Updates to FASB’s Purchased Financial Assets Project

By Brett Schwantes, Wipfli

FASB has voted to move forward with their purchased financial assets project and expects to issue a final standard in 2025. For credit unions, this could mean significant changes to year-end reporting and M&A accounting.

Here’s a breakdown of the updates and the potential impacts on credit unions.

What Is the Purchased Financial Assets Project?

On July 14, 2021, the FASB launched a project to simplify accounting for acquired financial assets under CECL (ASU 2016-13), following concerns about complexity and the potential consequences of the accounting model in place under CECL. This was followed by an exposure draft issued on June 27, 2023, to address additional stakeholder feedback.

As of April 30, 2025, FASB continued deliberations on the proposed update and made several key decisions.

Under the proposed changes, loan discounts on performing loans related to credit conditions – which are currently recognized as part of the loan discount – will now be generally recognized as allowance for credit losses (ACL) as part of business combination accounting. Other loan discounts or premiums consisting of the fair value impacts not related to expected credit losses will continue to be amortized to interest income over the remaining life of the loans acquired.

There is also a significant operational benefit for acquirers: In general, funding the ACL through the provision of credit losses in conjunction with a merger or acquisition will no longer be necessary. This change could reduce immediate earnings volatility and streamline post-deal accounting.

Accounting for purchased credit deteriorated (PCD) loans will be unchanged by the update. And certain loans acquired outside of a business combination, credit card loans and securities will not be included in the scope of the accounting update.

What Does the Update Mean for Credit Unions?

The revised project objective is to improve the accounting for the acquisition of purchased financial assets, excluding those with credit deterioration.

Under the current accounting standards:

• Credit unions are required to measure and recognize acquired loans at their fair value or at the consideration transferred. This often results in a loan discount or premium that includes valuation adjustments for interest rate, market, credit and other factors.
• For PCD loans, credit unions would measure and recognize an ACL by reclassifying an amount from the loan discount or premium.
• For other loans (performing loans), the ACL is recognized through a subsequent charge to provision for credit losses (i.e., expenses), which will decrease net income and, consequently, capital.
• The entire loan discount or premium is accreted/amortized to interest income over the life of the loan pool.

The proposed standard would align the accounting for performing loans, excluding credit cards (qualifying loans) that meet certain criteria with the current accounting for PCD loans.

Qualifying loans would still be measured and recognized at their fair value or the consideration transferred, and there would be no change to the amount of goodwill recognized in a business combination. However, an acquirer would recognize the ACL for qualifying loans as part of the loan acquisition or business combination by reclassifying the initial ACL, measured using an appropriate CECL methodology, from the loan discount or premium.

No provision for credit losses will be necessary to recognize the initial ACL for qualifying loans. Accounting under the proposed ASU will also result in lower discounts, or higher premiums, and lower effective interest margins for qualifying loans acquired.

Purchased Financial Assets Project Scope

The amendments will apply to qualifying loans but not to held-to-maturity debt securities that meet either of the following seasoning criteria:

• Acquired in a business combination
• Acquired more than 90 days after its origination date, and the acquirer did not have involvement with the origination of the loan

Assessing an acquirer’s involvement with the origination of the loan requires consideration of relevant facts and circumstances, including, but not limited to:

• The acquirer’s exposure, either directly or indirectly, to the economic risks and rewards of ownership before obtaining control of the financial asset
• The nature of the relationship between the transacting entities, including arrangements made in contemplation of recurring transfers of similar financial assets and the acquirer’s ability to influence the originator’s underwriting standards
• The contractual terms of the transaction, including forward purchase commitments written by the acquirer to the originator or call options written by the originator to the acquirer
• The existence of funding arrangements between the acquirer and the originator, or conveyance of a put option or similar contract from the acquirer to the originator
• The existence of a loss-sharing arrangement in which the acquirer has an obligation to reimburse an originator for an amount of principal loss incurred by the originator prior to the transfer of the financial asset
• The existence of a make-whole arrangement in which the acquirer has an obligation to reimburse the originator upon termination of the purchase transaction by the acquirer

The initial amortized cost basis for qualifying loans will be calculated as the purchase price plus the initial ACL. In other words, the acquirer will measure and recognize the initial ACL using an appropriate CECL methodology upon acquiring the qualifying loans with a corresponding entry to loan premium/discount.

As a result, the acquirer will not recognize a provision for credit losses immediately after the acquisition to set up the ACL as is required under the current CECL accounting standards.

The disclosure requirements of ASC 326 will remain unchanged.

Next Steps

The FASB approved drafting a final ASU for a vote. It’s expected that the final ASU will be issued in the third quarter of 2025.

Based on decisions made to date, credit unions may early adopt the ASU when it is finalized. If it is adopted early, it may be applied as of the beginning of the interim reporting period or as of the beginning of the annual reporting period, as long as the financial statements have not yet been issued.

Assuming a final standard is issued in 2025, credit unions will be able to apply the proposed ASU to loan acquisitions that occurred earlier in 2025. A fiscal year entity (e.g., year ended June 30, 2025) should be able to apply the proposed ASU to loan acquisitions that occurred during the fiscal year. This applies even if the ASU is issued after the fiscal year-end, as long as financial statements have not been issued.

Credit unions will not be able to restate financial statements of prior periods for loan acquisitions occurring in those periods.

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