Written By: Danielle MacKenzie, CPA, MSA
Key Points
- Several additional Accounting Standards Updates will affect nonpublic entities in 2026 and beyond
- Upcoming changes include updates related to credit losses, internal use software, and tax disclosures
- Early planning and evaluation can help reduce implementation challenges
Preparing for What Is Next in Financial Reporting
With 2025 reporting underway, nonpublic entities should begin preparing for additional Accounting Standards Updates that will take effect in 2026 and beyond. While broad accounting overhauls have slowed, targeted amendments continue to refine recognition, measurement, and disclosure under U.S. GAAP.
These updates address share-based considerations payable to customers, credit losses, refinements to the derivative scope, and purchased loans. Though narrower than prior major standards, they may affect earnings patterns, transaction price estimates, capitalization timing, and financial statement presentation.
Early evaluation allows management to determine scope applicability, assess policy elections, and plan implementation before the year of adoption.
ASU 2025-04: Clarifications to Share-Based Consideration Payable to a Customer
Summary
ASU 2025-04 clarifies the accounting for share-based consideration payable to a customer under Topics 718 and 606 to provide more consistent outcomes. The ASU revises the definition of a performance condition to include purchase-based metrics and eliminates the policy election that permits forfeitures to be recognized as they occur (unless granted in exchange for a distinct good or service). The update also clarifies that the constraint guidance in Topic 606 does not apply to share-based consideration payable to a customer.
Effective Date for Nonpublic Entities
Fiscal years beginning after December 15, 2026. Early adoption is permitted.
What Changed
The revised definition of performance conditions broadens the definition to explicitly include conditions based on volume or monetary amount of purchases, which may result in fewer awards being classified as having service conditions. The ASU eliminates the policy election to recognize forfeitures as incurred for share-based consideration granted to customers with service conditions and requires nonpublic entities to estimate forfeitures as a reduction of revenue. The ASU also clarifies that Topic 718 applies when assessing vesting probability rather than the variable consideration constraint guidance in Topic 606. The share-based consideration is measured and classified under Topic 718 and then recognized as a reduction of revenue in the same manner as if the payment were made in cash.
Financial Statement Presentation Impact
- Income statement: Changes in forfeiture estimates and vesting assessments may affect revenue.
- Footnotes: Additional disclosure may be required to explain significant judgments, as it will still require judgment to determine whether share-based consideration to a customer has a performance or a service condition.
Transition
The ASU may be applied using either a modified retrospective or full retrospective approach. Nonpublic entities must use the actual outcomes of a performance or service condition, if known as of the beginning of the annual period of adoption, for all prior-period estimates when electing full retrospective adoption.
ASU 2025-05: Measurement of Credit Losses for Accounts Receivable and Contract Assets
Summary
ASU 2025-05 simplifies the application of the current expected credit losses model for accounts receivable and contract assets arising from revenue transactions. The ASU provides a practical expedient and accounting policy election related to the estimation of expected credit losses. The practical expedient permits a nonpublic entity to assume that current conditions as of the balance sheet date do not change the asset's remaining life when developing reasonable and supportable forecasts used to estimate expected credit losses. A nonpublic entity that elects the practical expedient is permitted to make an accounting policy election to consider collection activity occurring after the balance sheet date when estimating expected credit losses.
Effective Date for Nonpublic Entities
Fiscal years beginning after December 15, 2025.
What Changed
The amendments reduce the need for detailed forward-looking forecasts for current accounts receivable and contract assets. Nonpublic entities electing the policy option may consider collections received after the balance sheet date but before issuance of the financial statements when estimating the allowance for credit losses.
Financial Statement Presentation Impact
- Balance sheet: The allowance for credit losses will allow a nonpublic entity to reflect its actual collection experience in its estimate of the allowance for credit losses at year-end.
- Income statement: Credit loss expense may fluctuate depending on the estimation approach
- Footnotes: Disclosure is required if a nonpublic entity has applied the practical expedient and the accounting policy election. The date through which subsequent cash collections were evaluated must also be disclosed.
Transition
The amendments are applied prospectively. Nonpublic entities should document policy elections and consistently apply the selected approach.
ASU 2025-07: Derivatives Scope Refinements and Scope Clarification for Share-Based Noncash Consideration from a Customer in a Revenue Contract
Summary
ASU 2025-07 refines derivative scope guidance under Topic 815 and clarifies accounting for share-based noncash consideration received from a customer under Topic 606. Particular non-exchange-traded contracts based on operations and activities specific to one of the parties to the contract may now qualify for a scope exception from derivative accounting. Contracts based on certain underlyings would not qualify for the scope exception. The amendments also clarify how share-based noncash consideration should be measured in a revenue contract.
Effective Date for Nonpublic Entities
Fiscal years beginning after December 15, 2026. Early adoption is permitted.
What Changed
The derivative scope refinements expand the existing exception, potentially excluding additional contracts and embedded features from derivative accounting. For share-based noncash consideration, entities must apply the measurement guidance in Topic 606. Other advice, including Topic 815 and Topic 321, is not applied unless and until the right to receive or retain the share-based noncash consideration becomes unconditional under Topic 606.
Financial Statement Presentation Impact
- Balance sheet: Certain contracts may no longer be recorded as derivatives
- Income statement: Revenue patterns may change for contracts involving share-based noncash consideration
- Footnotes: Disclosure of scope judgments may be necessary
Transition
The ASU may be applied prospectively or on a modified retrospective basis. It is permitted to elect different transition methods for the derivatives scope refinement and scope clarification for share-based noncash consideration. Nonpublic entities should evaluate existing contracts and determine the most practical approach.
ASU 2025-08: Financial Instruments – Credit Losses (Purchased Loans)
Summary
ASU 2025-08 improves accounting for purchased loans by expanding the population of acquired financial assets subject to the gross-up approach in Topic 326. Loans acquired without credit deterioration, other than credit cards, debt securities, or trade receivables arising from transactions accounted for under Topic 606, are treated as purchased seasoned loans and accounted for using the gross-up approach at acquisition.
Effective Date for Nonpublic Entities
Annual reporting periods beginning after December 15, 2026. Early adoption is permitted.
What Changed
The amendments require a consistent gross-up approach for qualifying purchased loans, eliminating prior differences in accounting treatment. This reduces subjectivity and improves comparability in recognizing expected credit losses at acquisition.
Financial Statement Presentation Impact
- Balance sheet: Acquired loans may reflect grossed-up balances at acquisition
- Income statement: Subsequent credit loss expense may differ due to the revised initial measurement
- Footnotes: Additional disclosures may be required
Transition
The amendments are applied prospectively to loans acquired on or after the initial application date. Nonpublic entities should evaluate anticipated acquisition activity before adoption.
Bringing These Standards into Your Future Reporting Process
With additional standards scheduled to take effect in the coming years, now is an appropriate time for nonpublic entities to assess applicability and prepare for implementation. Even targeted amendments can influence earnings patterns, capitalization timing, and disclosure requirements.
If questions arise as you evaluate these upcoming requirements, our team can help you assess what applies to your organization and guide you on how to address the changes within your reporting timeline. Our goal is to help you navigate these updates with clarity and confidence, so your financial statements continue to reflect accurate and compliant reporting.
Frequently Asked Questions (FAQ’s)
- How do I know if ASU 2025-05 will significantly impact my organization?
If you maintain material accounts receivable or contract assets, and your current method to estimate expected credit losses is complex and time-consuming, evaluate whether the available practical expedient and policy election simplifies your estimation process.
2) Will the internal use software update allow more costs to be capitalized?
Not necessarily. While timing may change under the revised threshold, eligible costs remain largely consistent with existing guidance.
3) What steps should nonpublic entities take now?
Review effective dates, evaluate scope applicability, discuss potential impacts with your advisors, and confirm that systems and processes can support new requirements.