FASB Makes Refinements to CECL for Purchased Loans

In November 2025, the FASB issued Accounting Standards Update (ASU) No. 2025-08, Financial Instruments - Credit Losses (Topic 326): Purchased Loans. The standard represents one of the most significant modifications to CECL accounting since the adoption of ASC 326, Current Expected Credit Losses and is expected to impact banks that acquire loans through mergers, branch acquisitions, or portfolio purchases.

For banks, this new guidance changes how certain purchased loan portfolios are accounted for under CECL, with the goal of reducing front-loaded “Day 1” loss recognition.

Why is “Day 1” Loss Recognition is an issue?

Under the original CECL framework, acquired loans were separated into two categories: Purchased Credit Deteriorated (PCD) loans and Non-PCD acquired loans.

PCD loans used the “gross-up” approach, where expected credit losses were added to the loan’s amortized cost basis rather than immediately recognized through earnings. Non-PCD loans, however, required banks to record an allowance for credit losses immediately through provision expense at acquisition.

This treatment can create an artificial “Day 1” earnings impact because expected credit losses are effectively recognized twice:

Through the fair value discount embedded in the purchase price, and
Again through the allowance for credit losses recorded upon acquisition.

This issue is particularly important for banks engaged in acquisition activity.

What does ASU 2025-08 change?

ASU 2025-08 expands the “gross-up” approach to a broader category called Purchased Seasoned Loans (PSLs). Under the new guidance, acquired loans that are more than 90 days old and were not originated by the acquiring institution will now receive treatment similar to PCD assets.

The update applies to:

Loans acquired in business combinations
Loans acquired in asset purchases
Loans obtained through consolidation of certain variable interest entities
Loans purchased more than 90 days after origination where the buyer had no substantive involvement in underwriting or origination.

The ASU eliminates the immediate provision expense for many acquired non-PCD loans. Instead, banks add an allowance to the purchase price at acquisition to determine the initial amortized cost basis. For loans acquired in pools, the allowance and any premium or discount are allocated to the individual loans. After acquisition, changes in expected credit losses on PSLs are recognized through the allowance and recorded in earnings.

Why does the standard matter to banks?

1. Simplification of CECL Accounting

Community banks have consistently expressed concerns regarding the operational complexity of CECL, particularly in distinguishing between PCD and non-PCD acquired loans.

ASU 2025-08 simplifies the framework by broadening the use of a single accounting methodology for acquired seasoned loans.

As a result of adopting the ASU, benefits may include easier loan accounting integration after acquisitions, fewer classification judgments, and lower compliance and audit burden. This simplification could be especially valuable for smaller institutions with limited accounting and risk management resources.

2. Reduced Earnings Volatility

Banks often rely on acquisitions to achieve growth, expand geographically, or increase scale. Under prior CECL rules, acquisitions could produce significant upfront provision expense that negatively affected earnings immediately after closing.

ASU 2025-08 reduces this volatility by allowing banks to recognize acquired loans using the “gross-up” method instead of recording a large “Day 1” provision charge.

For banks, this means more stable post-acquisition earnings, less pressure on short-term profitability metrics, and improved comparability between acquired and originated loans resulting in simplified acquisition-related financial reporting.

3. Potential Capital and Strategic Implications

Because provision expense directly affects earnings and regulatory capital, eliminating large “Day 1” CECL charges can benefit capital ratios following acquisitions.

Banks may gain more flexibility in structuring transactions and face less pressure on post-merger capital levels. Although the ASU does not change the underlying credit economics, it changes how they appear in financial statements, which may affect investor perception and regulatory discussions.

Implementation Considerations

Despite the benefits, implementation will still require planning. Banks will need to:

Update acquisition accounting policies
Modify CECL models and assumptions
Establish processes to identify “purchased seasoned loans”
Document whether the bank had involvement in loan origination
Coordinate with auditors and regulators regarding adoption.

The ASU also adds financial statement disclosures to improve transparency about how purchased loans affect the allowance. Specifically, the allowance rollforward must separately present the initial allowance recognized for PSLs and PCD loans by portfolio segment and major asset type.

Conclusion

ASU 2025-08 represents a meaningful shift in accounting for purchased loans. By expanding the “gross-up” approach previously reserved for only PCD loans to PSLs, the standard reduces CECL-related earnings distortions and simplifies accounting treatment.

For community banks pursuing growth through mergers and loan acquisitions, the ASU could lower operational complexity and improve transaction economics. The overall effect is expected to be favorable for institutions active in acquisition strategies and portfolio expansion.

The standard becomes effective for fiscal years beginning after December 15, 2026, although early adoption is permitted.

Suttle & Stalnaker, PLLC is ready to help. If you would like more information on how this applies to you, contact Kelly Shafer, CPA at 304.343.4126.