FASB Proposes Simplified Credit Loss Measurement for Private Companies and Nonprofits

NORWALK, Conn., December ​4, 2024 – The Financial Accounting Standards Board (FASB) has published a project to update accounting standards (ASU) to simplify the measurement of credit losses for accounts receivable and contractual assets of ​private ​companies and certain non-profit entities. This initiative aims to address the challenges faced by these organizations in implementing the current planned ​credit loss model (CLEC) in item 326, ​Financial Instruments – Loss of ​Credit.

Treatment of implementation Challenges

Since the introduction of the CLEC ​model, stakeholders ​have been ​concerned about its complexity ​and burden on private companies and non-profit ​organizations. The proposed Implementation Support Unit offers a ​practical choice of experience and accounting policy to address these challenges, allowing for more direct ​application of the measure ​of credit loss for accounts receivable and contractual assets ​arising ​from income transactions.

Proposed ​practical costs

Practical experience allows eligible ​entities to measure expected credit losses for eligible assets using a ​loss rate method based on historical credit loss experience, adjusted ​to current conditions ​and reasonable forecasts. This approach simplifies the ​estimation process ​by reducing the need for complex modelling and extensive data collection, making it ​more accessible to ​small organizations with limited resources.

Election of accounting policies

In addition ​to practical experience, the proposed USA offers ​an accounting policy choice that allows institutions to exclude the effects of anticipated ​advance payments when measuring expected credit losses for certain financial assets. The purpose of this choice is to further simplify the application of the CECL model by allowing institutions to focus on the ​most relevant factors affecting credit losses without more complex prepayment behaviour.

Public observation period

The AFSCA actively solicits comments from stakeholders on the proposed USA. Interested parties are encouraged to consider the proposal and submit their comments by 17 January 2025. Feedback can ​be provided through the FASD website, ensuring that ​a ​wide range ​of views are considered before the end of the standard.

Implications for private and not-for-profit enterprises

If approved, the ASU project is expected to significantly reduce the burden of financial information ​for private companies ​and some non-profit entities. By providing ​simpler methods for measuring credit ​losses, these ​organizations can gain greater precision in financial ​relationships with lower compliance costs. This development highlights the AFSCA’s commitment to adapt accounting standards to meet the diverse needs of ​all entities, by promoting transparency and comparability in all financial statements.

Stakeholders are encouraged to participate in ​the consultation process to ensure that the final standard effectively ​addresses the practical challenges faced by private companies and non-profit organizations in implementing the CECL model.