Understanding the Change 

The Financial Accounting Standards Board (FASB) has released Accounting Standards Update (ASU) 2025-08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans, a significant development for banks involved in loan acquisitions. This update expands the use of the gross-up method beyond loans with credit deterioration (PCD assets) to include a new category called purchased seasoned loans 

The new guidance addresses long-standing concerns about inconsistencies in accounting for acquired loans under the previous dual model (PCD and non-PCD). It simplifies reporting and better aligns accounting outcomes with the economics of acquired loans recorded at fair value 

Key Provisions 

Under ASU 2025-08, the gross-up method now applies to loans that meet the definition of a purchased seasoned loan. In practice, this means: 

• Purchased seasoned loans are acquired loans (other than credit cards) that have not experienced significant credit deterioration since origination and are obtained more than 90 days after origination, provided the acquirer was not involved in the loan’s origination 

• All loans acquired in a business combination are considered seasoned. 

• The gross-up method recognizes an allowance for credit losses (ACL) at acquisition with a corresponding adjustment to the loan’s amortized cost basis. This eliminates the “Day-1 credit loss expense” that existed under prior guidance for non-PCD assets. 

In essence, this approach provides a more accurate reflection of credit risk, reduces double counting of expected losses, and enhances comparability across institutions. 

Impact on Banks 

Banks acquiring loan portfolios will experience the most impact. The expanded gross-up approach simplifies accounting for mergers and acquisitions and provides more transparent credit quality reporting. The elimination of the Day-1 credit loss expense will also influence how banks model loan profitability and earnings in acquisition scenarios. 

While the gross-up and PCD models share similar initial accounting, there are narrow differences in subsequent measurement. For purchased seasoned loans, entities may elect to measure expected credit losses based on the amortized cost rather than the unpaid principal if a method other than discounted cash flow is used. This optional policy choice allows for operational flexibility without sacrificing comparability. 

Effective Date and Early Adoption 

The amendments are effective for annual periods beginning after December 15, 2026, including interim periods within those fiscal years. Early adoption is permitted for entities with financial statements not yet issued, and the guidance should be applied prospectively to loans acquired on or after the adoption date. 

For banks considering early adoption in 2025, the update can be applied either at the start of the interim period or at the beginning of the fiscal year that includes it. 

How YHB Can Help 

YHB’s financial services team can help your institution evaluate how this new standard affects financial reporting, credit models, and acquisition accounting. Our professionals can assist with implementing the new requirements efficiently and developing policies to assess whether a loan qualifies as a purchased seasoned loan. Contact us to learn more.