FASB issues new accounting standard for purchased loans
- ASU 2025-08 changes accounting for purchased seasoned loans, using a “gross-up” approach and CECL methodology.
- Allowance for credit losses is recognized at acquisition, removing the need for a post-acquisition provision.
- Purchased seasoned loans are clearly defined by acquisition timing and involvement in origination.
- The standard applies prospectively after December 15, 2026, with early adoption allowed.
On November 12, 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans, which aims to enhance the transparency of accounting for acquired financial assets. Here’s the information your financial institution should know about the new standard:
Changes to purchased financial assets accounting
Accounting for purchased credit deteriorated (PCD) loans remains unchanged. That is, if an entity determines there is more-than-insignificant deterioration of an acquired loan, it will continue to be accounted for as a PCD loan.
If an acquired loan (excluding credit card loans) is not considered a PCD loan and meets the “seasoned” criteria (a “purchased seasoned loan”), it will be accounted for using the “gross-up” approach. Under the gross-up approach, the entity increases the amortized cost of the acquired loans and recognizes expected credit losses at the date of acquisition (calculated using a CECL methodology) as part of its allowance for credit losses (ACL) rather than as a loan discount.
As a result, the ACL for purchased seasoned loans is established as part of the acquisition, eliminating the need for a post-acquisition provision for credit losses that is, a charge to net income — required under current CECL accounting standards.
Other loan discounts or premiums attributable to fair value adjustments not related to expected credit losses will continue to be accreted or amortized into interest income over the remaining life of the acquired loans.
This guidance does not apply to PCD loans, credit card loans, or debt securities.
Purchased seasoned loans
A purchased seasoned loan must meet one of the following criteria:
- The loan is obtained through a business combination.
- The loan is obtained outside of a business combination and meets 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 ASC 326-20-30-17).
A transferee is more likely to be involved with the origination of a loan if there is an existing contractual relationship, financing arrangement, purchase commitment, or other agreement with the entity that originated the loan.
A 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.
What these changes could mean for your institution
- Current accounting standards
- New accounting standard
Under current accounting standards, acquired non-PCD loans are measured and recognized at fair value or the consideration transferred, resulting in a loan discount or premium that reflects valuation adjustments for market, credit, interest rate and other factors.
An ACL for these non-PCD loans is recognized through a subsequent charge to provision for credit losses, which can decrease both net income and capital. Additionally, the entire loan discount is accreted into interest income over the life of the loan pool, inflating the effective yield of those loan
The new standard seeks to align the accounting for purchased loans that meet the “seasoned loans” criteria with the existing approach for accounting for PCD loans.
Purchased seasoned loans would still need to be measured and recognized at the consideration transferred or fair value, and the amount of goodwill recognized in a business combination would not change.
However, an acquirer would recognize the purchased seasoned loan’s initial ACL — measured using an appropriate CECL methodology — as part of the business combination or loan acquisition. A provision for credit losses would not be necessary to recognize the initial ACL for these loans.
The gross-up approach will result in lower discounts or higher premiums and lower effective interest margins for any purchased seasoned loans acquired.
How the new standard works
Let’s assume the following:
- Financial institution has $400 million in assets and $3 million in net income
- Institution acquires a $100 million institution with a $60 million loan portfolio
- None of the acquired loans are PCD or credit card loans
- Fair value of the loan portfolio is $58 million ($1.2 million discount for market factors, like interest rates, and $800,000 discount for credit factors)
- The estimated expected credit losses under CECL are $900,000
- Estimated credit losses on other acquired financial assets are immaterial
The financial institution would recognize the following at and immediately following the acquisition date:
| (Dollars in thousands) | Before ASU 2025‑08 | After ASU 2025‑08 |
|---|---|---|
| Loans — par | 60,000 | 60,000 |
| Fair value discount | (2,000) | (1,100) |
| Interest rate discount (1,200) | ||
| Credit discount (800) | ||
| Loans — amortized cost basis | 58,000 | 58,900 |
| Allowance for credit losses | (900) | (900) |
| Loans — carrying basis | 57,100 | 58,000 |
| Net income before acquisition | 3,000 | 3,000 |
| Provision for credit losses | (900) | 0 |
| Net income after acquisition | 2,100 | 3,000 |
Before the adoption of ASU 2025-08, the institution would recognize a provision for credit losses of $900,000 to set up the ACL for the new loans, which would reduce net income. The carrying basis of the acquired loans includes credit losses as part of the fair value discount and as part of the ACL, which many referred to as “double counting” of credit losses.
After the adoption of the new standard, the allowance is recognized as part of the acquisition by reducing the fair value discount. Consequently, no provision for credit losses is recognized, the loan acquisition does not directly affect net income or capital on the acquisition date, and the carrying basis of the acquired loans is equal to their estimated fair value.
Other considerations
In addition, the new standard allows acquirers to elect to subsequently measure the ACL for purchased seasoned loans using the initial amortized cost basis of the loans (rather than the unpaid principal balance) unless the institution is using a discounted cash flow method. This election will allow institutions to pool purchased seasoned loans with other loans that share similar risk characteristics but did not follow the gross-up approach (e.g., originated loans and loans acquired prior to the new standard).
Acquired loans that do not meet the purchased seasoned loans criteria will continue to follow current standards — the difference between the fair value measurement and par value of the loans will be recognized as a discount or premium, and the ACL will be recognized through a provision for credit losses subsequent to the acquisition.
Transition period for the accounting standard
The new accounting standard will be applied prospectively to annual reporting periods beginning after December 15, 2026, including interim reporting periods within those annual periods. The disclosure requirements under ASC 326 will remain unchanged.
Institutions can early adopt the ASU for interim or annual reporting periods as long as financial statements have not yet been issued or made available for issuance. If an entity early adopts the ASU in an interim period, it may apply the standard as of either the beginning of that interim reporting period or the beginning of the annual reporting period that includes that interim period.
For example, a calendar year entity that adopts the standard before December 31, 2025, may apply the proposed ASU to loan acquisitions that occurred earlier in the year. However, that institution will not be permitted to restate prior-period financial statements for loan acquisitions occurring in prior periods.
How Wipfli can help
If your institution is planning for or has recently completed a business combination or loan acquisition, Wipfli is ready to help. We combine decades of accounting experience and knowledge of the financial services industry’s unique challenges to deliver guidance on how you can navigate accounting changes effectively.
Connect with our financial services assurance team to explore how the new accounting standard could impact your institution.
