The Financial Accounting Standards Board (FASB) published an update to its accounting standards that improves the accounting for purchased loans.
This change stems from a review where stakeholders highlighted concerns about the accounting for acquired financial assets. Many noted that the existing guidance for acquired financial assets – mainly the distinction between purchased credit-deteriorated (PCD) and non-PCD assets — created unnecessary complexity and reduced comparability.
Under current GAAP standards, acquired financial assets are initially recorded at their amortized cost basis, with an allowance for expected credit losses recognized separately. The process for PCD assets uses a “gross-up approach” to record the initial allowance through an adjustment to the initial amortized cost basis. Meanwhile, the initial allowance for non-PCD assets requires a direct charge to credit loss expense.
This dual approach was seen as subjective, inconsistently applied, and it resulted in double counting expected credit losses for non-PCD assets.
The new update addresses this by expanding the population of acquired financial assets accounted for using the gross-up approach. Acquired loans, excluding credit cards, are deemed purchased seasoned loans and accounted for using the gross-up approach upon acquisition. This change aims to enhance comparability, consistency, and better reflect the economics of acquiring financial assets.