Accounting Standards Update: Purchased Loans

November 14, 2025

On Wednesday, November 12, 2025, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2025-08 Financial Instruments—Credit Losses (Topic 326): Purchased Loans. This ASU is welcome news for acquisitive banks and other lenders as this new ASU removes the hit to earnings for acquiring performing loans and also reduces complexity and improves comparability in the accounting treatment for acquired loans.

The Current and Expected Credit Loss (“CECL”) standard codified in FASB ASC 326 and issued in 2016 resulted in purchased credit deteriorated (“PCD”) loans and non-PCD loans having disparate accounting treatment for the establishment of the initial allowance for credit loss (“ACL”). The CECL standard required that acquirers record an initial ACL for PCD loans using the gross-up method with the purchase accounting entries and no effect on the income statement, while non-PCD loans were to have an initial ACL recorded with a provision for credit loss through the income statement on Day 1 after the acquisition date.

The gross-up method refers to recording the initial allowance for credit loss at acquisition and a corresponding increase to the amortized cost basis, instead of recording a credit loss provision expense. PCD and non-PCD loans were to be recorded at fair value on the acquisition date, and the measurement of fair value premium or discount to be recorded in the purchase accounting included assessing the credit quality. This treatment for non-PCD loans resulted in a “double count” of the credit risk to be recorded associated with these acquired loans.

ASU 2025-08 provides for entities to record the initial ACL for purchased seasoned loans (“PSL”) using the gross-up method, provided that these loans meet the criteria to be PSL. Seasoned loans in this context refers to loans in existence at the time of the acquisition that were acquired, as opposed to newly originated loans.

The criteria for a PSL is as follows:

Not a PCD loan

Either:

• A loan obtained through a business combination or
• Obtained through a transfer that is not a business combination or initially recognized through the consolidation of a variable interest entity. 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.

Excludes:

• Credit card receivables
• Debt securities
• Trade receivables arising from revenue transactions from contracts with customers accounted for under Topic 606

Any remaining acquired financial assets that do not meet the criteria for PCD and PSL are to be accounted for at acquisition as if originated, with an initial recognition at their purchase price or fair value, and any initial and subsequent ACL is recognized through a provision for credit loss in the income statement.

When is this effective?

This ASU is effective for all entities for annual periods for calendar year entities in 2027 and for non-calendar year entities for annual reporting periods beginning after December 15, 2026, and for interim reporting periods within those annual reporting periods. Early adoption is permitted for interim and annual reporting in which financial statements have not yet been issued or made available for issuance.

This ASU requires a prospective adoption treatment and no change to the previous recognition of acquired non-PCD loans in years previous to adoption of this new ASU and since the adoption of CECL.