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FASB Proposes Changes to Purchased Financial Assets Accounting

S.J. Steinhardt
Published Date:
Jun 28, 2023

iStock-826741128 Accounting Standards

The Financial Accounting Standards Board (FASB) proposed an accounting standards update to improve the accounting treatment for purchased financial assets.

The FASB issued its credit losses standard in 2016 and has heard feedback, particularly from investors, regarding the accounting for financial assets acquired in a business combination or asset acquisition since then. That feedback led the FASB to reconsider the accounting for purchased financial assets.

The proposal would eliminate the “double count” that occurs under current expected credit loss (CECL) accounting.

Investors and preparers provided feedback communicating that having two accounting models for purchased financial assets is unnecessarily complex, and that they would prefer to apply a single accounting model to recognize credit losses for all purchased financial assets, FASB stated. "These stakeholders noted that assessing whether credit has deteriorated since origination is subjective and inconsistently applied, which creates comparability issues and diminishes the decision usefulness of financial information. In addition, they were particularly concerned with the non-PCD [purchased credit deteriorated] accounting model and the requirement to record a day one allowance in addition to any credit discount reflected in the initial fair value."

Larger banks, such as BB&T (now Truist Financial Corp.) and TCF Financial (now a part of Huntington Bank), had told the FASB several years ago that CECL treats non-PCD and originated assets differently, CPA Practice Advisor reported. They said the CECL standard requires a double-counting on expected credit losses for the non-PCD assets and “unnecessarily penalizes” the acquirer’s equity.

"When you think about cost benefit, it is an important part because at the end of the day, our mission and our focus is to provide the best information to make for investors to make capital allocation decisions," said FASB chair Richard Jones during an accounting conference earlier this month at the University of Southern California's Leventhal School of Accounting, Accounting Today reported. "But there is a cost benefit trade-off because ultimately, those costs are borne by investors that are borne by the investors in that company, so it's something they have to think about. While we don't have a mathematical calculation of a cost benefit, we do go through that process. I would emphasize that costs aren't isolated to one stakeholder. In other words, costs aren't simply viewed from a preparer perspective. There's also a cost from an investor perspective. There are also benefits from an investor as well as a preparer perspective and we look at all those. Now each board member may weigh those costs and benefits slightly differently. But ultimately, the conclusion as to how we weigh those costs, benefits are included in our basis of conclusion on any finalized standard."

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