Understanding CECL and the Private Company Election under ASU 2025-05

Understanding CECL and the Private Company Election under ASU 2025-05

January 29, 2026

Article Summary

• CECL under ASC 326 requires entities to recognize expected credit losses over the life of financial assets, creating added complexity and cost for many private companies with short-term, low-risk receivables.
• ASU 2025-05 provides targeted relief by introducing a “current conditions” practical expedient and a private-company accounting policy election that allows consideration of subsequent collections.
• The new guidance reduces implementation burden while preserving decision-useful information, and is effective for annual periods beginning after December 15, 2025, with early adoption permitted.

The Current Expected Credit Losses (CECL) model, introduced through Accounting Standards Update (ASU) 2016‑13 and codified in ASC Topic 326, represents one of the most significant changes in credit‑loss accounting in recent years. CECL fundamentally shifts how entities in various industries, including construction, real estate, manufacturing, technology, life sciences, non-profits, and auto-dealers, estimate and report potential losses on financial assets, particularly accounts receivable.

Under CECL, entities must estimate expected credit losses over the life of financial assets—including loans, trade receivables, and held‑to‑maturity debt securities—and recognize those losses when the assets are originated or acquired. This marks a departure from the previous incurred loss model, which allowed entities to record losses only when a loss event became probable.

The objective of CECL is to provide timelier and forward‑looking information, enabling users of financial statements to better assess credit risk. Because CECL applies to all entities holding financial assets measured at amortized cost, its impact extends well beyond large public institutions and includes private companies with less complex portfolios.

In response to concerns from private companies regarding CECL’s cost, complexity, and perceived limited benefit, the Financial Accounting Standards Board (FASB) issued ASU 2025‑05, offering new practical expedients to ease the burden for eligible private companies.

Private Company Concerns and Arguments Against CECL

Although CECL was designed to enhance transparency and comparability in credit‑loss reporting, private companies expressed several significant concerns:

• Complexity and Cost: CECL requires sophisticated modeling and forecasting capabilities to estimate expected credit losses over the life of each asset. Many private companies, especially smaller ones, lack the resources, data, and expertise to develop such models, especially forecasting future conditions of short-term receivables.

• Relevance: Stakeholders such as owners, local banks, and private lenders often do not require the same level of predictive loss information as users of public‑company financial statements. As a result, the enhanced CECL requirements were viewed as providing limited incremental benefit.

• Disproportionate Impact: Private companies frequently hold short‑duration receivables with historically low loss rates. Many also observed that CECL forced them to estimate expected losses on current accounts receivable and contract assets that were collected before the financial statements were even issued—further increasing perceived inefficiency.

These concerns led to widespread advocacy from private company constituents, industry groups, and the Private Company Council (PCC) for relief from the CECL requirements, ultimately leading to targeted relief under ASU 2025-05.

The New Practical Expedient: ASU 2025-05

ASU 2025‑05, Financial Instruments—Credit Losses (Topic 326): Practical Expedient for Private Companies, introduces two key forms of relief:

• “Current Conditions” Practical Expedient – Available for all entities

All entities may elect a practical expedient that assumes current conditions at the balance sheet date remain unchanged for the remaining life of the asset. This eliminates the need for complex longer term economic forecasts.

However, entities must still adjust historical loss information for any known conditions that differ from historical experience. Examples include:

• • A specific customer experiencing financial distress that affects expected collections.

  • Expansion of credit to lower quality customers that could influence future loss rates.

  • A significant change in economic conditions as of the balance sheet date

• Accounting policy election – Only available to non-public entities

Non‑public business entities electing the above practical expedient may also adopt an accounting policy to consider subsequent collections when estimating expected credit losses for accounts receivable and contract assets arising from revenue contracts (Topic 606).

If an entity elects to implement this policy, they should estimate their expected credit losses on accounts receivable and current contract asset balances by doing the following:

1. 1. Consider subsequent collections first. No credit loss allowance is needed for asset balances that have been collected before the financial statements are available to be issued.

   2. Apply the “Current Conditions” practical expedient to any remaining uncollected amounts.

This approach is intended to significantly reduce the cost and complexity of CECL implementation for private companies while still providing decision‑useful information to financial‑statement users.

Effective Date

ASU 2025-05 is effective for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods, with early adoption permitted. Early adoption is permitted. Entities should apply the new guidance prospectively.

For questions about how this new ASU impacts your entity balances, please consult a Larson accounting advisor for assistance.  Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.

Frequently Asked Questions About CECL and the Private Company Election Under ASU 2025-05

What is CECL and how does it affect private companies?  CECL, established under ASC Topic 326, requires entities to estimate and recognize expected credit losses over the life of financial assets when those assets are originated or acquired. For private companies, this represents a shift from the incurred loss model and can increase complexity, particularly for short-term receivables with historically low loss rates.

What relief does ASU 2025-05 provide for private companies under CECL?  ASU 2025-05 introduces practical expedients that reduce the cost and complexity of CECL implementation. These include a “current conditions” practical expedient that eliminates the need for long-term economic forecasts and, for non-public entities, an accounting policy election that allows consideration of subsequent collections when estimating expected credit losses.

When is ASU 2025-05 effective, and can it be adopted early?  ASU 2025-05 is effective for annual reporting periods beginning after December 15, 2025, including interim periods within those annual periods. Early adoption is permitted, and the guidance should be applied prospectively.