FASB issues ASU on purchased loans

The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2025-08, Financial Instruments – Credit Losses (Topic 326): Purchased Loans (ASU 2025-08 or the ASU), which expands the population of acquired financial assets subject to the “gross-up approach” in Topic 326.

Background

Stakeholders raised concerns about the complexity and inconsistency created by the dual acquisition models for purchased financial assets in Topic 326. Under current guidance, if a financial asset acquired has a “more-than-insignificant” deterioration of credit quality since its origination, it is accounted for as a purchased financial asset with credit deterioration—the purchase credit deteriorated (PCD) asset—using a gross-up approach. The gross-up approach requires recognition of an allowance for expected credit losses (ACL) for the estimate of credit losses at the acquisition date. The ACL is recorded with an offsetting gross-up adjustment to the purchase price of the acquired financial asset. If a financial asset acquired does not have “more-than-insignificant” deterioration of credit quality since its origination (non-PCD asset), the ACL is recognized with a corresponding charge to credit loss expense. Many stakeholders view this assessment as subjective and inconsistently applied. Investors also noted that recording an ACL through credit loss expense for non-PCD assets acquired at fair value can result in double counting expected credit losses already embedded in the fair value measurement of those assets.

Main provisions

Under ASU 2025-08, loans (excluding credit cards) that are acquired without credit deterioration and deemed “seasoned” are subject to the gross-up approach at acquisition. 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 considered to be seasoned if they were purchased at least 90 days after origination and the acquirer was not involved in the origination of the loans.

Effective date and transition

The amendments in ASU 2025-08 are effective for all entities for annual reporting periods beginning after December 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. 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 ASU 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.