The Financial Accounting Standards Board (FASB) has issued amendments to Topic 326 (CECL) that significantly expand the use of the gross-up approach for acquired financial assets. The updates introduce a new category, Purchased Seasoned Loans, and require these assets to be accounted for using the gross-up method at acquisition, even when they do not meet the definition of Purchased Credit Deteriorated (PCD) assets. The amendments are designed to eliminate double counting of credit losses and increase consistency in accounting for acquired loans, particularly in business combinations.

Expanded Use of the Gross-Up Approach

Under legacy CECL guidance, only PCD assets required gross-up accounting. This created two persistent concerns for acquired non-PCD assets:

• Double Counting: Non-PCD acquired loans were recorded at fair value and required a Day 1 allowance for credit losses (ACL) through earnings, effectively recognizing credit losses twice.
• Comparability: The coexistence of two different acquisition accounting models reduced consistency across institutions and made it more difficult for users to compare credit results. 

By expanding the gross-up approach to all acquired financial assets, the amendments create a single unified framework that better aligns with how users analyze credit risk and allows preparers to apply acquisition accounting more consistently.

What Is a Purchased Seasoned Loan?

A purchased seasoned loan is a non-PCD loan that meets certain seasoning criteria and is not an excluded asset such as credit cards, ASC 606 receivables, or debt securities.

The determination follows two pathways:

• Automatically Seasoned in Business Combinations: All non-PCD loans acquired in a business combination (except credit cards) are automatically treated as purchased seasoned loans.
• Seasoned Based on Time and Originator Involvement: For loans acquired outside a business combination, including through the consolidation of a VIE that is not a business, the loan is a purchased seasoned loan if:
• It is acquired more than 90 days after origination
• The acquirer was not involved in origination

A transferee is considered involved if it had risk exposure within 90 days of origination or influenced underwriting or loan structuring in a substantive way. Each loan must be evaluated individually.

Gross-Up Accounting Requirements

For PCD assets and purchased seasoned loans, the acquirer must:

• Record an ACL at acquisition, including expected recoveries of amounts previously written off or expected to be written off
• Add the ACL to the purchase price to establish the initial amortized cost basis
• Allocate noncredit discounts/premiums and initial ACL to individual loans when acquired as a group

This model removes Day 1 earnings impact and prevents recognizing credit losses twice.

Interest Income Recognition

To ensure consistency with CECL principles, credit-related discounts cannot be accreted into interest income. Additional, only noncredit discounts/premiums are recognized in interest income under ASC 310-20-35 or 325-40-35.

This aligns interest income with economic yield rather than credit expectations.

Measurement of Expected Credit Losses

Discounted Cash Flow Methods

If using a DCF model, expected losses must be discounted at the rate that equates expected future cash flows with the purchase price.

Non-DCF Methods

If using PD/LGD or other non-DCF methods, expected losses must be based on the unpaid principal balance, unless the entity elects the new measurement option (discussed below) for purchased seasoned loans.

New Measurement Election for Purchased Seasoned Loans

To reduce operational complexity, entities may elect, on an acquisition-by-acquisition basis, to measure ACLs for purchased seasoned loans using the initial amortized cost basis rather than unpaid principal.

This irrevocable option allows:

• Pooling of purchased seasoned loans with similar originated loans
• Simplification of CECL modeling
• Avoidance of multiple measurement systems

Subsequent Measurement

Once established, the ACL is updated each reporting period based on revised expectations. If the amortized-cost measurement election is made, it must be applied consistently throughout the loan’s life.

The 90-Day Bright Line

FASB acknowledged that any bright line is somewhat arbitrary but concluded that 90 days provides operational clarity, supports consistent application, and reduces structuring opportunities.

Transition Guidance

The amendments are effective for annual periods beginning after December 15, 2026, including interim periods. Entities must apply the guidance prospectively to loans acquired on or after the adoption date; existing portfolios will continue under legacy rules.

Early adoption is permitted for interim or annual periods in which financial statements have not yet been issued. If adopted in an interim period, the amendments must be applied as of the beginning of that interim period or the beginning of the related annual period.

Entities should consider:

• Timing of pending acquisitions
• System readiness for ACL recalibration and gross-up entries
• Comparability across reporting periods
• Communication with investors and auditors

The transition approach minimizes operational burden while improving reporting consistency.

Example: Legacy Guidance vs. New Guidance

Scenario

• Purchase price: $92
• Par: $100
• Expected credit losses: $5
• Noncredit discount: $3

A non-credit discount of $3 will be recognized as interest income using effective interest rate method.

Outcome: The new guidance aligns accounting with the loan’s economics and eliminates double counting.