A manufacturer that counts collections after year end in its credit loss allowance should count as uncollected each year-end invoice its AI cash application tool matched to a payment without the full invoice number, to the extent the payment would not reach it if applied to the customer's open invoices newest first, unless its credit manager has the customer confirm the match before the date through which collections count. Counted as collected on a wrong match, an unpaid invoice carries no allowance.
Counting collections after year end is an accounting policy election in Accounting Standards Update 2025-05, published in July 2025 by the Financial Accounting Standards Board. An entity other than a public business entity may make it for current accounts receivable and current contract assets arising from revenue under Topic 606, provided it also takes the update's practical expedient, which assumes current conditions at the balance sheet date hold for the asset's remaining life. The election considers collection activity after the balance sheet date and before the financial statements are available to be issued, or before an earlier date the entity selects. No allowance is recorded for balances collected by then, and uncollected balances are evaluated on their delinquency status as of that date. The update applies to annual reporting periods beginning after December 15, 2025, and interim periods within them, with early adoption permitted.
The update's illustrative example is a manufacturer selling mostly to retail stores on 30-day terms, with credit loss rates from 0.3 percent on balances not yet past due to 99 percent on those more than 120 days past due. Which invoices each payment cleared decides which year-end invoices carry no allowance and which take a rate for how far past due they are on the date through which collections count. That answer comes from the company's cash application, matching each payment to the invoices it pays. An October 2024 article by staff of the Association for Financial Professionals describes, in general terms, AI tools that match remittances with open invoices even when only part of an invoice number is available. A match made without the full invoice number, including one made from part of it, is the tool's inference.
Before a December 31, 2026 year end, the CFO decides whether to take the election, tells the auditor, and picks the date through which collections count, early enough for the controller to close after it. Weekly from early January to that date, the credit manager lists, by checking each payment's remittance against the invoices it cleared, the year-end invoices the tool matched without the full invoice number, largest and most past due first, has each customer confirm, by email reply or on its own supplier portal or remittance advice, which invoices each payment covered, and reapplies any payment the customer places differently. A match a clerk made the same way gets the same check. After that date the controller sets the allowance, applying the payment on each listed match not confirmed before that date to that customer's open invoices dated before the payment arrived, newest invoice date first, treating an invoice as open unless some other payment settled it, and counting as uncollected, under the company's own test of collection, each matched year-end invoice, or a portion of one, that the payment does not reach. That allocation is the controller's, for the allowance alone, and in the subledger the credit manager leaves the cash where the tool or clerk posted it. The cost is the credit manager's time, carried in the finance budget, and the allowance on each year-end invoice counted as uncollected for lack of a confirmation, in the statements for the year being closed.
The step holds at every portfolio company that takes the election, whether its cash application runs on AI or by hand. The election also reaches receivables acquired in a business combination such as an add-on, so the step should cover the add-on's cash application. A portfolio company that is a public business entity may take only the practical expedient, and each electing company must disclose in its annual statements the date through which it considered collection activity. Moving that date in a later year, which changes how many weeks the credit manager has for confirmations, is not a change in accounting principle, and the Board's example of a reason is a company obtaining financing that finalizes its statements sooner to provide them to lenders or investors.
