At an April 29, 2025, FASB meeting, the board changed direction on its proposed accounting treatment for purchased financial assets (PFA). FASB acknowledged the unintended consequences of purchased credit deterioration (PCD) accounting in the original CECL model. Here are the details.

Background

Accounting Standards Update (ASU) 2016-13 updated the definition and accounting treatment for purchased credit impaired assets, rechristened them as purchased credit deteriorated (PCD) assets, and updated Accounting Standards Codification (ASC) 805, Business Combinations, to require the recognition of an allowance for credit losses in the period of acquisition for both PCD and non-PCD assets. The determination of PCD versus non-PCD determines how the allowance for credit loss flows through the financial statements. For PCD assets, the gross-up method includes the impact in the day one business combination entries with no impact to expense. For non-PCD assets, the impact is reflected outside of business combination entries (day two) and hits expense (double count of credit).

FASB’s decisions on PCD accounting were one of the most debated deliberations of the standard-setting process. During deliberations and in the post-implementation review process, FASB received feedback that the PCD/non-PCD determination for acquired financial assets is complex and the credit discount on non-PCD loans is viewed as double counted upon acquisition, unintuitive and not reflective of the underlying economics.

In June 2023, FASB issued an exposure draft to address these concerns, and feedback was again mixed. The 2023 proposal would have expanded the population of acquired financial assets subject to ASC 326’s “gross‑up” approach currently applied to PCD assets, including credit cards, HELOCs, revolving arrangements, lessor’s net investment in sales-type and direct financing leases, and contract assets. Comment letter feedback raised significant operational and cost challenges of applying gross-up accounting for some of these asset classes.

FASB believes that the following changes should benefit both investors and preparers and achieve greater consistency in how non-PCD financial assets are accounted for. Rich Jones, board chair, noted that this may also reduce the use of non-GAAP measures to communicate the uneconomic portrait of acquired loans under current GAAP in financial statements.

Revised Approach

Scope
FASB voted to narrow scope to only loan receivables (including revolvers) and excluded credit cards (due to operational challenges). Covered assets would also be subject to seasoning threshold after the acquirer has determined that the loans are non-PCD. The narrower scope now excludes trade account receivables, contract assets, lease receivables, loan commitments, forward contracts and held-to-maturity (HTM) debt securities.

While HTM debt securities and loan receivables are comparable financial instruments, bank portfolios of HTM securities tend to be of high quality and government guaranteed and are not contributing to the unintuitive accounting outcomes to which investors and preparers objected.

The forthcoming ASU will not change the PCD accounting, only the assets subject to that model. No new disclosures will be added.

Seasoning
An acquirer’s PCD/non-PCD determination would remain the primary basis for acquisition accounting. Seasoning will serve as a secondary test applicable only to the non-PCD portion of in-scope acquired assets. The following seasoning criteria would determine which non-PCD purchased assets would be subject to the gross-up approach:

• Financial assets originated without involvement by the acquirer and transferred 90 days or more after origination date.
• Assets acquired through a business combination are deemed seasoned assets and accounted for using the gross-up approach.

Assets that meet the seasoning criteria would be recognized under the PCD model. Assets not deemed seasoned would be recognized as if originated. For loans outside a business combination, an acquirer would do a loan-by-loan assessment of seasoning after the non-PCD determination.

Recognition and Measurement
Several additional modifications are needed to account for both PCD and seasoned acquired assets (without credit deterioration) under the PCD model.

• The initial amortized cost basis (ACB) for seasoned financial assets would equal the purchase price plus the initial allowance for credit losses (ACL) measured on the acquisition date.
• An entity should use the interest method to recognize the noncredit discount or premium on seasoned loan receivables as interest income.
• The final ASU will include an irrevocable election to estimate expected credit losses on seasoned financial assets using the ACB for reporting periods after initial recognition when credit losses are estimated using a method other than the discounted cash flow method. This would allow an acquirer to pool the acquired assets with any existing assets to collective measure credit losses on a single pool of assets with shared risk characteristics. This would apply at each business combination or asset acquisition after adoption.

The board clarified that seasoned non-PCD assets would not be subject to a recovery cap and the recognition of interest income will not depend on the acquirer having a reasonable expectation of amounts expected to be collected. These two provisions would only apply to PCD assets and not seasoned assets.

Effective Date and Transition
The forthcoming ASU would be effective for periods beginning after Dec. 15, 2026, and interim periods within those annual reporting periods. Early adoption would be permitted for any financial statements that have not been issued, at the beginning of any interim period. An option would also allow early adoption at the beginning of the year. In a substantial change from the proposal, prospective applications would be allowed, which will reduce cost and operational challenges.