The FASB has issued an Exposure Draft intended to simplify and improve the application of Topic 326, Financial Instruments – Credit Losses to purchased financial assets. As currently written, the existing guidance requires entities to differentiate purchased financial assets between those with a “more-than-insignificant” deterioration in credit quality (PCD assets) and those without a “more-than-insignificant” deterioration (non-PCD assets) as of the acquisition date. Stakeholders have expressed concern that having two acquisition accounting approaches creates unnecessary complexity and may reduce comparability. This Exposure Draft is intended to alleviate this concern by establishing a uniform approach to all purchased financial instruments.
Under existing Topic 326 guidance, the initial amortized cost basis for a PCD asset is an amount equal to the sum of the allocated purchase price and the allowance for expected credit loss. This is commonly referred to as the gross-up approach. Any difference between this amortized cost basis and the par value is treated as a noncredit discount and is accreted or amortized to interest income over time. Alternatively, for a non-PCD asset, the initial amortized cost basis is equal to the purchase price and an allowance for expected credit losses is separately recorded through a charge to credit loss expense. The purchase discount or premium, if any, is subsequently recognized as interest income using the effective interest rate as of the acquisition date.

The Exposure Draft would simplify the above accounting by requiring the application of the gross-up approach to all purchased financial assets, regardless of their credit standing as of the acquisition date.

The Exposure Draft would be applied on a modified retrospective basis to the beginning of the fiscal year that an entity has adopted ASU 2016-13. The effective date and whether early adoption would be permitted have not yet been determined. Comments on the Exposure Draft are due by August 28, 2023.

The full text of the Exposure Draft can be found here.