The Financial Accounting Standards Board (FASB) has updated ASC 326: Financial Instruments – Credit Losses. This update to ASC 326-20 (CECL) finally addresses the Day-1 credit loss expense on income statements, a “double-count” of expected losses on acquired performing loans. Instead, FASB released guidance to expand the population of acquired financial assets subject to the gross-up approach.
Updated Guidance on ASC 326-20 (CECL) for Credit Losses
Previous guidance classified purchased loans into two groups: purchased credit-deteriorated (PCD) and non-PCD assets.
Purchased Credit-Deteriorated (PCD) Asset Treatment
Under prior guidance, acquired PCD assets were recorded at their initial amortized cost basis which was calculated as the purchase price paid plus initial expected credit losses. Historically referred to in practice as the “gross-up approach,” no portion of the initial expected credit loss goes through the income statement.
Non-PCD Asset Treatment
Conversely, non-PCD acquired assets have any required allowance for expected losses recorded through earnings, which triggers a Day-1 credit loss expense in the income statement. Critics noted the asymmetry between PCD and non-PCD assets, which added complexity and reduced comparability to financial reporting. Additionally, stakeholders have observed that the non-PCD approach created a “double count” of the expected credit loss since acquired financial assets recorded at fair value already considered expected credit losses.
Updated FASB Guidance
The Accounting Standards Update (ASU) has removed the accounting-based distinction between PCD and non-PCD loans (now referred to as purchased seasoned loans (PSLs), applying the “gross-up” accounting method to both. PSLs are those that meet either of the following criteria and are not a purchased financial loan with credit deterioration:
- Acquired in a business combination (deemed seasoned automatically), or
- Loans that are acquired in transactions outside of business combinations that are acquired more than 90 days after origination, and the acquirer was not involved in the loan’s origination.
The updated guidance is effective for annual reporting periods starting after December 15, 2026, including interim periods within those fiscal years.
Early Adoption Considerations
Early adoption is permitted in interim or annual reporting periods where financial statements haven’t been issued or made available for issuance yet. Once the amendments have been adopted in an interim reporting period, an entity should apply the amendments as of the beginning of that interim reporting period or at the beginning of the annual reporting period, including the interim reporting period.
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