Key Points

• The Financial Accounting Standards Board (FASB) has agreed to move forward with aproposed accounting standards updateaimed at simplifying how private companies and most not-for-profit organizations account for credit losses on current receivables and contract assets arising from revenue transactions. This decision is based on a summary of preliminary decisions reached during the U.S. accounting standard-setter's meeting last week, where the board also set a 45-day comment period for the update.
• Under the relief measure, known as a "practical expedient," endorsed by the board, private companies would not need to adjust receivable and contract asset loss information to reflect potential future losses based on economic forecasts. Instead, they could assume that current economic conditions remain unchanged from the balance sheet date through the forecast period, FASB said.
• Several board members also supported studying the possibility of extending this relief to some or all public companies, noting that forecasting future losses can be costly while having little impact on the information provided in financial statements. "I don't think we should slow down the process, but I'm very interested in extending this measure to other companies," FASB member Susan Cosper said during the October 16 meeting. She called for further research on applying the practical expedient to public companies.

In-Depth Analysis

The proposed update stems from a request by the Private Company Council, FASB's primary advisory group on private company matters. According to board meeting materials, the core change involvesTopic 326, Financial Instruments—Credit Lossesand how it should be applied in transactions involving Topic 606, Revenue from Contracts with Customers.

According to Sean Prince, a Washington, D.C.-based partner at Crowe LLP, the new proposal involves a specific and limited class of assets that are more relevant to vendors than to banks or financial services firms. Trade receivables typically reflect amounts that customers have unconditionally agreed to pay vendors for goods or services, whereas payment on contract assets is effectively conditional, with vendors able to invoice only after the service or product provided is 100% complete, Prince said.

As private companies adopt the new standard, rules have required complex analysis and collaboration between company accountants and auditors to determine which macroeconomic factors need to be considered in assessing potential losses, an issue that has become increasingly prominent.

"This proposal would eliminate that burden," Prince said in an interview. "It essentially says, 'Look, for a specific subset of financial assets, you don't need to look forward at macroeconomic trends; you can just carry forward current or historical economic conditions for trade receivables and contract assets.'"

Prince noted that the proposal only offers an alternative to current requirements, which mandate that companies incorporate macroeconomic forecasts into loss calculations. Private companies considering an initial public offering may prefer to maintain the current requirements applicable to public companies. "There are always companies thinking about going public, and they might shy away from these alternatives," Prince said.

Earlier this year, FASB also took another step to adjust Topic 326. The standard, which originated from the 2008financial crisis, was designed to address concerns from banks and other financial companies about delayed recognition of asset value deterioration, pushing for more timely reporting of financial losses, CFO Dive previously reported. Under that new proposal, companies would be required to use a single so-called"gross-up" accounting modelwhen reporting purchased financial assets such as equity, loans, and debt securities acquired through business combinations or direct asset purchases, CFO Dive previously reported.