The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2025-08, a pivotal change for financial institutions navigating the complexities of loan acquisitions under the Current Expected Credit Loss (CECL) model. 

The change comes after FASB’s post-implementation review of ASU 2016-13, which required the differentiation of purchased credit-deteriorated (PCD) and non-PCD loans.

Effective for fiscal years beginning after Dec. 15, 2026, ASU 2025-08 simplifies acquisition accounting, enhances comparability and better reflects the economic reality of purchased loans or loan portfolios. Much like other standards updates, and fortunately for anyone with a recent merger, early adoption is permitted.

Key Improvements in ASU 2025-08

The new standard expands use of the gross-up approach, previously limited to PCD assets, to include purchased seasoned loans (PSLs), wherein the loan was acquired at least 90 days post-origination, and the acquirer was not involved at origination or obtained in a business combination (credit cards, debt securities and trade receivables remain excluded). The update provides examples of when a transferee is more likely to have been involved with the origination of a loan. Being involved includes: involved in the “offering, arranging, underwriting or other nonadministrative lending activity” related to the loan's origination. 

This expansion brings several key improvements in accounting for acquired loans:

 Must be at least 90 days post origination AND the acquirer was not involved at origination

Eliminates Day 1 Credit Loss Expense

Using the gross-up method for seasoned loans, institutions no longer need to immediately record an expense for the expected credit losses. Rather, the expected credit loss allowance can be added to the loan’s cost basis, preventing the appearance of a first-day income dip.

Provides a More Accurate Economic Picture

By allowing the credit loss allowance on seasoned loans to be embedded into the loan value rather than being treated as a new loss, the gross-up method provides a more accurate economic picture of loan purchases. As a result, there is less volatility in reported earnings.

Creates More Consistency Across Purchased Loans

With one accounting method applying to both PCD and non-PCD assets, financial statements will be easier to prepare and understand. This unified approach also improves comparability and consistency across institutions.

Accounting Entries

The accounting entries for PSL now are the same entries used for PCD loans. The one question to be answered is whether the entity uses the “discounted cash flow” method to account for the expected credit losses. An entity shall elect this option on an acquisition-by-acquisition basis in the period the acquisition occurs and apply it to all purchased seasoned loans recognized in that acquisition. 

Here are two scenarios and the related accounting:

Method other than discounted cash flow to account for expected losses.

Assumptions: The loan has a balance of $2,176,204. The loan is purchased for $1,918,559. The purchaser expects a 10% loss rate, based on historical loss information over the contractual term of the loan, adjusted for current conditions and reasonable and supportable forecasts, for groups of similar loans. The following journal entry is recorded at the acquisition of the loan:

The non-credit discount is accreted into interest income over the life of the loan and the allowance for credit losses is re-evaluated at each balance sheet date.

Discounted cash flow method to account for expected losses.

Assumptions: The loan has a balance of $2,176,204. The loan is purchased for $1,918,559. The expected credit loss is determined to be $217,620 but is discounted by a rate of 8.46%. The following journal entry is recorded at the acquisition of the loan:

The non-credit discount is accreted into interest income over the life of the loan. The allowance for credit losses is increased each year by multiplying the allowance by 8.46% and recording a provision expense (see below for year one example):

($185,012 X 8.46% to adjust for the time value of money).

The accounting impact of the two methods above are eventually the same over the life of the loan. Therefore, the non “discounted cash flow” method seems much more practical.

Next Steps for Your Financial Institution

To leverage the benefits of ASU 2025-08, financial institutions will want to take proactive steps to update policies, systems and disclosures, including:

• Review how your institution currently accounts for purchased loans under CECL and identify portfolios that will qualify as PSLs.
• Modify CECL allowance calculation models to apply the gross-up approach for PSLs and ensure systems can adjust the amortized cost basis.
• Revise internal accounting policies to reflect the single model for purchased loans.
• Train accounting and finance teams on the new PSL criteria and gross-up mechanics.
• Ensure due diligence processes for future acquisitions account for the new treatment.
• Review financial statement presentation and disclosures related to purchased loans.
• Consider whether early adoption of the new standard makes sense for your institution based on expected business combination or loan purchase plans. 

The financial institutions pros at Doeren Mayhew stand ready to help you stay compliant, while maximizing the benefits of ASU 2025-08.