition paragraph (326-10-65-6) uses that same wording for all entities. It does not set a later interim date for private companies. Some summaries phrase this differently, so check the ASU text if you see a different date.
Three transition details matter for the first year-end:
- Prospective application. The guidance applies to estimates made after the date of adoption. Prior periods are not restated.
- Early adoption is permitted in interim and annual periods whose statements are not yet issued or available for issuance. If you adopt in an interim period, apply it from the start of that annual period.
- No preferability letter. An entity other than a public business entity that elects after the effective date does not need a preferability assessment under 250-10-45-2.
How does the practical expedient work?
The practical expedient lets you assume that conditions at the balance sheet date stay the same for the remaining life of a current receivable. You skip the reasonable and supportable forecast of unemployment, rates or industry data. You still start from historical loss rates by risk pool.
The expedient does not remove adjustments for current conditions. Paragraph 326-20-30-10D gives three examples where you still adjust historical loss information:
- An individual customer in financial distress, even if it has not defaulted yet.
- A credit policy loosened before the balance sheet date to sell to lower-quality customers.
- A severe recession that began before the balance sheet date.
In practice, the expedient replaces a forecast with a documented check of today's conditions. Your memo says what you looked at, what changed and why the historical rates still hold. In the ASU's own example, a customer that filed for bankruptcy before year-end is pulled out of the pool and reserved individually at 100%.
How does the subsequent-collections election work?
The subsequent-collections election lets a private company count cash received after year-end when it sets the year-end allowance. Any balance outstanding at the balance sheet date and collected before your cutoff gets no allowance (326-20-30-10E).
The ASU sets the order of the calculation (326-20-30-10F):
- Start with collections. Remove every year-end balance collected by the cutoff date.
- Re-age what is left. Place each unpaid balance in the delinquency bucket it sits in on the cutoff date, not at year-end.
- Apply the expedient. Use your historical loss rates for those buckets. You may update the rates for post-year-end collection activity, but you are not required to (326-20-30-10G).
The cutoff date is your choice, within limits. It can be the date the financial statements are available to be issued, or any earlier date after the balance sheet date. You disclose the date in annual statements. Changing it in a later year is not a change in accounting principle (326-20-30-10H).
Worked example: one private SaaS company at December 31, 2026
This example is hypothetical, and every figure is illustrative. A private SaaS company bills on net 30 terms. It has $2,000,000 of current receivables at December 31, 2026, no contract assets, and no customers showing distress. Its financial statements will be available to be issued on March 31, 2027. It chooses February 26, 2027 as its collections cutoff.
Step 1: The allowance with the practical expedient only
With the expedient alone, the allowance is the year-end aging multiplied by historical loss rates, with no forecast overlay.
| Aging at Dec 31, 2026 | Balance | Historical loss rate | Allowance |
|---|---|---|---|
| Current | $1,600,000 | 0.5% | $8,000 |
| 1 to 30 days past due | $250,000 | 3% | $7,500 |
| 31 to 60 days past due | $90,000 | 10% | $9,000 |
| 61 to 90 days past due | $40,000 | 25% | $10,000 |
| Over 90 days past due | $20,000 | 60% | $12,000 |
| Total | $2,000,000 | $46,500 |
Step 2: Remove what was collected by the cutoff
By February 26, 2027, the company collected $1,910,000 of the $2,000,000 open at year-end. Only receipts applied to invoices that were open on December 31 count. New 2027 invoices are out of scope.
| Aging at Dec 31, 2026 | Year-end balance | Collected by Feb 26 | Still unpaid |
|---|---|---|---|
| Current | $1,600,000 | $1,560,000 | $40,000 |
| 1 to 30 days | $250,000 | $238,000 | $12,000 |
| 31 to 60 days | $90,000 | $78,000 | $12,000 |
| 61 to 90 days | $40,000 | $30,000 | $10,000 |
| Over 90 days | $20,000 | $4,000 | $16,000 |
| Total | $2,000,000 | $1,910,000 | $90,000 |
Step 3: Re-age the unpaid balances to the cutoff and apply the rates
The $90,000 still unpaid is placed in the bucket each invoice sits in on February 26, 2027. An invoice that was current at year-end and due January 20 is now 37 days past due. Every unpaid balance moves into an older bucket.
| Aging at Feb 26, 2027 | Unpaid balance | Historical loss rate | Allowance |
|---|---|---|---|
| Current | $0 | 0.5% | $0 |
| 1 to 30 days past due | $10,000 | 3% | $300 |
| 31 to 60 days past due | $32,000 | 10% | $3,200 |
| 61 to 90 days past due | $12,000 | 25% | $3,000 |
| Over 90 days past due | $36,000 | 60% | $21,600 |
| Total | $90,000 | $28,100 |
The year-end allowance drops from $46,500 to $28,100 in this scenario, a reduction of $18,400. The direction is not guaranteed. If less had been collected, the re-aged balances would carry higher rates, and the allowance could exceed the expedient-only figure. Run both calculations before you write the policy memo.
Want to see how your year-end aging and January receipts line up today? Book a workflow review.
What should the AR team set up before December 31?
The AR team should freeze the year-end aging, tie every January receipt to a specific open invoice, and get the policy decisions written down before the year closes. The accounting conclusion belongs to your controller and auditor. The records that support it belong to AR.
| Before Dec 31 | Why it matters | Evidence to keep |
|---|---|---|
| Decide whether to elect the expedient, the election or neither | The election applies consistently to all eligible current receivables and contract assets | Signed policy memo |
| Pick the collections cutoff date | It is disclosed and drives the whole calculation | Memo and close calendar |
| Confirm aging is by invoice and due date | Re-aging at the cutoff needs invoice-level due dates | Aging report definition |
| List customers in distress | They still need an individual assessment | Credit review notes |
| Include current contract assets | They are in scope alongside receivables | Contract asset listing by customer |
| From Jan 1 to the cutoff | Why it matters | Evidence to keep |
|---|---|---|
| Freeze the December 31 aging | Every calculation starts from it | Dated, locked snapshot |
| Apply each receipt to the specific invoices it pays | Only year-end balances count, by invoice | Cash application record with dates |
| Clear unapplied cash before the cutoff | Unapplied cash cannot prove a year-end invoice was paid | Unapplied cash report at the cutoff |
| Re-age unpaid balances on the cutoff date | The ASU uses delinquency at the cutoff | Cutoff aging report |
| Draft the disclosure | The date through which collections were considered is required annually | Disclosure draft |
Unapplied and misapplied cash is where this breaks. A payment applied to the wrong invoice, or left on account, makes a collected year-end balance look unpaid. For how aging buckets are built and read, see our guide to the AR aging report. If your days sales outstanding (DSO) has been rising, expect less to clear by the cutoff; our DSO explainer covers the calculation.
How do contract assets fit in?
Current contract assets are in scope, so they need the same treatment as receivables. A contract asset is revenue recognized before your right to payment is unconditional. Many SaaS companies carry them on ramp deals and milestone billing. If you are not sure which balances are contract assets and which are unbilled receivables, our article on unbilled AR and how it differs from a contract asset sets out the line.
How do you choose: expedient, election or neither?
Choose the expedient if your forecast step takes real effort and rarely moves the number. Choose the election as well if you are a private company with fast collections and a gap of several weeks between year-end and issuance. Stay on your current method if it already runs cleanly and your auditor is comfortable with it.
| Your situation | Likely fit |
|---|---|
| Public business entity | Practical expedient only. The election is not available. |
| Private company, most AR collected within 60 days | Expedient plus election. More balances clear before the cutoff. |
| Private company, slow or lumpy collections | Run both calculations. The election may raise the allowance. |
| Material long-term receivables | Those stay under the existing guidance either way. |
| Credit policy recently loosened | Either path still needs an adjustment for that change. |
Whatever you choose, apply it to every eligible balance. Paragraph 326-20-30-10B requires consistent application across all current receivables and contract assets in scope. Your credit limits and credit hold policy is part of the same picture: a loosened policy is a current condition you must reflect.
Where Loopfour fits
Loopfour builds the AR workflow that produces the collections evidence while the receipts arrive, not in March. The accounting election stays with your controller. The workflow handles the record-keeping that the election depends on:
Dec 31 aging frozen → each receipt matched to open year-end invoices on fixed rules → exceptions routed to AR in Slack → cutoff aging generated → controller approves in Slack → schedule and evidence stored for the auditor
Matching runs on predefined rules, so the same receipts produce the same result every time. Where a remittance arrives as a PDF or email, AI is used only to extract the invoice numbers, and anything below the confidence threshold goes to a person. Loopfour is SOC 2 Type II certified and SOC 1 Type I certified. We build it, run it and maintain it on the stack you already use, such as NetSuite, QuickBooks, Sage Intacct or Xero with Stripe. More on the AR side is in our accounts receivable hub.
Frequently asked questions
When is ASU 2025-05 effective?
ASU 2025-05 is effective for all entities for annual reporting periods beginning after December 15, 2025, and interim periods within those years. Early adoption is permitted for periods whose financial statements have not been issued or made available for issuance. For a calendar-year company, the first annual period is 2026, so December 31, 2026 is the first year-end in scope.
Can a public company use the ASU 2025-05 practical expedient?
Yes. The practical expedient to assume current conditions do not change for the remaining life of the asset is available to all entities, including public business entities. Only the election to consider collections after the balance sheet date is limited to entities other than public business entities.
Does ASU 2025-05 apply to long-term receivables?
No. ASU 2025-05 covers current accounts receivable and current contract assets that arise from transactions under ASC 606. Current means within one year, or within the operating cycle if that cycle is longer than 12 months. Long-term receivables and other financial assets stay under the existing Topic 326 guidance.
Is ASU 2025-05 mandatory?
No. ASU 2025-05 is elective. A company that does nothing keeps estimating its allowance under existing Topic 326 guidance. A company that elects the expedient, or the expedient plus the subsequent-collections election, must apply it consistently to all eligible current receivables and contract assets and disclose the election.
What do we disclose if we elect to consider subsequent collections?
You disclose that you elected both the practical expedient and the accounting policy election. In annual financial statements, you also disclose the date through which you considered collection activity. Changing that date later is not a change in accounting principle under Topic 250.
Can the allowance go up after we consider subsequent collections?
Yes. Balances still unpaid at the date you choose are evaluated at their delinquency status on that date, so they can move into older aging buckets with higher loss rates. Whether the allowance falls depends on how much of the year-end balance was collected.
Conclusion
ASU 2025-05 gives every company a simpler AR allowance and gives private companies a way to let January's cash inform December's estimate. The first calendar year-end in scope is December 31, 2026, and the evidence has to exist before the cutoff date you choose. Freeze the aging, apply every receipt to a specific invoice, and write the policy down now. Then the ASU 2025-05 calculation is arithmetic, not a reconstruction.
Tell us the one workflow your team dreads. We will show it running. Book a demo.