Accounting, Reporting, and Compliance Hub (ARCH)

Summary

The Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2025-08, Purchased Loans, in response to stakeholders’ concerns about the accounting for acquired financial assets in accordance with Accounting Standards Codification (ASC) 326, Financial Instruments — Credit Losses. The ASU amends the current expected credit loss (CECL) model in ASC 326-20 to:

• Expand the population of acquired financial assets subject to the “gross-up approach” for measuring credit losses to apply to seasoned purchased loans. This approach allows entities to avoid recording a day-one credit loss expense in profit or loss but also reduces interest income recognized in subsequent periods.
• Introduce criteria for determining whether a purchased loan is considered “seasoned” and will be accounted for using the gross-up approach.

The ASU will primarily affect financial institutions and banks as it applies only to purchased loans, but could affect other entities. The amendments will be effective for interim and annual periods beginning after December 15, 2026, with early adoption allowed for financial statements that have not yet been issued or made available for issuance.

Background

ASC 326 currently includes two approaches for recognizing expected credit losses on an acquired financial asset depending on whether the acquired financial asset sustained a “more-than-insignificant” deterioration of credit quality since its origination (referred to as a purchased credit deteriorated, or PCD, asset). 

• To account for a PCD asset, an entity must recognize an allowance for expected credit losses at the acquisition date with an offsetting increase to the purchase price of the acquired financial asset (a gross-up approach) to arrive at its amortized cost. 
• To account for a non-PCD asset, an entity follows the general approach under the CECL model and recognizes the expected credit loss immediately as credit loss expense in profit or loss.

The premise behind the gross-up approach is that the purchase price of a PCD asset already reflects an expectation of credit losses and as such is already discounted from its par value. Accordingly, if this discount were accreted through interest income, it would result in recognizing interest income attributable to cash flows in excess of what the acquirer expects to collect. To prevent this scenario, the gross-up approach increases the PCD asset’s purchase price by the amount of the allowance for expected credit losses at the acquisition date, such that interest income is accreted only with respect to a noncredit discount. For an illustration of the gross-up approach, see Example 12 in ASC 326-20-55-61.

During a post-implementation review (PIR) of ASC 326, stakeholders expressed concerns about the different approaches for PCD and non-PCD acquired financial assets and recommended expanding the gross-up method to most non-PCD acquired financial assets. Aside from the inherent judgment in determining when an asset has experienced significant credit deterioration since origination and the lack of comparability, stakeholders observed that acquired financial assets often are initially recognized at fair value, which already captures expectations about collections. Accordingly, they observed that the requirement to recognize immediate credit loss expense at the acquisition date for non-PCD assets results in double counting credit losses. Based on this feedback, the FASB decided to expand the gross-up approach only to non-PCD purchased loans meeting specified seasoning criteria.

The accounting for PCD assets will not change.

Scope

The ASU applies to all entities. The ASU applies to any non-PCD purchased seasoned loan (as discussed in more details below), except for:

• Credit cards
• Debt securities
• Trade receivables arising from revenue transactions in the scope of ASC 606, Revenue From Contracts With Customers

Although credit cards are excluded, the amendments apply to other open-ended lines of credit (for example, home equity line of credit).

The scope of these amendments differs from existing guidance on PCD assets, which does not distinguish between the types of acquired financial assets.

Main Provisions

Initial Measurement

An entity must apply the gross-up approach to any non-PCD purchased seasoned loan.

• Loans acquired in a business combination accounted for using the acquisition method are considered seasoned and do not require further evaluation under the seasoning criteria. 
• Loans acquired in any transaction other than a business combination (that is, loans purchased individually, as a portfolio or through the initial consolidation of a variable interest entity that is not a business) must meet both of the following seasoning criteria:
  • The loan is acquired more than 90 days after its origination.
  • The purchaser is not involved with the origination of the loan.

The purchaser is considered involved with the origination of the loan when either of the following occurs:

• The purchaser has direct or indirect exposure to the economic risks and rewards of ownership within 90 days after the origination of the loan, or
• The purchaser has substantive influence on the offering, arranging, underwriting, or other nonadministrative lending activity that the originator (the transferor) performs in connection to the initial extension of credit to a debtor.

When a purchase of a loan occurs pursuant to the terms of an existing financing agreement, purchase commitment, or other agreement with the originator of the loan, the purchaser is more likely to be involved with its origination. 

For purchased seasoned loans, the purchaser initially measures the loan at its amortized cost which equals its purchase price increased by the amount of allowance for credit losses at the acquisition date. If a purchased loan does not meet the seasoning criteria (or if the non-PCD financial asset is excluded from the scope of the ASU), the purchaser must immediately recognize an expected credit loss expense in profit or loss rather than adjusting the amortized cost.

Subsequent Measurement of Purchased Seasoned Loans

The initial recognition of PCD assets and purchased seasoned loans is the same. However, as the gross-up approach was originally developed for financial assets with more-than-insignificant deterioration of credit since origination, the ASU introduces some differences in the subsequent measurement of purchased seasoned loans and PCD assets, as follows:

Effective Date and Transition

The following table summarizes transition for ASU 2025-08:

Link to ASU 2025-08