FASB Proposes Amendments to the Accounting for Purchased Financial Assets
Overview
On June 27, 2023, the FASB issued a proposed ASU1 that would amend the guidance in ASU 2016-132 on the accounting upon acquisition for financial assets acquired in (1) a
business combination, (2) an asset acquisition, or (3) the consolidation of a
variable interest entity (VIE) that is not a business. Comments on the proposed ASU
are due by August 28, 2023.
Background
In June 2016, the FASB issued ASU 2016-13, which requires entities to measure
expected credit losses over the life of an asset upon origination or
acquisition. ASU 2016-13 is aimed at reducing the complexity in U.S. GAAP of
accounting for acquired assets with credit impairment. Specifically, under the
ASU, the asset acquirer is required to differentiate between assets purchased
with credit deterioration (PCD assets) and assets that are not purchased with
credit deterioration (non-PCD assets). PCD assets are defined as assets with
“more than insignificant” credit deterioration since origination.
Upon acquisition, a gross-up approach is currently used to account for the PCD
assets. As a result, the expected credit losses are added to the asset’s
purchase price to arrive at the amortized cost basis and no provision for credit
loss expense is recognized upon acquisition. Non-PCD assets are accounted for
similarly to originated assets upon acquisition. That is, expected credit losses
are recorded through a provision for credit loss expense.
As part of its postimplementation review process, the FASB received feedback
suggesting that ASU 2016-13 creates additional complexities and reduces
comparability by requiring entities to use two accounting models to
differentiate between PCD assets and non-PCD assets.
In July 2021, the Board added to its technical agenda a project on improving the
accounting for acquired financial assets within the scope of ASU 2016-13.
Main Provisions of the Proposed ASU
The proposed ASU would broaden the population of financial assets that are within
the scope of the gross-up approach under ASC 326.3 Accordingly, an asset acquirer would apply the gross-up approach to all
financial assets acquired in a business combination in accordance with ASC
8054 rather than first determining whether an acquired financial asset is a PCD
asset or a non-PCD asset. 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.
Connecting the Dots
Although the proposed ASU would expand the application of the gross-up
approach, it would not amend the measurement, presentation, or
disclosure requirements in ASU 2016-13. In addition, the gross-up
approach would not apply to acquired available-for-sale debt securities.
Proposed Effective Date and Transition
Effective Date
The Board will determine the effective date, as well as whether to permit
early adoption, after considering stakeholder feedback on the proposed ASU.
Transition
An entity would apply the proposed amendments on a modified retrospective
basis, reflected as of the beginning of the fiscal year in which the entity
adopted the amendments in ASU 2016-13. If necessary, a cumulative-effect
adjustment “would be recorded as of the later of (1) the beginning of that
reporting period and (2) the beginning of the earliest period presented” in
which the entity adopted the amendments in ASU 2016-13.
Contacts
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Marla Lewis
Audit & Assurance Partner
Deloitte & Touche LLP
+1 203 708 4245
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Danielle Foti
Audit & Assurance Manager
Deloitte & Touche LLP
+1 860 725 3193
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Footnotes
1
FASB Proposed Accounting Standards Update (ASU),
Financial Instruments — Credit Losses (Topic 326): Purchased
Financial Assets.
2
FASB Accounting Standards Update No. 2016-13, Measurement
of Credit Losses on Financial Instruments.
3
FASB Accounting Standards Codification (ASC) Topic 326, Financial
Instruments — Credit Losses.
4
FASB Accounting Standards Codification Topic 805, Business
Combinations.