FASB proposes improvements to accounting for purchased fin assets

The FASB has published the proposed Accounting Standards Update (ASU), Financial Instruments—Credit Losses (Topic 326)—Purchased Financial Assets. The FASB intends the proposal to improve the accounting for purchased financial assets and is seeking stakeholders to review and provide input on the proposed ASU by August 28, 2023. 

Since the issuance of the credit losses standard in 2016, with ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the FASB has monitored and assisted stakeholders with implementation through the post-implementation review (PIR) process. Through that process, the FASB heard feedback, particularly from investors, regarding the accounting for financial assets acquired in a business combination or asset acquisition that requested the FASB reconsider the accounting for purchased financial assets. 

Current accounting for purchased financial assets

Under current GAAP, if a purchased financial asset has experienced a more-than-insignificant deterioration in credit quality since origination, it is accounted for under the purchased credit deteriorated (PCD) model (referred to as the gross-up approach) with no credit loss recorded on acquisition. If instead, the purchased financial asset has not experienced a more-than-insignificant credit deterioration since origination, it is accounted for in a manner consistent with an originated financial asset (referred to as non-PCD accounting). Under non-PCD accounting, a day one credit loss is recorded in addition to any credit discount reflected in the fair value of the acquired assets.

Proposed amendments

Investors and preparers provided feedback that having two accounting models for purchased financial assets is unnecessarily complex, and they would prefer to apply a single accounting model to recognize credit losses for all purchased financial assets. 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 accounting model and the requirement to record a day one allowance in addition to any credit discount reflected in the initial fair value. 

The amendments, if adopted as proposed, would address these concerns by requiring that all acquired financial assets, with certain limited exceptions, would follow the existing gross-up approach.

Effective date

The proposed ASU notes that the FASB will determine the effective date and whether early adoption of the amendments would be permitted after it considers the feedback on the proposed amendments. At this time, the FASB expects that the amendments, if adopted as proposed, would be applied on a modified retrospective basis to the beginning of the fiscal year that an entity has adopted the amendments in ASU 2016-13. A cumulative-effect adjustment, if necessary, would be recorded as of the later of (1) the beginning of that reporting period and (2) the beginning of the earliest period presented.

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