6.3 PSL Model (After the Adoption of ASU 2025-08)
After adopting ASU 2025-08, for purchased (i.e., acquired) assets within the scope of
the CECL model, an entity would first determine whether the assets meet the
definition of a PCD asset (Section 6.2.1). If
the definition of a PCD asset is not met, the entity would then determine whether
the purchased assets meet the definition of a PSL.
Purchased assets that do not qualify as either PCD assets or PSLs are accounted for
under the “general” CECL model. Accordingly, for such assets, the initial allowance
for credit losses would be recognized immediately as credit loss expense in the
income statement.
Connecting the Dots
Acquired Portfolios
An acquired portfolio may include assets that are subject to different credit
loss models. For example, some acquired assets may be PCD assets, some
acquired loans may qualify as PSLs, and other acquired assets may be
accounted for under the general CECL model. Unlike the PCD assessment, which
may be performed on a pool basis for certain assets measured at amortized
cost, the PSL determination is performed at the level of the individual loan
(see Section 6.3.1).
6.3.1 Scope of the PSL Model
ASC 326-20
30-16 A purchased seasoned
loan is a loan that meets either of the following
criteria and is not a purchased financial asset with
credit deterioration or a financial asset listed in
paragraph 326-20-30-19:
- The loan is obtained through a business combination accounted for using the acquisition method in accordance with Subtopic 805-20.
- The loan is (i) obtained
through a transfer that is not a business
combination accounted for using the acquisition
method in accordance with Subtopic 805-20 or (ii)
initially recognized through the consolidation of
a variable interest entity in accordance with
paragraph 810-10-30-3. In addition, the loan must
meet both of the following criteria:
- The loan is obtained more than 90 days after its origination date.
- The transferee was not involved with the origination of the loan. See paragraph 326-20-30-17 for guidance on how to assess whether the transferee was involved with the origination of the loan.
30-17 The transferee is more
likely to be involved with the origination of a loan
when the transfer of that loan is effected through the
terms of an existing contractual relationship, financing
arrangement, purchase commitment, or other agreement
with the entity that originated and transferred the
loan. The transferee is involved with the origination of
a loan when either of the following occurs:
- Within 90 days after the loan origination date, the transferee has direct or indirect exposure to the economic risks and rewards of ownership.
- The transferee has substantive influence on the offering, arranging, underwriting, or other nonadministrative lending activity performed by the originator (the transferor) related to the initial extension of credit to a debtor.
30-18 When the transferee
acquires a group of loans under paragraph
326-20-30-16(b), it shall evaluate the guidance in
paragraph 326-20-30-17 on an individual loan basis.
30-19 Purchased seasoned loans
do not include the following:
- Credit cards
- Debt securities
- Trade receivables arising from transactions accounted for under Topic 606 on revenue from contracts with customers.
ASU 2025-08 broadens the population of financial assets that are within the scope
of the gross-up approach under ASC 326 to include PSLs, which the ASU defines as
either of the following:
- Non-PCD loans that are obtained in a business combination.
- Non-PCD loans that are (1) obtained in an asset acquisition or upon consolidation of a variable interest entity that is not a business and (2) acquired more than 90 days after their origination date by a transferee that was not involved in their origination.
ASC 326-20-30-17 lists indicators of when a “transferee is more likely to be
involved with the origination of a loan,” and ASC 326-20-30-18 states that this
guidance should be evaluated “on an individual loan basis.”
PSLs, as that term is used in ASC 326-20-30-16, are meant to include only
acquired financial assets that meet the definition of a “loan” in the ASC master
glossary. In accordance with ASC 326-20-30-19, PSLs do not include credit cards,
debt securities, or “trade receivables arising from transactions accounted for
under” the revenue guidance in ASC 606.
6.3.1.1 Partially Funded Lines of Credit That Are PSLs
An entity may acquire a line of credit, a portion of which may be funded
(i.e., has been drawn by the borrower and funded by the lender) and a
portion of which may be unfunded (i.e., has not been drawn by the borrower).
The funded portion of the line of credit that is noncancelable by the
acquirer should be evaluated to determine whether it meets the definition of
a PCD asset (Section 6.2.1.3) or a
PSL. See Section 6.2.1.3 for more
information about the accounting for the unfunded and funded portions of the
line of credit.
6.3.2 Recognition and Measurement Under the PSL Model
6.3.2.1 Initial Recognition
The initial recognition of purchased assets that are within the scope of the
PSL model is similar to that under the PCD model (Section 6.2). That is, an entity should
apply the gross-up approach when initially recognizing expected credit
losses upon acquisition. In other words, the entity would recognize such
expected losses as an adjustment to the asset’s cost basis. Because the
entity applies the gross-up approach to recognize expected credit losses on
PSLs, it does not recognize in net income the initial expected credit losses
on those assets. Interest income recognition for PSLs would be based on the
purchase price plus the initial allowance accreting to the contractual cash
flows. This is similar to interest income recognition under the PCD
model.
6.3.2.2 Initial and Subsequent Measurement
ASC 326-20-30-14 (quoted in Section 6.2.3.1) permits an entity to use various methods to
estimate expected credit losses for PSLs. This guidance is similar to that
in ASC 326-20-30-3 for non-PCD/PSL assets (see Section 4.4 for more information).
Although there are similarities between the methods an entity uses to
estimate expected credit losses for PSL assets and those for non-PSL assets,
there are also distinct differences:
- Application of the DCF method:
- Non-PSL assets — ASC 326-20-30-4 requires entities to discount expected credit losses by using the asset’s EIR (i.e., the rate of return implicit in the financial asset).
- PSLs — ASC 326-20-30-14 requires entities to discount expected credit losses by using a “rate that equates the present value of the purchaser’s estimate of the asset’s future cash flows with the purchase price of the asset.” For an illustration of how an entity would apply the DCF method to estimate expected credit losses on assets within the scope of the gross-up approach, see Example 14 in ASC 326-20-55-72 through 55-78.
- Application of a method other than the DCF method (e.g., a
loss-rate method):
- Non-PSL assets — ASC 326-20-30-5 requires an entity to estimate expected credit losses on the basis of an asset’s amortized cost.
- PSLs — ASC 326-20-30-14 requires an entity to estimate expected credit losses “on the basis of [the asset’s] unpaid principal balance,” with the exception of PSLs for which the accounting policy was elected (see Section 6.3.2.2.1). For an illustration of how an entity would apply a loss-rate method to estimate expected credit losses on assets within the scope of the gross-up approach, see Example 13 in ASC 326-20-55-66 through 55-71.
After initial recognition of the PSL and its related allowance, an entity
would continue to apply the CECL model to the asset — that is, any changes
to the estimate of cash flows that the entity expects to collect (favorable
or unfavorable) would be recognized immediately in the income statement
(such recognition differs from how the original estimate of expected credit
losses was recognized under the gross-up approach).
6.3.2.2.1 Accounting Policy Election — PSLs
ASC 326-20
35-1A If an entity
estimates expected credit losses on purchased
seasoned loans using a method other than a
discounted cash flow method described in paragraph
326-20-30-4, the entity may elect to measure an
allowance for credit losses on purchased seasoned
loans using the amortized cost basis and apply the
guidance in paragraph 326-20-30-2 as of each
balance sheet date after the acquisition date. An
entity shall elect this option on an
acquisition-by-acquisition basis in the period
that the acquisition occurs and apply it to all
purchased seasoned loans recognized in that
acquisition. The effect of electing this option
shall be recorded in net income as a credit loss
expense.
35-1B If an
entity elects the option in paragraph
326-20-35-1A, the initial amortized cost basis
measured in accordance with paragraph 326-20-30-13
and effective interest rate measured in accordance
with paragraph 310-10-35-53B as of the acquisition
date shall not be remeasured in connection with
electing this option. In addition, expected credit
losses shall be measured consistently for the
remaining life of the purchased seasoned
loans.
Under ASC 326-20-35-1A (added by ASU 2025-08), an accounting policy
election is available to entities that use a method other than a DCF
method to estimate expected credit losses on PSLs. An entity that makes
this election can use the amortized cost basis of the asset to
subsequently measure the credit loss allowance. Accordingly, an entity
can aggregate purchased and originated loans when adjusting estimates of
credit losses for assets that share similar risk characteristics. This
election would be made on an acquisition-by-acquisition basis in the
period in which the acquisition occurs and would apply to all PSLs
recognized in the acquisition.
In paragraph BC31 of ASU 2025-08, the FASB acknowledges
that this policy election could result in a one-time “true-up” in the
provision for credit losses (i.e., an adjustment to the recorded
allowance for credit losses, which is recognized in earnings) because
the entity has changed from using the unpaid principal balance to using
the amortized cost basis in measuring expected credit losses. However,
since “the amount of the true-up will be qualitatively and
quantitatively insignificant,” the Board believes that the practical
benefit of allowing the election outweighs the costs.
6.3.2.2.2 Expected Recoveries
ASC 326-20
30-13 An entity shall
record the allowance for credit losses for
purchased financial assets with credit
deterioration and purchased seasoned loans in
accordance with paragraphs 326-20-30-2 through
30-10, 326-20-30-12, and 326-20-30-14.
Additionally, expected recoveries of amounts
previously written off and expected to be written
off shall be included in determining the allowance
for credit losses in accordance with paragraph
326-20-30-1 for purchased seasoned loans and
paragraph 326-20-30-13A for purchased financial
assets with credit deterioration. An entity shall
add the allowance for credit losses at the date of
acquisition to the purchase price to determine the
initial amortized cost basis for purchased
financial assets with credit deterioration and
purchased seasoned loans. Any noncredit discount
or premium resulting from acquiring a pool of
purchased financial assets with credit
deterioration or purchased seasoned loans shall be
allocated to each individual asset. At the
acquisition date, the initial allowance for credit
losses determined on a collective basis shall be
allocated to individual assets to appropriately
allocate any noncredit discount or premium.
As discussed in Chapter 4, when
applying the CECL model, an entity must consider recoveries in
determining its allowance for expected credit losses in accordance with
ASC 326-20-30-1. Similarly, ASC 326-20-30-13 requires that “expected
recoveries of amounts previously written off and expected to be written
off . . . be included in determining the allowance” for expected credit
losses for PSLs.
Connecting the Dots
Guidance on Expected Recoveries for PSLs Versus That for
PCD Assets
Expected recoveries are included in the estimation of the
allowance for credit losses for both PSLs and originated loans.
However, the guidance on recoveries for PCD assets differs from
that for non-PCD assets (including PSLs after the adoption of
ASU 2025-08). Specifically, ASC 326-20-30-13A indicates that for
loans that meet the definition of a PCD asset, expected
recoveries are limited to the allocated noncredit discount (see
Section 6.2.3.4).
6.3.3 Effective Date and Transition Requirements
ASC 326-10
65-7 The following represents
the transition and effective date information related to
Accounting Standards Update No. 2025-08, Financial
Instruments — Credit Losses (Topic 326): Purchased
Loans:
Effective date and early adoption
a. All entities shall apply the pending content
that links to this paragraph for annual reporting
periods beginning after December 15, 2026, and
interim reporting periods within those annual
reporting periods.
b. Early adoption of the pending content that
links to this paragraph is permitted in an interim
or annual reporting period in which financial
statements have not yet been issued or made
available for issuance. If an entity adopts the
pending content that links to this paragraph in an
interim reporting period, it shall apply the
pending content as of the beginning of that
interim reporting period or the beginning of the
annual reporting period that includes that interim
reporting period.
Transition method
c. An entity shall apply the pending content
that links to this paragraph prospectively to
loans that are acquired on or after the date of
initial application of the pending content.
The guidance in ASU 2025-08 is effective for annual reporting periods beginning
after December 15, 2026, including interim reporting periods. 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.”
The amendments must be applied prospectively. Once an entity selects its initial
adoption date, it must evaluate all assets acquired after that date to determine
whether they are within the scope of the PCD model and, if not, whether they are
within the scope of the PSL model. The amendments cannot be applied on an
acquisition-by-acquisition basis (i.e., once the amendments are initially
adopted, they apply to all acquired assets on or after that date).