Background
Since the introduction of the Current Expected Credit Losses model under ASC 326, stakeholders have raised persistent concerns about the inconsistent accounting outcomes for acquired financial assets. Under the pre-existing guidance, entities were required to distinguish between PCD assets and other acquired loans (commonly referred to as non-PCD). This distinction often produced results that were misaligned with the underlying economics of purchase transactions.
While PCD assets followed a gross-up approach—where expected credit losses were embedded in the initial amortized cost basis—most non-PCD assets required recognition of a Day-1 credit loss expense. This difference created two key challenges:
- Earnings volatility at the acquisition date, driven by immediate loss recognition for non-PCD assets.
- Limited comparability across acquisitions that were similar in substance but accounted for differently due to technical definitions rather than credit risk profiles.
These issues became increasingly prominent as CECL matured and as acquisition activity involving loan portfolios, fintech originations, and specialty finance platforms accelerated. Users of financial statements provided feedback that the model did not always accurately reflect purchase economics, and operational complexity increased as entities applied two different measurement approaches to similar acquired assets.
Responding to this feedback, the FASB issued ASU 2025-08, introducing the concept of PSLs and aligning their initial measurement with the PCD gross-up model. The update aims to enhance consistency, reduce acquisition-date volatility, and simplify aspects of the CECL framework while maintaining its forward-looking intent.
Key Highlights of Amendment in ASU
Purchased Seasoned Loans (PSLs)- What They Are and Why They Matter
ASU 2025-08 expands the use of the gross-up method beyond PCD assets to a specific subset of non-PCD loans referred to as “purchased seasoned loans.” The standard introduces a two-step framework:
- First, assess whether an acquired loan is a PCD asset.
- If it is not, assess whether the loan qualifies as a purchased seasoned loan.
Purchased Credit-Deteriorated asset
Under existing CECL guidance (ASC 326), an acquired loan is classified as a Purchased Credit-Deteriorated asset if both of the following conditions are met at the acquisition date:
A. The loan has experienced more-than-insignificant credit deterioration since origination
To evaluate this, entities typically consider:
- Significant decline in credit score / internal risk grade
- Material deterioration in the probability of default or expected cash flows
- Adverse changes in the borrower’s financial condition
- Past-due status, non-accrual history, or recent modifications
- Collateral value decline impacting recoverability
No single factor is determinative; the assessment is principles-based, focused on whether the overall level of credit risk has meaningfully worsened since the loan was originally issued.
B. The deterioration must be since origination, not merely relative to current market benchmarks
The test compares the loan’s credit quality at origination versus at acquisition, not versus peer loans or market pricing.
Purchased a Season loan
A purchased seasoned loan is defined as a loan that meets either of the following pathways:
Pathway 1: Business Combination
The loan is acquired as part of a business combination accounted for under the acquisition method.
Example: A bank acquires another financial institution. All loans acquired as part of the business combination—including mortgages, auto loans, and personal loans—are considered purchased seasoned loans unless already identified as PCD.
Pathway 2: Other Transfers or Consolidations
The loan is acquired in a transaction that is not a business combination, or the loan is initially recognized through consolidation of a VIE, and the loan meets both of these conditions:
- It is obtained more than 90 days after its origination, and
- The buyer/transferee had no involvement in the loan’s origination
Example: A bank purchases a pool of performing mortgages from another lender.
- The loans were originated 18 months ago (i.e., > 90 days), and
- The purchasing bank had no role in underwriting them
Flow diagram for Determining PCD vs Non-PCD and PSL Classification
Application Guidance or Implementation matters
What’s Not Included in PSLs
The following are not considered purchased seasoned loans:
- Credit card receivables
- Debt securities
- Trade receivables arising from revenue transactions under ASC 606
When Is a Transferee Considered Involved in Loan Origination?
ASU 2025-08 emphasizes that determining whether a loan qualifies as a purchased seasoned loan depends on whether the transferee participated—directly or indirectly—in the loan’s origination. This assessment is key because loans in which the transferee had origination involvement cannot be treated as purchased seasoned loans.
The standard clarifies that a transferee is more likely to be viewed as involved when the transfer occurs under an existing contractual relationship, such as a purchase commitment, pipeline financing agreement, or any arrangement that ties the transferee economically to the originator.
A transferee is considered involved in origination when either of the following conditions is met:
01. Early Economic Exposure (Within 90 Days)
The transferee has direct or indirect exposure to the economic risks and rewards of the loan within 90 days after origination. This suggests the transferee was effectively part of the initial lending decision.
02. Substantive Influence Over Lending Activities
The transferee has a meaningful influence over key non-administrative lending activities performed by the originator, such as offering, structuring, arranging, or underwriting the loan.
Illustrative Examples
Example 1: Pipeline Purchase Arrangement
- Bank A enters into a forward purchase agreement requiring it to buy mortgages originated by Bank B within 60 days of origination.
- Bank A is exposed to economic risks early.
- The purchase occurs through an existing contractual commitment.
Conclusion: Bank A is considered involved in origination
Loan is not a purchased seasoned loan.
Example 2: Influence on Underwriting Standards
- An investment firm collaborates with an originator to design underwriting criteria for small business loans and commits to buying a portion of the portfolio once originated.
- The firm influences underwriting decisions.
Conclusion: Transferee is involved
Loan is not a purchased seasoned loan.
Practical Considerations
Determining whether a transferee was involved in the origination of a loan will often require significant judgment. Because this is a new evaluation requirement introduced by ASU 2025-08, entities will need to establish robust policies, procedures, and internal controls to consistently assess both contractual and non-contractual arrangements. These frameworks should enable management to identify situations that may constitute origination involvement and ensure that loans are appropriately classified under the new model. Entities should consider:
- Enhanced Monitoring of Contractual Arrangements: Implement controls to track existing purchase commitments, forward-flow arrangements, and other agreements that may create early economic exposure or influence over origination activities.
- Periodic Review and Calibration: Given the judgmental nature of the assessment, entities should perform periodic reviews—supported by internal audit or second-line functions—to validate that conclusions remain consistent and aligned with evolving practice.
Overall, the new model places greater emphasis on governance structures that enable entities to demonstrate thoughtful, well-supported judgments in applying ASU 2025-08.
Key Accounting Considerations for Purchased Seasoned Loans
Initial Recognition principles
ASU 2025-08 aligns the initial accounting for purchased seasoned loans with the existing model for PCD assets. At the acquisition date, the acquirer grosses up the amortized cost basis by recording an allowance for expected credit losses, with no Day-1 impact to the income statement. This ensures that the acquired loan reflects both the purchase price and the estimated lifetime credit losses as of the date of acquisition.
Subsequent Recognition
While the initial recognition mirrors the PCD approach, the ASU introduces targeted differences in subsequent measurement, including:
Measurement Basis Election
For purchased seasoned loans, entities may elect an accounting policy (when using a method other than discounted cash flows) to measure expected credit losses based on amortized cost (i.e., the carrying amount after adjusting for purchase discount, fees, and accretion), not unpaid principal (i.e., the full amount the borrower still owes). In contrast, for PCD assets, expected credit losses—both initially and thereafter—must always be measured using the unpaid principal balance.
Guidance on Expected Recoveries
When estimating credit losses, entities may also expect to recover some amounts that were previously charged off or deemed uncollectible.
The accounting rules for how you treat these expected recoveries are different for:
- PCD assets, and
- Purchased seasoned loans
PCD assets follow detailed, specific rules for measuring and recording expected recoveries, such as
- How to estimate amounts you may recover from previously charged-off balances
- When recoveries can increase the allowance vs. when they should increase the asset’s basis
- Limits on recognizing recoveries that exceed expected losses
- Consideration of purchase discounts vs. non-credit-related amounts
Purchased seasoned loans do not get those special rules. Instead, they follow the general CECL framework, which is simpler and less prescriptive. In other words,
- Entity can include expected recoveries in determining the allowance for credit losses
- Entity don’t apply the PCD-specific constraints and calculations
- Entity does not need to worry about special treatment of recoveries related to purchase discount vs. credit discount
- Recoveries are simply part of the overall loss estimation process
Interest Income Recognition
Purchased seasoned loans do not follow the PCD-specific model that ties income recognition to whether the entity has a reasonable expectation of collection.
Under PCD rules: An entity can recognize interest only if it reasonably expects to collect the cash. So, income recognition is tied to the borrower’s ability to pay.
For purchased seasoned loans: The entity does not check whether it will collect before recognizing interest.
This results in a more streamlined approach compared with the PCD framework.
To know more, download PDF.
Effective date and transition
Applicability:
The amendment in ASU is applicable to all entities.
Effective Date
- ASU 2025-08 is effective for fiscal years beginning after December 15, 2026, including interim periods within those years.
- Early adoption:
- Entities may early adopt the amendments in any annual or interim reporting period as long as the related financial statements have not yet been issued or made available for issuance.
- If adopted in an interim period, the amendments must be applied as of the initial application date, which can be either:
- the beginning of that interim reporting period, or
- the beginning of the annual reporting period that includes the interim period.
Transition Provisions
Prospectively for acquisitions on or after the initial application date.
