FASB released an update to ASC 326: Financial Instruments – Credit Losses to address concerns regarding complexity and lack of comparability in the accounting for purchased loans under the current credit loss standard (Topic 326). The Accounting Standards Update (ASU) removes the previous distinction in accounting between purchased credit-deteriorated (PCD) assets and non-PCD assets by applying the “gross-up” accounting method; formerly used only for PCD assets, to most acquired loans. These loans will now be designated as “purchased seasoned loans” (PSLs). This change eliminates the Day-1 credit loss expense on PSLs, which the industry considered a “double-count” of expected losses on acquired performing loans, by instead recognizing expected credit losses at acquisition without immediate impact to earnings.
Effective Date: The new guidance is effective for annual reporting periods beginning after December 15, 2026, including interim periods within those fiscal years. Per the guidance: “Early adoption is permitted in an interim or annual reporting period in which financial statements have not yet been issued or made available for issuance. If an entity adopts the amendments in an interim reporting period, it should apply the amendments as of the beginning of that interim reporting period or the beginning of the annual reporting period that includes that interim reporting period.”
Background on ASC 326-20 (CECL)
According to prior guidelines of ASC 326-20 (CECL), purchased loans are classified into two groups:
- PCD assets, which have experienced significant credit deterioration since origination
- Non-PCD acquired assets
The acquired PCD assets are recorded at acquisition at their initial amortized cost basis, which is equal to the purchase price paid and initial expected credit losses. No portion of the initial expected credit loss goes through the income statement as there is no immediate credit loss expense recorded for these loans on Day 1. This has historically been referred to in practice as the “gross-up approach.”
Non-PCD acquired assets, however, have any required allowance for expected losses recorded through earnings, effectively causing a Day-1 credit loss expense in the income statement. This asymmetry has been criticized for creating a “double-count” of credit losses on non-PCD assets and has added complexity and volatility to financial reporting.
Key Changes Resulting From ASU 2025-08
ASU 2025-08 eliminates the prior differences in accounting for PCD assets and non-PCD assets by expanding the use of the gross-up approach. The gross-up approach was previously restricted to PCD assets and now expands to most acquired loans, to be referred to as PSLs (see criteria below) when they meet the definition. In practice, this means most loans acquired in acquisitions will have an allowance recorded at purchase with no immediate hit to earnings, aligning with how PCD loans are handled today. The expected result is no Day-1 credit loss expense for qualifying acquired loans, improving comparability and eliminating Day-1 “double-count” issues.
Assets in Scope
Included: Loan receivables acquired, including revolving credits/home equity lines of credit (HELOCs) that meet the purchased seasoned loan requirements (see below).
Excluded:
- Credit card receivables
- Debt securities
- Trade receivables arising from transactions accounted for under Topic 606, Revenue from Contracts with Customers
While off-balance-sheet credit exposures (loan commitments, guarantees) are not in the scope, they continue under existing CECL guidance, as those exposures are not recognized loans at acquisition and subsequent interest income is not affected by the double-count.
Seasoning Criteria: A PSL is a loan that meets either of the following criteria and is not a purchased financial asset with credit deterioration or a financial asset listed as excluded above.
- Acquired in a business combination – All loans acquired in a business combination accounted for under ASC 805-20 are deemed seasoned automatically.
- Loans that are acquired in transactions outside a business combination, e.g., loan portfolio purchases or acquisitions in the secondary market, and loans initially recognized through the consolidation of a variable interest entity (VIE) are considered “seasoned” if:
- They are acquired more than 90 days after the loan’s origination date, and
- The acquirer had no involvement in the loan’s origination, i.e., the buyer was not the originator or involved via prior commitments, relationship, or other indirect arrangements.
If a loan fails the seasoning test, e.g., acquired very soon after origination or the acquirer helped originate it, it would be accounted for as if the acquirer originated it, and any required allowance would be recorded through provision expense (like today’s non-PCD treatment).
Disclosure Updates
FASB decided not to add new disclosure requirements for PSLs. Entities will continue to provide credit quality and allowance rollforward disclosures per ASC 326, which will now inherently include the acquired PSL allowances.
The current rollforward requirements in ASC 326-20-50-13 have been expanded to include a line item for the initial allowance for credit losses recognized on financial assets accounted for as purchased seasoned loans.
Subsequent Measurement: After initial recognition, the loan and allowance will be treated like any other under CECL:
- The loan’s non-credit discount or premium (the difference between par and the grossed-up basis) is accreted into interest income over the loan’s remaining life using the effective interest method. This ensures that only the portion of the purchase discount unrelated to credit losses affects interest income.
- The allowance for credit losses on the acquired loan is updated at each reporting date. Any increases in expected credit losses after acquisition are recorded through provision expense (DR expense, CR allowance) consistent with normal CECL accounting.
- The ASU includes an election for PSLs using a method to estimate credit losses at acquisition other than a discounted cash flow method, these other methods are often based off unpaid principal balance. If elected, entities can transition to using the amortized cost basis for subsequent estimates of credit loss. This election is made on an acquisition-by-acquisition basis in the period that the acquisition occurs. Once elected, this method must be applied to all purchased seasoned loans in that acquisition. As a result of electing this option, a true-up will be effectively made through net income as a provision expense in the period subsequent to acquisition.
Accounting for Non-Qualifying Acquired Loans: If an acquired loan does not meet the seasoning criteria, e.g., acquired very shortly after origination or the acquirer was involved in the origination, the guidance is to account for the loan as if it was originated by the acquirer. Practically, the company would record the loan at the purchase price (fair value) with no initial allowance and would immediately record a CECL allowance through provision expense.
What You Should Consider Now
Entities should evaluate recent and upcoming acquisitions as soon as practicable to understand the impact the adoption of ASU will have on their purchased loans. Now is the time to understand how adopting this ASU will affect financial reporting and processes. Early adoption can offer immediate benefits, such as eliminating the Day-1 credit loss expense for eligible loans and simplifying the accounting treatment for eligible purchased loans. By transitioning sooner, entities benefit from improved comparability and consistency in financial reporting as well as subsequent measurement and accounting as all qualifying purchased loans will now follow the same accounting approach. Reach out to Forvis Mazars with questions on how this ASU could impact your recent or upcoming acquisitions.