6.1 Introduction
ASC 326-20 includes guidance on recognizing expected credit losses on certain purchased
assets for which a more-than-insignificant credit deterioration has occurred since
origination (otherwise referred to as purchased financial assets with credit
deterioration, or PCD assets) as well as for certain BIs in securitized financial
assets. Acquired assets that are not considered PCD assets are accounted for in a manner
similar to originated assets. That is, the “general” CECL model is used to account for
such assets and, accordingly, expected credit losses are estimated and recognized
immediately as credit loss expense in the income statement.
ASC 326-20 includes a distinct model related to acquired assets for
which credit has deteriorated since origination as well as for certain BIs in
securitized financial assets. Paragraph BC85 of ASU 2016-13 describes the FASB’s basis for
this distinction:
[R]ecognizing interest revenue on the basis of contractual cash
flows for all purchased assets could result in situations in which an entity
accretes to an amount that it does not expect to collect, which would result in
artificially inflated yields. For this reason, the Board concluded that when
recognizing interest income on certain assets, it is inappropriate to accrete
from the purchase price to the contractual cash flows. Specifically, when a
purchased asset has deteriorated more than insignificantly since origination, it
is more decision useful to exclude the credit discount from the amount accreted
to interest income. As a result, the discount embedded in the purchase price
that is attributable to credit losses at the date of acquisition of a purchased
financial asset with credit deterioration should not be recognized as interest
income.
While the measurement of expected credit losses on PCD assets is
consistent with that for non-PCD assets, the recognition of expected credit losses
differs between the two. Upon acquiring a PCD asset, the entity would recognize its
allowance for expected credit losses as an adjustment that increases the asset’s cost
basis (the “gross-up” approach). After initial recognition of the PCD asset and its
related allowance, the entity would continue to apply the CECL model to the asset — that
is, any changes in the estimate of cash flows that the entity expects to collect
(favorable or unfavorable) would be recognized immediately as credit loss expense in the
income statement. Interest income recognition would be based on the purchase price plus
the initial allowance accreting to the contractual cash flows.
The FASB issued ASU 2025-08 in November 2025 in response to stakeholder feedback
the Board received during its postimplementation review of ASU 2016-13. Paragraph BC5 of
ASU 2025-08 notes that such feedback indicated that the accounting for non-PCD assets
“[did] not appropriately reflect the economics of those assets [and] the process for
distinguishing PCD assets from non-PCD assets [w]as difficult to understand and . . .
was inconsistently applied.” Accordingly, ASU 2025-08 expands the population of acquired
assets that are subject to the gross-up approach in ASC 326-20. Specifically, such
assets now include certain loans, excluding credit cards, that are deemed seasoned at
the time of acquisition. These loans are known as “purchased seasoned loans” (PSLs).
Changing Lanes
Effective Date of ASU 2025-08
The guidance in ASU 2025-08 is effective for annual reporting periods beginning
after December 15, 2026, including interim reporting periods, and must be
applied prospectively. Entities may early adopt the guidance “in an interim or
annual reporting period in which financial statements have not yet been issued
or made available for issuance.” An entity that adopts the amendments in an
interim reporting period may apply them “as of the beginning of that interim
reporting period or the beginning of the annual reporting period that includes
that interim reporting period.”
After adopting the guidance in ASU 2025-08, entities are required to apply the gross-up
approach to purchased assets within the scope of ASC 326 upon acquisition if such assets
meet the definition of a PCD asset or a PSL. For more information about the PCD model,
see Section 6.2. For further details on the PSL
model (after the adoption of ASU 2025-08), see Section
6.3.