Nonprofits often operate with lean finance teams, making efficiency in financial reporting a top priority. The Financial Accounting Standards Board (FASB) has released Accounting Standards Update (ASU) 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets.
The update offers nonprofits two options to reduce the complexity of estimating expected credit losses for certain receivables—while still meeting compliance requirements and providing reliable financial information to boards, funders, and auditors.
Why This Matters for Nonprofits
Certain nonprofits have short-term receivables related to program service revenue including contract revenue, program fees, sponsorship payments or other non-contribution revenues that are typically collected quickly. Prior to the new ASU, rules for preparing credit loss estimates for these receivables may have resulted in:
- Increased workload – Finance staff must prepare forward-looking forecasts even when the risk of non-collection is low.
- Overstated allowances – Expected credit losses must be recorded even for receivables that are collected before the financial statements are issued.
ASU 2025-05 gives nonprofits two new tools to streamline this process without compromising financial transparency.
Two Key Provisions
- Practical Expedient (Available to All Nonprofits)
Nonprofits can elect to assume that current economic and operating conditions at the balance sheet date remain unchanged over the life of the receivable. This means no more extensive forecasting for short-term assets—current and future are treated as the same. - Accounting Policy Election (Available to Nonpublic Entities)
Nonprofits that adopt the practical expedient can also choose to factor in post–balance sheet date collection activity. This allows any receivables collected after year-end but before the financial statements are available for issuance to be excluded from the calculation of the current expected credit losses (CECL).
Benefits for the Nonprofit Sector
These changes can help nonprofits:
- Save time and reduce audit prep stress by simplifying calculations for low-risk receivables.
- Focus resources on mission-critical work rather than unnecessary forecasting.
- Provide timely, accurate financial information to boards, members, customers, and donors.
Next Steps for Nonprofit Leaders
The amendments are optional and available for immediate adoption. Finance leaders should:
- Review and potentially update current policies for estimating credit losses.
- Consult with auditors or accounting advisors to determine if adopting the expedient or policy election makes sense for their organization.
- Update documentation to ensure consistency in application.
For more details, visit www.fasb.org or reach out to Han Group to discuss how this change could work for your nonprofit’s unique funding and receivables mix.
Effective Dates:
- ASU 2025-05 is effective for fiscal years beginning after December 15, 2025
- Early adoption is permitted for financial statements not yet issued/ available
- Transition is prospective only
