Simplifying CECL for certain receivables
FASB’s Credit Losses–Topic 606 Receivables project is focused on reducing the burden of estimating expected credit losses for a narrow set of receivables. Specifically, it addresses accounts receivable and contract assets stemming from revenue transactions – those falling under ASC Topic 606 (Revenue from Contracts with Customers). These are not traditional loan products, but rather, receivables generated through the delivery of goods or services tied to performance obligations under a contract.
Examples include equipment rental payments, service contracts, or installment-based product deliveries where the revenue is recognized over time. These receivables are typically short-term, non-interest-bearing, and based on billing customers after goods or services have been delivered, making them different in nature from loans evaluated under standard CECL practices.
Applying the full current expected credit loss (CECL) model to these types of receivables has proven time-consuming and expensive for many private companies and not-for-profits. This FASB proposal aims to ease that burden, particularly for entities like equipment financing firms or accounts receivable lenders, which rely heavily on contract-based receivables.