FASB eyes CECL relief on some receivables for private firms; What it means for financial institutions

Breaking down Credit Losses-Topic 606 Receivables

In December 2024, FASB issued a proposed Accounting Standards Update (ASU) that introduces both a practical expedient and an accounting policy election. At a high level, if an organization has no history or expectation of significant credit losses on these contract receivables, it could elect not to apply CECL to them at all.

This option functions as a “common sense” exemption. Where credit loss risk is minimal, a complex model may not be necessary.

If finalized, the proposed update could be meaningful for entities that consistently collect in full and don’t experience material losses. For those organizations, the ASU offers a path to scale back CECL documentation and modeling efforts without compromising the integrity of financial reporting.

Implications for community financial institutions

The proposed changes are narrowly targeted and not directly applicable to traditional lending portfolios. However, the discussed adjustments still offer the following insight for community banks and credit unions:

1. Validation of simpler approaches
   Community financial institutions often look to broader industry practices when shaping internal policies. If FASB embraces a simplified approach in one area, it may influence examiner expectations elsewhere within CECL application.
2. CECL’s boundaries are becoming clearer
   These discussions help define where CECL applies and where it doesn’t. Greater clarity can reduce uncertainty for institutions still fine-tuning their interpretation of the standard.
3. FASB Is listening
   This project adds to a growing list of examples where standard-setters are acknowledging the compliance burden on smaller institutions. It shows momentum for targeted relief when the risk profile doesn’t justify additional complexity.

What financial institutions can do now

The comment period for this proposed ASU closed in January 2025. Feedback was reviewed in the March Private Company Council (PCC) meeting, with some discussion around whether the scope should be expanded, for example, to include receivables acquired in business combinations.

A final decision on the ASU has not yet been announced, but this remains a conversation worth following by community financial institutions.

Even if this proposal doesn’t apply to them directly, financial institutions might still see it as a positive sign that regulators are open to common-sense relief when the risk doesn’t warrant added complexity. Developments like this could shape future guidance and examiner expectations.

Stay tuned for future Abrigo updates on FASB’s movements and how they may impact CECL strategy and compliance. Meanwhile, check out additional resources on CECL and learn more about how Abrigo’s expert CECL advisors provide allowance support.

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