CECL Simplified: What Nonprofits Need to Know About ASU 2025-05

If your nonprofit finance team has spent hours forecasting economic trends for receivables that usually clear in 30–60 days, there’s good news. FASB’s new ASU 2025-05 update brings meaningful relief by simplifying how organizations estimate credit losses on short-term receivables. This change cuts unnecessary complexity while keeping your financial reporting strong and compliant.

Key Changes in ASU 2025-05

ASU 2025-05 provides nonprofits with a simpler approach to credit loss estimates. The update includes two key provisions: a practical expedient available to all entities and an accounting policy election available only to nonpublic entities, which includes most nonprofits.

Highlights:

• Practical expedient: assume current economic conditions remain constant for current receivables
• Simplifies credit loss estimates by removing the need for macroeconomic forecasts
• Policy election (for nonprofits): consider post-balance-sheet cash collections before financial statement issuance

The practical expedient allows organizations to assume current economic conditions at the balance sheet date will remain constant throughout the remaining life of current accounts receivable and contract assets. This eliminates the need to build macroeconomic forecasts for short-term receivables. The previous requirement to analyze unemployment rates, housing market trends, and other economic indicators added significant time and cost with minimal impact on the accuracy of loss estimates for receivables that typically turn over within weeks or months.

For nonprofits that elect the practical expedient, the accounting policy election offers an additional benefit. Organizations can consider actual cash collections that occur after the balance sheet date but before financial statements are issued when estimating credit losses. If you received payment on a receivable before releasing your financial statements, you can reflect that in your allowance calculation.

What Receivables Are Covered (and What Aren’t)

ASU 2025-05 applies specifically to current accounts receivable and current contract assets from ASC 606 exchange transactions. Think program service fees, tuition charges, membership dues with commensurate value, training revenues, and sponsorships with defined deliverables. These receivables arise from transactions where your organization provides goods or services in exchange for payment.

Covered:

• Current accounts receivable from ASC 606 exchange transactions (e.g., tuition, membership dues, program service fees, sponsorships)

Not covered: 

• Contributions and pledges (ASC 958)
• Longer-term receivables, loans, notes, or program-related investments

The update does not change how you account for contributions or pledge receivables. These fall under ASC 958 and remain outside the scope of this simplification. FASB deliberately excluded contributions because they operate under different recognition principles and risk characteristics than exchange transactions.

Current means receivables expected to be collected within one year, unless your organization has a longer operating cycle. Receivables acquired through business combinations or consolidating variable interest entities also qualify if they originated from ASC 606 transactions.

Why This Update Matters for Nonprofits

Most nonprofits have wrestled with CECL implementation since the 2023 effective date. Building reasonable and supportable forecasts for short-term receivables consumed staff time without meaningfully improving the quality of credit loss estimates. A membership organization with $2 million in current receivables and a 98% historical collection rate still had to document extensive economic analysis, even though the resulting allowance changed minimally year over year.

Why it matters:

• Reduces compliance burden by eliminating unnecessary forecasting
• Allows finance teams to focus on areas where forecasts add real value
• Provides relief for organizations with quick receivable turnover

The new practical expedient addresses this mismatch between effort and outcome. Your finance team can focus analytical resources on longer-term receivables and more complex financial instruments where forecasting adds real value.

The subsequent collections policy election offers particular relief for organizations that close their books relatively quickly. If you regularly issue financial statements within 30-60 days of year-end and collect most receivables during that window, you can reduce or eliminate allowances on balances that cleared before issuance.

How to Implement ASU 2025-05 in Your Nonprofit

Start by reviewing your current receivables to identify which ones fall under ASC 606. Separate exchange transaction receivables from contribution receivables. This step prevents confusion about which balances qualify for the new expedient.

Steps:

• Review receivables to identify which qualify under ASC 606
• Update accounting policies to document elections
• Build controls to capture post-balance-sheet receipts if policy election chosen
• Add disclosures to financial statements
• Communicate with auditors and audit committee

Update your accounting policies to document your election of the practical expedient and, if applicable, the subsequent collections policy. Specify the cut-off date you will use when considering post-balance-sheet cash collections. This date should align with when your financial statements are available to be issued.

Build controls to capture post-balance-sheet cash receipts accurately if you elect the policy option. Your accounts receivable aging should flag which balances were current at year-end but paid before the cut-off date. Train your accounting staff to apply these procedures consistently each period.

Add required disclosures to your financial statement checklist. You must disclose whether you elected the practical expedient and, if using the subsequent collections policy, the specific date through which you considered cash collections.

Brief your audit committee and external auditors about the change. While ASU 2025-05 simplifies the work, auditors still need to understand your methodology and test your application of the new guidance. Clear communication prevents surprises during your audit.

Effective Date and Transition Guidance

Organizations must adopt ASU 2025-05 for fiscal years beginning after December 15, 2025. Early adoption is permitted in both interim and annual periods where financial statements have not yet been issued. The guidance applies prospectively, meaning you apply it to credit loss estimates after the adoption date without restating prior periods.

Timeline:

• Effective for fiscal years beginning after Dec 15, 2025
• Early adoption permitted
• Prospective application — no need to restate prior periods
• No preferability assessment required for policy election

Nonprofits that elect the practical expedient or accounting policy election after the effective date do not need to perform a preferability assessment. You can make these elections without justifying them as superior to alternative methods under Topic 250.

Looking Ahead: What This Means for Nonprofits

ASU 2025-05 represents a practical response to feedback FASB received from the nonprofit sector. The amendment preserves the forward-looking nature of CECL while eliminating unnecessary complexity for short-term receivables. Your organization can maintain rigorous credit risk management without drowning in forecasting documentation that adds little value.

The update does not relax requirements for pledge receivables, loans, notes receivable, or program-related investments. Your accounting team should continue applying the full CECL model to these instruments, which carry different risk profiles and longer time horizons where economic forecasts provide meaningful insight.

Organizations that implemented CECL in 2023 can now streamline their processes for exchange transaction receivables while maintaining the quality of their financial reporting. The key is understanding which receivables qualify for the simplified approach and documenting your policies clearly.Ready to update your CECL methodology and take advantage of these new provisions?

Contact us today to learn how our team can help your nonprofit stay compliant with the latest accounting standards while reducing the administrative burden on your finance staff. Our accounting professionals offer guidance on credit loss estimation, policy documentation, and audit preparation tailored to nonprofit organizations using tools like Sage Intacct to keep your operations running smoothly while you focus on your mission.e value.