FASB Issues Improved Guidance on Purchased Loans (ASU 2025-08)
The Financial Accounting Standards Board (FASB) has released Accounting Standards Update (ASU) 2025-08, which significantly improves the accounting treatment for purchased loans. This update addresses long-standing concerns with the complexity and comparability of acquired financial assets under the Current Expected Credit Loss (CECL) model. Specifically, the new guidance eliminates the distinction between purchased credit-deteriorated (PCD) and non-PCD assets, simplifying the recognition process and reducing the risk of double-counting credit losses. ASU 2025-08 is effective for all entities for fiscal years beginning after December 15, 2026, including interim periods within those fiscal years, and should be applied prospectively to loans that are acquired on or after the initial application date. Early adoption is permitted.
Under prior guidance, institutions had to apply separate recognition models depending on whether loans were classified as PCD or non-PCD, often leading to inconsistent results and unnecessary complexity. ASU 2025-08 introduces a single accounting model for all purchased loans, requiring that loan discounts related to credit conditions be recognized as an allowance for credit losses rather than embedded in the purchase price. This change enhances transparency, improves comparability across institutions, and aligns more closely with the economic reality of purchased loan portfolios.
For banks, credit unions, and other financial institutions engaged in loan purchases or mergers, this update is particularly impactful. By eliminating the “Day 1 double count” of credit losses, ASU 2025-08 removes a significant headwind to merger and acquisition activity and provides clearer reporting for investors and regulators. Institutions should begin evaluating how this guidance will affect their acquisition accounting, CECL models, and financial statement disclosures.
BNN recommends that clients review their current purchased loan accounting practices and begin planning for implementation of ASU 2025-08. Early preparation will help ensure compliance, minimize disruption, and take advantage of the improved clarity and consistency this standard provides. Please reach out to our team if you would like assistance assessing the impact of this update on your institution’s financial reporting.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
