The FASB has recently issued Accounting Standards Update (ASU) 2025-08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans. This standard is intended to improve the application of Topic 326 to purchased financial assets. Topic 326 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. For PCD assets, the initial amortized cost basis 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. Under previous guidance, 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 new guidance in ASU 2025-08 now expands the population of acquired financial assets that are to be accounted for using the gross-up approach.  Specifically, if an entity determines that a loan is a non-PCD asset, the entity should then determine whether the loan is a “purchased seasoned loan” and if so, should account for the purchased loan using the gross-up approach. All non-PCD loans (excluding credit cards) that are acquired in a business combination or are purchased at least 90 days after origination and the acquirer was not involved in the origination of the loans are considered “purchased seasoned loans” and thus qualify for the gross-up accounting approach under these new amendments.

The amendments in ASU 2025-08 are effective for all entities for annual reporting periods beginning after December 15, 2026. Early adoption is permitted. In the period of adoption, the guidance is to be applied prospectively to loans that are acquired on or after the date of initial application.

The full text of the ASU can be found here.

Published: 01/05/2026

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