Since the beginning of its credit losses project, the FASB has sought to develop a model in which an entity would recognize in net income, in each reporting period (including upon initial recognition), a credit loss expense that arises from an allowance for expected credit losses that reflects management’s current estimate of such losses for both originated and purchased assets. However, as discussed in paragraph BC85 of ASU 2016-13, the Board questioned whether the same model should be applied to all originated and purchased assets:
[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.
AFS debt securities would be excluded from the PFA model. In addition, for financial assets acquired as a result of an asset acquisition or through consolidation of a VIE that is not a business, the asset acquirer would apply the gross-up approach to seasoned assets, which are acquired assets unless the asset is deemed akin to an in-substance origination. A seasoned asset is an asset (1) that is acquired more than 90 days after origination and (2) for which the asset acquirer was not involved with the origination.