The Financial Accounting Standards Board issued an update to accounting standards on Nov. 12 that it says improves the accounting for purchased loans.
Since issuing the credit losses standard, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in 2016, the FASB said it has monitored and assisted stakeholders with implementation through the post-implementation review process.
As part of the PIR process, stakeholders highlighted concerns about the accounting for acquired financial assets. Under current GAAP, financial assets acquired through (1) a business combination, (2) an asset acquisition, and (3) the consolidation of a variable interest entity that isn’t a business are initially recorded at fair value, and an allowance for expected credit losses (ACL) is separately recognized in accordance with Topic 326, according to the FASB.
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Many stakeholders noted that the existing guidance for acquired financial assets—specifically the distinction between purchased credit-deteriorated (PCD) and non-PCD assets—created unnecessary complexity and reduced comparability.
The process for PCD assets uses a “gross-up approach” to record the initial allowance through an adjustment to the initial amortized cost basis, while the initial allowance for non-PCD assets requires a direct charge to credit loss expense. This dual approach was seen as subjective, inconsistently applied, and resulted in double-counting expected credit losses for non-PCD assets.
“The majority of stakeholders (including practitioners) supported guidance that would better reflect the economics of the acquired assets by accounting for most acquired financial assets under the gross-up approach,” the FASB said.
The FASB listened to those stakeholders, as the Accounting Standards Update issued on Wednesday expands the population of acquired financial assets accounted for using the gross-up approach. Acquired loans (excluding credit cards) are deemed “purchased seasoned loans” and accounted for using the gross-up approach upon acquisition if criteria established by the new guidance are met.
The ASU states:
The amendments in this Update expand the population of acquired financial assets subject to the gross-up approach in Topic 326. In accordance with the amendments in this Update, loans (excluding credit cards) acquired without credit deterioration and deemed “seasoned” are purchased seasoned loans and accounted for using the gross-up approach at acquisition. Specifically, after an entity determines that a loan is a non-PCD asset based on its assessment of credit deterioration experienced since origination, the entity should apply the guidance described in the amendments to determine whether the loan is seasoned and, therefore, should be accounted for using the gross-up approach.
All non-PCD loans (excluding credit cards) that are acquired in a business combination are deemed seasoned. Other non-PCD loans (excluding credit cards) are seasoned if they were purchased at least 90 days after origination and the acquirer was not involved in the origination of the loans.
This change aims to enhance comparability, consistency, and better reflect the economics of acquiring financial assets, the FASB said.
The amendments in the ASU are effective for all entities for annual reporting periods beginning after Dec. 15, 2026, and interim reporting periods within those annual reporting periods.
The amendments should be applied prospectively to loans that are acquired on or after the initial application date, the FASB said. Early adoption is permitted in an interim or annual reporting period in which financial statements haven’t yet been issued or made available for issuance.
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