FASB Amends the Accounting for Purchased Loans (November 13, 2025)

An entity uses the gross-up approach to account for PCD assets upon their acquisition. Accordingly, at acquisition, the entity adds the expected credit losses to the asset’s purchase price to arrive at the amortized cost basis and does not recognize a provision for credit loss expense. Under ASU 2016-13, entities accounted for non-PCD assets in a manner similar to originated assets upon acquisition. That is, they recorded expected credit losses through a provision for credit loss expense.

In feedback received as part of the FASB’s postimplementation review of ASU 2016-13, stakeholders indicated that the guidance increased complexity and reduced comparability because it established two accounting models, which required entities to differentiate between PCD assets and non-PCD assets. They also noted that the models’ outcomes were unintuitive because entities would record a loss upon the acquisition of non-PCD assets but not PCD assets.

The ASU provides indicators of when a transferee is more likely to have been involved with the origination of a loan. These include (1) exposure to the loan within 90 days of origination and (2) influence on the “offering, arranging, underwriting, or other nonadministrative lending activity” related to the loan's origination. An entity should perform its analysis on an individual-loan basis.

ASU 2025-08 also introduces an accounting policy election related to the subsequent measurement of expected credit losses for entities that use a method other than a discounted cash flow analysis to estimate credit losses on purchased seasoned loans. If this accounting policy is elected, entities can use the amortized cost basis of the asset to subsequently measure their credit loss allowance. Accordingly, they can aggregate purchased and originated loans when adjusting estimates of credit losses for assets that share similar risk characteristics. The FASB acknowledges in the ASU that this policy election could result in a one-time “true-up” in the provision for credit losses because of an entity’s change 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 such costs.

Lastly, although the ASU expands the application of the gross-up approach, it does not amend the measurement, presentation, or disclosure requirements in ASC 326.

 

Connecting the Dots

The FASB does not define “credit cards,” but in paragraph BC16 of the ASU, the Board explains its rationale for excluding credit cards from the definition of purchased loans:

Comment letter feedback strongly encouraged the Board to reconsider the proposed amendments that would have imposed a significant operational burden on preparers by requiring credit cards (which are open-ended, active lines of credit) to apply the gross-up approach upon acquisition. [Emphasis added]

Given the discussion in the ASU’s Basis for Conclusions and decisions made by the Board during deliberations of the proposed guidance, the exclusion of credit cards from the definition of a purchased loan is expected to apply to open-ended lines of credit with active revolving privileges regardless of whether a physical card is issued or an arrangement is described as a credit card.