FASB amends credit loss accounting for purchased loans

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans. This update expands the population of acquired financial assets accounted for using the gross-up approach, aiming to improve the usefulness and consistency of accounting outcomes for acquired financial assets.

Background

Under current GAAP, financial assets acquired through a business combination, asset acquisition, or 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 is separately recognized in accordance with Topic 326, Measurement of Credit Losses on Financial Instruments.

If an acquired financial asset has a more-than-insignificant deterioration of credit quality since its origination, it’s accounted for as a purchased financial asset with credit deterioration (PCD asset). If an acquired financial asset doesn’t have a more-than-insignificant deterioration of credit quality since its origination, it’s accounted for as a non-PCD asset.

• For PCD assets, the initial allowance for expected credit losses is recorded with a corresponding gross-up adjustment to the purchase price of the acquired financial asset.
• For non-PCD assets, the initial allowance for expected credit losses is recorded with a corresponding charge to credit loss expense.

Through the post-implementation review process, stakeholders highlighted concerns regarding the dual approach for the accounting of acquired financial assts. Specifically, stakeholders noted that the distinction between PCD and non-PCD assets creates unnecessary complexity and reduced comparability. ASU 2025-08 responds to stakeholder feedback and the FASB’s ongoing efforts to improve the clarity, operability, and consistency of credit loss accounting by requiring purchased seasoned loans to be accounted for using the gross-up approach.

Key provisions

Under the amended guidance, the population of acquired financial assets subject to the gross-up approach in Topic 326 is expanded to include purchased seasoned loans.

The amended guidance defines a purchased seasoned loan to include non-PCD loans that meet either of the following criteria:

• Non-PCD loans that are acquired in a business combination accounted for using the acquisition method in accordance with Topic 805, Business Combinations.
• Non-PCD loans acquired outside a business combination, including a financial asset acquisition or the consolidation of a variable interest entity that isn’t a business, that were purchased or obtained more than 90 days after origination and the acquirer or transferee wasn’t involved in the origination of the loans.

The definition of a purchased seasoned loan specifically excludes credit cards, debt securities, and trade receivables arising from transactions accounted for under Topic 606, Revenue from Contracts with Customers.

The amendments further clarify that the acquirer or transferee would be considered involved in the origination of the loan when either of the following occurs:

• The transferee has direct or indirect exposure to the economic risks and rewards of ownership within 90 days after the loan origination date.
• The transferee has substantive influence on the offering, arranging, underwriting, or other nonadministrative lending activity performed by the originator related to the initial extension of credit to a debtor.

When a group of loans is acquired, the above criteria should be evaluated on an individual loan basis.

Initial measurement

The amended guidance aligns the initial measurement of purchased seasoned loans with PCD assets by requiring the use of the gross-up approach. For purchased seasoned loans, an entity will now be required to record the allowance for credit losses in accordance with Topic 326 and add the allowance to the purchase price of the loans to determine their initial amortized costs basis.

Subsequent measurement

The allowance for credit losses is subsequently measured at each reporting date after the acquisition date with any adjustment to the allowance recorded through credit loss expense.

Under current GAAP, when a method other than discounted cash flow is used to estimate credit losses, the allowance for credit losses is determined using the unpaid principal balance for assets accounted for under the gross-up approach. The amendments provide an accounting policy election that allows an acquirer to subsequently measure the allowance for credit losses for purchased seasoned loans using the initial amortized cost basis of the loans when credit losses are estimated using a method other than a discounted cash flow. The accounting policy election applies on an acquisition-by-acquisition basis and is irrevocable.

Effective dates

The amendments are effective for all entities for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after Dec. 15, 2026.

Early adoption is permitted in both interim or annual reporting periods in which financial statements haven’t yet been issued or made available for issuance. If early adopted in an interim reporting period, the amendments should be applied as of the beginning of that interim reporting period or the beginning of the annual reporting period that includes that interim reporting period.

Transition requirements

The amendments should be applied prospectively to loans that are acquired on or after the initial application date.