ASC 310 – Receivables: A Complete Guide to Credit Loss Accounting

Accounting for receivables is a critical aspect of financial reporting, ensuring businesses recognize and measure credit losses accurately. ASC 310 – Receivables, issued by the Financial Accounting Standards Board (FASB), establishes the framework for reporting credit impairments, allowances, and expected losses.

With the rise of credit risk and financial uncertainties, companies must comply with ASC 310 to maintain transparent, accurate, and regulatory-compliant financial statements. But what exactly does ASC 310 cover? How does it impact businesses? And how can organizations ensure compliance while mitigating credit risks?

In this guide, we’ll break down ASC 310, covering its key principles, scope, calculation methods, journal entries, and best practices to help you stay ahead of regulatory challenges.

What is ASC 310?

ASC 310 outlines how companies should record and evaluate receivables, particularly in assessing collectability and credit loss provisions. The goal is to ensure that businesses don’t overstate the value of their receivables by failing to account for expected credit losses.

Purpose of ASC 310 in Accounting

The primary objectives of ASC 310 include:

• Ensuring that bad debts and credit losses are appropriately recognized.
• Providing guidelines for estimating allowance for doubtful accounts.
• Improving comparability across financial institutions.
• Ensuring compliance with GAAP (Generally Accepted Accounting Principles).

Scope of ASC 310 – Who Does It Apply To?

ASC 310 applies to various types of receivables, including:

 ✔ Loans issued by financial institutions
✔ Trade receivables from business customers
✔ Lease receivables and financing receivables
✔ Notes receivable

However, it does not cover debt securities, which are addressed under ASC 320 (Investments – Debt and Equity Securities).

Example: If a bank issues a loan to a customer, ASC 310 ensures that the bank properly accounts for potential losses from non-payment.

Accounting for Credit Losses Under ASC 310

Expected Credit Loss Model

ASC 310 requires companies to estimate and record expected credit losses rather than waiting for a receivable to be deemed uncollectible. This proactive approach aligns with the broader Current Expected Credit Loss (CECL) model introduced under ASC 326.

Impairment and Loan Loss Allowance

If a receivable is deemed impaired, companies must:

 ✔ Measure the impairment using discounted cash flows or historical loss data.
✔ Recognize an allowance for credit losses in financial statements.
✔ Regularly review and adjust allowances based on current and expected economic conditions.

Allowance for Credit Losses: How to Calculate

The Allowance for Credit Losses (ACL) is a crucial aspect of ASC 310 compliance. Companies must estimate ACL based on:

• Historical Loss Data: Past bad debt experiences.
• Current Economic Conditions: Industry trends, market conditions, and financial stability.
• Forward-Looking Estimates: Expected changes in economic conditions that could impact collectability.

Formula Example:
Allowance for Credit Losses = (Historical Loss Rate) × (Outstanding Receivables)

Example Calculation:
If a company has $1 million in outstanding receivables and a historical default rate of 2%, the required allowance would be:

$1,000,000 × 2% = $20,000 allowance for credit losses

ASC 310 vs CECL (Current Expected Credit Loss Model)

The Current Expected Credit Loss (CECL) model, introduced under ASC 326, replaces certain aspects of ASC 310’s incurred loss approach.

Journal Entries for ASC 310 Receivables

Companies must record allowances for expected credit losses using journal entries. Here are some common examples:

Example: Recording Allowance for Credit Losses

Dr. Bad Debt Expense      $10,000  

   Cr. Allowance for Doubtful Accounts   $10,000  

➡ This entry recognizes an estimated credit loss in the company’s financial statements.

Example: Writing Off a Bad Debt

Dr. Allowance for Doubtful Accounts  $5,000  

   Cr. Accounts Receivable   $5,000  

➡ This entry removes an uncollectible receivable from the books after confirming that the amount cannot be recovered.

Why This Matters: Proper journal entries ensure that credit losses are accurately reflected, preventing overstated financial positions.

Common Challenges in ASC 310 Compliance

While ASC 310 provides clear guidelines for accounting for receivables, many businesses face challenges when implementing it. Below are some of the most common hurdles:

Difficulty in Estimating Credit Losses

• Determining the correct allowance for doubtful accounts can be complex, especially for companies with diverse receivables.
• Credit loss estimation requires historical data, economic trends, and forward-looking assessments—which can be difficult to compile accurately.

Transitioning to CECL (ASC 326)

• Many businesses must adapt from ASC 310 to CECL (Current Expected Credit Loss), which involves new data models and forecasting techniques.
• The shift requires companies to adjust their internal accounting policies and update their financial reporting procedures.

Changing Economic Conditions

• Economic downturns, inflation, and recessions impact the probability of credit defaults, making it necessary for companies to regularly adjust their loss reserves.

Compliance and Auditing Complexity

• Companies must document their credit loss estimations for auditors and regulatory bodies.
• Failure to comply with ASC 310 can lead to financial misstatements, compliance penalties, and reputational risks.

Best Practices for ASC 310 Compliance

To navigate these challenges and ensure smooth compliance, businesses should follow these best practices:

Implement Robust Credit Risk Assessment Models

• Use historical data, industry benchmarks, and forward-looking analysis to estimate credit losses accurately.
• Regularly update credit risk models to reflect changing economic conditions.

Maintain Proper Documentation

• Keep detailed records of credit evaluations, impairment assessments, and journal entries for audit compliance.
• Implement internal controls to ensure accuracy in credit loss estimates.

Use Data Analytics & AI

• Leverage AI-driven financial modeling to predict credit risks and adjust allowances dynamically.
• Automated tools can help businesses analyze creditworthiness more effectively than traditional methods.

Stay Updated on FASB Regulations

• ASC 310 guidelines are subject to periodic updates from FASB.
• Businesses should regularly review FASB releases and adjust their accounting policies accordingly.

Train Accounting Teams on ASC 310 Compliance

• Conduct training sessions on estimating impairments, recognizing allowances, and recording journal entries.
• Educate staff on the differences between ASC 310 and CECL to prepare for future transitions.

Summary

ASC 310 plays a critical role in financial reporting, ensuring that companies accurately account for receivables, recognize impairments, and estimate credit losses.

To maintain compliance and mitigate risks, businesses should:

• Implement accurate credit risk assessment models
• Regularly update allowance estimates based on market conditions
• Ensure proper documentation and internal controls
• Stay informed about FASB updates and ASC 326 (CECL) transitions

By following these best practices, companies can enhance financial transparency, comply with regulations, and improve risk management—leading to stronger financial stability and investor confidence.