New FASB updates: How purchased financial assets accounting is changing
The Financial Accounting Standards Board (FASB) is pressing ahead with the purchased financial assets project, aiming to simplify and enhance the transparency of acquired financial assets accounting.
As of April 30, 2025, the FASB continued deliberating on proposed updates and made key decisions. It’s expected that a final standard will be released later in 2025.
Here’s the information your financial institution should know ahead of potential changes:
Changes to purchased financial assets accounting
The proposed changes to acquired financial assets accounting include:
- In general, loan discounts on performing loans related to credit conditions will now be recognized as allowance for credit losses (ACL) under business combination accounting.
- Other loan discounts or premiums that are attributable to fair value adjustments and unrelated to expected credit losses will continue to be accreted/ amortized to interest income over the remaining life of the acquired loans.
- The requirement to establish the ACL through a provision at the time of a merger or acquisition will generally be eliminated.
The accounting treatment for purchased credit deteriorated (PCD) loans will not be changed under the update. Additionally, certain loans — such as those acquired outside of business combinations, credit card receivables and securities — are excluded from the scope of the update.
Purchased financial assets project scope
The amendments will apply to qualifying loans, which are loan receivables excluding credit cards.
However, held-to-maturity debt securities are excluded if they meet the seasoning criteria:
- They were acquired as part of a business combination.
- They were acquired more than 90 days after the loan origination date, with no involvement by the acquirer with the origination of the loan.
Determining whether an acquirer was involved in the origination of a loan requires a careful evaluation of all relevant facts and circumstances. Key considerations include:
- The acquirer’s direct or indirect exposure to the economic risks and rewards of ownership prior to obtaining control of the financial asset.
- The nature of the relationship between the transacting entities, including arrangements made in contemplation of recurring transfers of similar financial assets and the acquirer’s ability to influence the originator’s underwriting standards.
- The nature of the transacting entities’ relationship, including any arrangements made contemplating recurring transfers of similar assets or the acquirer’s ability to influence the underwriting standards of the originator.
- The transaction’s contractual terms, such as call options written for the acquirer by the originator or forward purchase commitments written by the acquirer to the originator.
- Whether funding arrangements between the originator and acquirer or conveyance put options or a similar contract from the acquirer to the originator exists.
- Whether a loss-sharing arrangement obligating the acquirer to reimburse the originator for an amount of principal loss incurred by the originator prior to the transfer exists.
- Whether a make-whole arrangement obligating the acquirer to reimburse the originator if the acquirer terminates the purchase transaction exists.
For qualifying loans, the initial amortized cost basis is calculated as the purchase price plus the initial ACL. Accordingly, the acquirer will measure and recognize the ACL at acquisition using an appropriate CECL methodology, with a corresponding entry to a loan’s premium or discount.
This approach means the acquirer will not need to recognize a post-acquisition provision for credit losses to set up the ACL, as is required under current CECL accounting standards.
What these changes could mean for your institution
The revised project objective focuses on improving accounting treatment for the acquisition of purchased financial assets, excluding those classified as PCD.
Under the current accounting standards, acquired loans are measured and recognized at fair value or the consideration transferred, which typically results in a loan discount or premium reflecting valuation adjustments for market, credit, interest rate and other factors.
For PCD loans, the ACL is established by reclassifying an amount of the loan discount or premium. Other performing loans recognize ACL 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.
The proposed standards seek to align the accounting for qualifying loans — performing loans, excluding credit cards — that meet specific criteria with the existing approach for accounting for PCD loans.
Qualifying 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 qualifying loan’s initial ACL as part of the business combination or loan acquisition by reclassifying it — measured with an appropriate CECL methodology — from the loan premium or discount. A provision for credit losses would not be necessary to recognize the initial ACL for qualifying loans.
This approach under the proposed ASU is expected to result in lower discounts or higher premiums and lower effective interest margins for any qualifying loans acquired.
Your next steps
Once finalized, the amendments 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.
Based on previous FASB decisions, institutions can early adopt the ASU once finalized. However, your institution will not be permitted to restate prior-period financial statements for loan acquisitions occurring in those periods.
If the final standard is issued in 2025, a calendar year entity may apply the proposed ASU to loan acquisitions that occurred earlier in the year. A fiscal year entity (e.g., the year ended June 30, 2025) may apply the proposed ASU to loan acquisitions that occurred within the fiscal year — provided the financial statements have not yet been issued, even if the ASU is finalized after the fiscal year-end.
How Wipfli can help
If your institution is planning 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 assurance for financial services team today to explore how the proposed accounting standards could impact your institution.
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