FASB Makes Refinements to CECL for Purchased Loans By KELLY L. SHAFER, CPA, Member, Suttle & Stalnaker LLC In November 2025, the FASB issued Accounting Standards Update (ASU) No. 2025-08, Financial Instruments — Credit Losses (Topic 326): Purchased Loans. The standard represents one of the most significant modifications to CECL accounting since the adoption of ASC 326, Current Expected Credit Losses and is expected to impact banks that acquire loans through mergers, branch acquisitions or portfolio purchases. For banks, this new guidance changes how certain purchased loan portfolios are accounted for under CECL, with the goal of reducing front-loaded “Day 1” loss recognition. WHY IS “DAY 1” LOSS RECOGNITION AN ISSUE? Under the original CECL framework, acquired loans were separated into two categories: Purchased Credit Deteriorated (PCD) loans and Non-PCD acquired loans. PCD loans used the “gross-up” approach, where expected credit losses were added to the loan’s amortized cost basis rather than immediately recognized through earnings. Non-PCD loans, however, required banks to record an allowance for credit losses immediately through provision expense at acquisition. This treatment can create an artificial “Day 1” earnings impact because expected credit losses are effectively recognized twice: • Through the fair value discount embedded in the purchase price; and • Again, through the allowance for credit losses recorded upon acquisition. This issue is particularly important for banks engaged in acquisition activity. WHAT DOES ASU 2025-08 CHANGE? ASU 2025-08 expands the “gross-up” approach to a broader category called Purchased Seasoned Loans (PSLs). Under the new guidance, acquired loans that are more than 90 days old and were not originated by the acquiring institution will now receive treatment similar to PCD assets. The update applies to: • Loans acquired in business combinations • Loans acquired in asset purchases • Loans obtained through the consolidation of certain variable interest entities • Loans purchased more than 90 days after origination, where the buyer had no substantive involvement in underwriting or origination The ASU eliminates the immediate provision expense for many acquired non-PCD loans. Instead, banks add an allowance to the purchase price at acquisition to determine the initial amortized cost basis. For loans acquired in pools, the allowance and any premium or discount are allocated to the individual loans. After acquisition, changes in expected credit losses on PSLs are recognized through the allowance and recorded in earnings. WHY DOES THE STANDARD MATTER TO BANKS? 1. Simplification of CECL Accounting Community banks have consistently expressed concerns regarding the operational complexity of CECL, particularly in distinguishing between PCD and non-PCD acquired loans. ASU 2025-08 simplifies the framework by broadening the use of a single accounting methodology for acquired seasoned loans. As a result of adopting the ASU, benefits may include easier loan accounting integration after acquisitions, fewer classification judgments, and lower compliance and audit burden. This simplification could be especially 12 WEST VIRGINIA BANKER
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