FASB issues ASU on purchased loans

Applicability

ASU 2025-08
All entities

Relevant dates

Effective date	All entities
Annual periods – Fiscal years beginning after	December 15, 2026
Interim periods – In fiscal years beginning after	December 15, 2026
Early adoption permitted?	Yes, any annual or interim reporting period if financial statements have not yet been issued or made available for issuance. If early adopted in an interim period, an entity applies the amendments at the initial application date, which is the beginning of either: the interim reporting period; or the annual reporting period that includes the interim period.
Transition method	Prospectively for acquisitions on or after the initial application date.

The ASU expands the use of the gross-up method to certain acquired loans beyond those that are purchased financial assets with credit deterioration. The gross-up method records an allowance for credit losses at the acquisition date with an offsetting entry to the asset’s amortized cost basis.

The ASU does the following:

Applies the gross-up method to acquired non-purchased credit deteriorated (PCD) assets that are ‘purchased seasoned loans’ and provides criteria for determining whether acquired loans qualify as purchased seasoned loans;
For purchased seasoned loans, eliminates the Day 1-credit loss expense and reduces interest income recognized in subsequent periods (because the gross-up method will now apply to those loans);
Keeps the guidance for PCD assets unchanged; and
Results in narrow subsequent measurement differences between purchased seasoned loans and PCD assets.