The Financial Accounting Standards Board has released ASU 2025-08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans, a significant update for banks and financial institutions that acquire loan portfolios. Issued on November 12, 2025, the new standard aims to eliminate longstanding concerns around “double-counting” expected credit losses and brings greater consistency to how acquired loans are reported under CECL. For financial institutions, the changes will alter acquisition accounting, credit-loss modeling, and the presentation of post-acquisition earnings in a meaningful way.
Current Guidance & Day-1 Double Counting
Under current guidance, acquired assets are evaluated as either purchased financial assets with credit deterioration (PCD) or non-PCD assets. PCD assets follow the gross-up approach, while non-PCD assets require an immediate Day-1 allowance through earnings. Preparers and investors have argued for years that this Day-1 charge effectively counts expected losses twice: once in the fair-value purchase price and again as a credit-loss expense. The result has often been earnings volatility and inconsistent application across institutions, particularly in bank M&A activity where large acquired portfolios can produce substantial non-economic charges.
Key Changes in ASU 2025-08
ASU 2025-08 resolves this issue, by eliminating the Day-1 credit loss expense, and expanding the gross-up model to all purchased financial assets deemed to be “seasoned.” Purchased Seasoned Loans are generally loans acquired after they have seasoned in the market and for which the acquirer was not involved in origination. In business combinations, loans are automatically considered seasoned. For other acquisitions, a loan qualifies if it is purchased at least 90 days after origination. Credit cards, debt securities, and trade receivables are excluded from this definition.
Gross-Up Approach & Interest Income Clarification
By applying the gross-up approach to this new category, the standard eliminates the Day-1 provision expense for most acquired loans. Instead, expected credit losses are reflected through an adjustment to the amortized cost basis at acquisition, which the FASB believes more accurately represents the economics of the transaction. The board also clarified the recognition of interest income, confirming that institutions should accrete only the portion of the discount or premium that is unrelated to credit. This clarification is intended to improve the consistency of yield reporting across institutions and acquisition types.
Optional Measurement Method
ASU 2025-08 also provides an option for institutions that do not use a discounted cash flow method to measure expected credit losses on Purchased Seasoned Loans using amortized cost rather than unpaid principal balance. This election may simplify credit-loss modeling and portfolio aggregation for institutions using probability-of-default or other non-DCF methodologies.
Effective Date & Adoption
The new rules take effect for fiscal years beginning after December 15, 2026, and apply prospectively. Institutions will not need to revisit prior acquisitions, which avoids a substantial operational burden. Early adoption is permitted.
Operational & Strategic Implications
For banks, the implications of the new standard are both operational and strategic. Policies for identifying acquired loans will need to be updated to distinguish Purchased Seasoned Loans from other categories. CECL models will require modifications to incorporate the expanded gross-up approach and, if applicable, the new measurement option. Systems will need to reliably capture origination dates and acquisition dates, especially for loan-portfolio purchases where source-system data may vary in quality. Institutions involved in M&A should also reassess how the new model affects purchase-price allocations and post-acquisition earnings patterns, given that the elimination of the Day-1 provision may meaningfully change projected results.
Judgment & Expected Benefits
Although some judgment will still be required—particularly in evaluating whether acquisition timing and involvement in origination meet the seasoning criteria—the framework under ASU 2025-08 is more intuitive and aligns better with how financial institutions evaluate the economics of acquired loan portfolios. The result should be greater transparency and comparability for investors and regulators, and fewer non-economic swings in earnings tied solely to acquisition timing.
How We Can Help
Our firm is assisting financial institutions as they assess the effects of the new standard, review CECL modeling implications, and prepare for implementation. If you would like to discuss how ASU 2025-08 may affect your institution or need help planning for adoption, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
