FASB Moves to End the “CECL Double Count” with Forthcoming Standards Change

By Spencer Hathaway June 9, 2025

One of the most debated aspects of the new current expected credit loss (CECL) standard that went into effect in recent years has been the treatment of certain purchased financial assets. If you’ve been following the developments on this topic, you know we’ve been awaiting these changes for some time. BNN had previously published an article regarding the treatment of purchased financial assets prior to the upcoming change which provides excellent context and can be found here. Before we dive into what is and what is not, changing under the finalized rule change, a brief synopsis of what got us here is worthwhile.  

From Concept to Controversy

Within the lengthy text of ASU 2016-13 and the subsequent amendments that have become CECL as we know it today was a newly defined term, “purchased credit deteriorated” or PCD assets. PCD assets are purchased assets which have experienced “more than insignificant” credit deterioration since their origination, with no further explicit definitions of what qualifies as “more than insignificant” in the standard. The determination of what was considered PCD could have significant ramifications for an acquirer of such assets, because PCD assets are afforded a special accounting treatment often referred to as the “gross-up” method. Upon purchase, the estimated amount of expected credit losses is effectively added back to the amortized cost of the asset with an offsetting allowance for credit losses recorded. Any remaining non-credit related discount is accreted into income over the life of the loan. This “gross-up” for credit losses recognizes that the credit discount is baked into the purchase price of such assets, and therefore does not impact earnings on the purchase date.

The controversy stems from the treatment of non-PCD assets. Assets not meeting the “more than insignificant” credit deterioration since origination threshold set in the standard were subject to different accounting treatment. These assets had the entirety of their purchase discount accreted to interest income over the life of the loan. The day 1 expected credit losses for these assets had to be established through provision expense, impacting earnings at the acquisition date.

Stakeholders pointed out that, even for assets that have not yet experienced significant credit deterioration at purchase, there is still an inherent credit related discount factored into the purchase price or fair value mark-to-market which is effectively “double counted” when the full lifetime expected credit loss is booked at acquisition. The impact is decreased earnings and capital after a business combination or loan pool purchase which may not fully reflect the economic reality of the transaction.

The real-world implications of this accounting treatment were borne out in some of the post-CECL deals between larger banks and can be seen in quarterly public filings. Several mergers in the last few years have resulted in significant provisions impacting earnings and capital in the quarter where the acquisition took place, only to be followed by several subsequent quarters of low or negative provisions as overall credit losses were reevaluated.

All this could potentially lead to a classic “tail-wagging-the-dog” scenario that we often caution our clients against, in which accounting considerations steer business decisions rather than the other way around.

A Refined Solution

In June of 2023, the FASB issued an exposure draft with the goal of addressing some of these concerns. However, this initial exposure draft was met with varied feedback. One sticking point was with the scope of the proposed expansion of the “gross-up” approach. The initial exposure draft would have expanded the approach to not only traditional acquired loan receivables but trade receivables, certain lease assets, contract assets, and held-to-maturity securities. Stakeholders expressed concerns that applying this approach to some of those asset classes would pose significant operational challenges. Perhaps the biggest issue many stakeholders raised, however was with regard to transition approach. This exposure draft would have required modified retrospective adoption treatment, requiring institutions to effectively look back to acquisitions completed prior to this change but subsequent to CECL adoption and account for them under the new rules.

On April 30, the FASB met and finalized its decision regarding the accounting for purchased financial assets. Ultimately it was decided that the “gross-up” method currently applied to PCD assets would be expanded, but to a narrower scope than the 2023 exposure draft, to include only loan receivables (including revolving loans) but excluding credit cards. Let’s take a closer look at what is and isn’t changing under the new rules:

What Isn’t Changing

• PCD classification and treatment – the expanded gross up method applies to other assets only after the initial PCD/non-PCD classification is made.
• Non-credit related discounts continue to be amortized to interest income using the effective interest method.
• Disclosures – no new disclosures are required under this change.
• Historical accounting treatment of purchased assets – in a major change from the exposure draft a prospective transition approach is allowed.
• Accounting treatment for purchased assets other than loan receivables – only loan receivables (excluding credit cards) are subject to the expansion of the gross-up method.

What Is Changing

• The gross up method, whereby the initial amortized cost basis is adjusted upward by the initial allowance for credit losses on the acquisition date has been expanded beyond just those assets classified as PCD.
• Non-PCD assets not acquired in a business combination are subject to a seasoning test before the gross-up approach can be applied. Seasoned assets are those that were originated without involvement by the acquirer and transferred 90 days or more after origination. Assets not deemed “seasoned” would be recognized as if originated by the acquirer. All assets acquired in a business combination are deemed seasoned.
• An irrevocable election can be made to estimate credit losses on seasoned purchased financial assets using the adjusted amortized cost basis when credit losses are estimated using a method other than discounted cash flows. This election, applied for each business combination or asset acquisition, allows an institution to pool the purchased assets within its existing asset pools for allowance for credit loss estimation provided they share similar risk characteristics.

Looking Ahead

This change is welcome news for many financial institutions, particularly those eyeing merger opportunities or looking to expand loan portfolios through purchasing assets. Post-acquisition capital volatility should be reduced, and comparability and consistency will be enhanced from the point of view of stakeholders and investors.

We continue to await the issuance of a formal accounting standards update reflecting the changes described above but expect it will be issued sometime in 2025.

Institutions will have two options in terms of timing. Early adoption will be permitted, so institutions will have the option to start applying the new guidance as early as this year assuming the ASU is issued in time to report 2025 results. For those not electing to early adopt, a mandatory adoption date of fiscal years beginning after December 15, 2026 will be in place, meaning calendar-year institutions can hold off until 2027 to apply these provisions. In the meantime, BNN is here to answer any questions you have regarding this new change or accounting for purchased financial assets in general.