The Financial Accounting Standards Board (FASB) has released a new Accounting Standards Update (ASU) intended to streamline how institutions account for purchased loans.

According to a FASB press release, the update follows years of feedback gathered through the board’s post-implementation review of the credit losses standard issued in 2016, where stakeholders repeatedly raised concerns about the split between purchased credit-deteriorated (PCD) and non-PCD assets. 

Under existing guidance, acquired financial assets are recorded at amortized cost with a separate allowance for expected credit losses. For PCD assets, the allowance is incorporated through a “gross-up approach,” while non-PCD assets require a direct charge to credit loss expense. Many preparers and users argued that the two-track model added complexity, created subjectivity in determining asset classifications, and in some cases, resulted in double counting expected losses. 

The new ASU expands the use of the gross-up approach to a broader set of acquired loans. Acquired loans, other than credit cards, will be treated as purchased seasoned loans and accounted for using the gross-up method when they meet the criteria outlined in the guidance. According to FASB, the goal is to improve consistency in application and better align the accounting with the economics of loan acquisitions. 

By consolidating the treatment of purchased loans, the board aims to reduce variation in practice and address longstanding comparability issues raised throughout the review process.