U.S. banks and other financial institutions that buy loans are poised for significant accounting changes by 2027, as new rules from the Financial Accounting Standards Board (FASB) aim to bring clarity and consistency to how they report expected credit losses on acquired debt.
The board on November 12, 2025, released Accounting Standards Update No. 2025-08, Financial Instruments—Credit Losses (Topic 326), Purchased Loans, designed to stop companies from “double-counting” future loan losses and to end vague accounting practices that made financial reports inconsistent and confusing for investors.
For banks and lenders, these updated rules promise to cut through accounting complexities, offering a more consistent and realistic approach to valuing acquired loans. This, in turn, will provide a more accurate snapshot of their financial health, according to Bob Michaels, Technical Accounting Lead at CrossCountry Consulting.
“The new guidance improves transparency by ensuring purchased loans are reported in a way that reflects their underlying economics—the actual cost and expected credit risk assumed at acquisition,” Michaels said. “Expanding the ‘gross-up approach’ means investors see both the purchase price and the embedded credit risk in the loan portfolio, rather than an immediate Day 1 expense that can distort results,” he explained. “This provides a more accurate picture of post-acquisition earnings and enhances comparability across institutions.”
Michaels added that the new rules “simplify what was previously a two-model approach and eliminate the Day 1 provision that created operational challenges and earnings volatility.” However, he acknowledged, “some judgment remains, particularly in determining which purchased assets fall within scope and whether acquisition timing meets the seasoning criteria.” Despite these caveats, Michaels concluded that “the overall framework is more consistent and easier to apply.”
The amendments apply to all entities subject to Topic 326, Credit Losses, which includes publicly traded companies, private companies, and non-profit organizations that engage in financial reporting under U.S. Generally Accepted Accounting Principles (GAAP). Specifically, any entity that acquires loans will be directly impacted by these changes.
The rules exclude: credit cards from the definition of purchased seasoned loans due to their unique nature and transaction volume; and debt securities and trade receivables from the new PSL definition.
The Problem: Confusion and Inconsistency
Under existing accounting rules, particularly the “current expected credit losses” (CECL) model introduced by ASU 2016-13, financial assets acquired by institutions were categorized into two main types: “purchased financial assets with credit deterioration” (PCD assets) and “non-PCD assets.”
PCD assets, which had already experienced significant credit quality deterioration since their origination, were accounted for using a “gross-up approach.” This meant that the expected credit losses were recognized as an adjustment to the purchase price, reflecting that these losses were already baked into the acquisition cost.
However, for non-PCD assets—those without significant credit deterioration—the process was different. Companies had to recognize an allowance for expected credit losses with a corresponding charge to credit loss expense immediately upon acquisition (often called a “Day-1” expense). This led to confusion and frustration among investors and preparers because:
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- Double Counting: The fair value of these non-PCD assets already implicitly included an estimate for expected future credit losses. Recording an additional “Day-1” expense effectively double-counted these anticipated losses, leading to a balance sheet amount that didn’t truly reflect the expected cash collections.
- Lack of Comparability: The distinction between PCD and non-PCD assets was often subjective and applied inconsistently across different entities, making it difficult for investors to compare financial statements.
- Complexity: Managing two distinct accounting approaches for acquired assets added unnecessary complexity to financial reporting.
The Solution: A New Category and Expanded “Gross-Up”
The FASB’s ASU 2025-08 seeks to resolve these issues by expanding the use of the more intuitive “gross-up approach” and introducing a new classification: “Purchased Seasoned Loans.”
Key Changes and How They Work:
- “Purchased Seasoned Loans” (PSL) Defined: The update creates a new category for loans (excluding credit cards) that are acquired without significant credit deterioration and are considered “seasoned.”
- What makes a loan “seasoned”?
- Loans obtained through a business combination (e.g., when one bank acquires another) are automatically deemed seasoned.
- For other acquisitions, a loan is seasoned if it was purchased at least 90 days after its origination date and the acquiring institution was not involved in the loan’s initial origination. This “seasoning guidance” is to be applied at the individual asset level, preventing an entire portfolio from being excluded if a few loans don’t meet the criteria.
- Expanded Gross-Up Approach: PSLs will now be accounted for using the “gross-up approach” at acquisition, similar to how PCD assets are handled. This means the allowance for expected credit losses will be recognized as an adjustment to the purchase price of the loan, eliminating the “Day-1” expense and the problematic double-counting.
- Clarified Interest Income: For both PCD assets and PSLs, interest income will be recognized by accruing or amortizing the non-credit-related discount or premium that was part of the purchase price. This aims to provide a clearer economic representation of the acquired asset’s yield.
- Optional Measurement for PSLs: For institutions estimating credit losses using a method other than discounted cash flow, there’s an option to measure the allowance for credit losses for PSLs using their amortized cost basis (instead of the unpaid principal balance). This aims to simplify tracking and allow for easier aggregation of assets in certain portfolios.
Effective Date
The new rules are effective for annual reporting periods beginning after December 15, 2026, including interim periods within those annual reporting periods. Early adoption is permitted.
The changes must be applied prospectively, meaning they only apply to loans acquired on or after the initial application date, not retroactively to past acquisitions. This avoids the significant cost and complexity of restating prior financial statements.
[For more information on the FASB’s CECL standard go to Checkpoint.]
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