FASB’s Adjustment To CECL; Good News For Capital and Earnings
By Larry Davis & Rich Abrahamian
Overview
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2025-08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans (“ASU”) on November 12, 2025, eliminating a long-standing concern over double counting of credit losses on certain purchased loans. This will improve earnings and capital levels by eliminating the initial Day 1 income statement charges associated with purchases of qualifying loans covered by this ASU. It also represents a limited time opportunity to early adopt in 2025, for those banks and credit unions that have completed a business combination or have purchased significant quantities of seasoned loans within the current year.
The new ASU adopts the gross-up methodology previously afforded purchased financial assets with credit deterioration (“PCD assets”). For loan purchases meeting these requirements, the initial estimate of expected credit losses no longer affects the income statement. The initial estimate of credit losses is measured as of the acquisition date and will now be recorded as an increase in the allowance for credit losses with an offsetting adjustment made to increase the initial amortized cost basis of those acquired loans to their “gross-up basis”. Previously, the initial credit allowance for non-PCD loans was reflected in the income statement. The non-credit discount or premium, representing the difference between the asset’s gross-up basis and the unpaid principal balance, is accreted or amortized into interest income over time.
Purchased Seasoned Loans
The FASB chose not to apply the gross-up method to all loans but expanded its use from PCD loans to apply to an additional category of purchased loans identified as purchased seasoned loans (PSLs”). The initial assessment is to consider whether purchased loans meet the definition as a PCD loan or a PSL. Purchases of PCD loans continue to employe the gross-up method.
A loan is considered a PSL if it is not a PCD loan and meets either of the following:
- The loan is obtained through a business combination accounted for using the acquisition method.
- The loan is (i) obtained through a transfer that is not a business combination accounted for using the acquisition method or (ii) 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 acquirer was not involved with the origination of the loan.
PSLs do not include credit cards; debt securities or trade receivables arising from transactions accounted for under Topic 606 on revenue from contracts with customers.
Transition Method, Dates and Opportunity
The revisions apply prospectively to loans acquired on or after the date of initial application of the pending content.
- All entities are required to apply this guidance for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods.
- Early adoption is permitted in an interim or annual reporting period in which financial statements have not yet been issued or made available for issuance.
- If an entity adopts these amendments in an interim reporting period, it shall apply the requirements as of the beginning of that interim reporting period.
These changes will improve capital levels by eliminating initial Day 1 credit loss provisions on qualifying purchased loans. The early adoption provisions allow for implementation now in 2025 before calendar year end December 31, 2025, financial statements are finalized.
You should confirm your approach with your independent auditors.
Larry Davis is a Director at CFO Consulting Partners within the Financial Institutions and Insurance practice. A former Controller at a regional bank, Larry has been consulting with banks since 2013, focusing on accounting, financial reporting, and compliance to enhance operational efficiency.
Rich Abrahamian is a finance and accounting consultant, currently working with banks and credit unions. He was previously Corporate Controller at OceanFirst Bank and the CFO at Two River Community Bank