CONTACT INFORMATION
Share
Key Changes for Acquired Loans
- FASB’s ASU 2025-08 eliminates the “Day 1 double count” for most acquired loans by introducing a single approach for purchased loans, reducing complexity and improving comparability.
- Introduces a new category: Purchased Seasoned Loans (PSLs), broadly defined to include most acquired loans, excluding credit cards and a few other exceptions.
- Removes a major accounting hurdle for mergers and acquisitions, shortening earn-back periods and improving overall deal optics.
- Effective for fiscal years beginning after December 15, 2026, with early adoption permitted immediately.
Why ASU 2025-08 Fixes CECL’s Day 1 Double Count
Since the adoption of Current Expected Credit Losses (CECL), banks and credit unions acquiring loans have faced a persistent challenge: the “Day 1 double count.” When purchasing loans, institutions typically pay a discounted price that reflects market adjustments and expected credit losses.
However, CECL required an immediate provision expense for those same losses on loans without credit deterioration (non-PCD), resulting in a Day 1 charge that impacted earnings and capital. This accounting quirk distorted deal economics and added complexity to financial reporting.
ASU 2025-08 addresses this issue by expanding the gross-up method – previously limited to Purchased Credit Deteriorated (PCD) loans – to a new category called Purchased Seasoned Loans (PSLs). This change aligns accounting with economic reality. For most acquisitions, the initial allowance for credit losses will now be added to the loan’s basis rather than charged to earnings on Day 1.
Old vs. New: How Accounting Changes
Here’s a quick comparison of CECL treatment before and after ASU 2025-08:
| Feature | Before (CECL) | After (ASU 2025-08) |
|---|---|---|
| Categories | Two: PCD (gross-up) vs. non-PCD (Day 1 expense) | PSL (gross-up for most loans) + PCD (same treatment) |
| Criteria | PCD: Significant credit deterioration Non-PCD: All others | PSL: Acquired in a business combination OR seasoned >90 days |
| Credit Cards | Generally included in non-PCD (Day 1 expense); could be PCD if deterioration criteria met | Excluded from PSL — still Day 1 expense |
| Initial Allowance | PCD: Added to loan basis Non-PCD: Charged to earnings | PSL: Added to loan basis (same as PCD) |
| Day 1 Earnings Impact | Non-PCD: Negative hit to income | PSL: No hit to income |
| Complexity | High — subjective PCD determination | Lower — clear PSL criteria, consistent treatment |
Purchased Seasoned Loans: Broad Scope
Under the new guidance:
- All loans acquired in a business combination qualify as PSLs – regardless of age.
- Loans acquired outside a merger qualify if:
- Originated more than 90 days before acquisition, and
- Acquirer had no involvement in origination.
- Credit cards remain excluded, along with certain non-loan assets like debt securities.
This broad definition means nearly all acquired loans will now follow the same accounting model, reducing complexity and improving comparability.
Impact on M&A
The change won’t create a surge in deals overnight, but it removes a real obstacle. Under old rules, acquirers faced a large Day 1 provision expense, immediately depressing earnings and capital ratios. Now:
- Dilution shifts from an immediate earnings hit to a gradual effect, as the initial allowance is added to the loan’s basis rather than charged to earnings. This means the impact flows through as reduced interest income over the life of the loans, not as a large provision expense at acquisition. If actual credit losses are lower than expected, subsequent reversals of the allowance (negative provisions) will increase income, reflecting ongoing credit performance.
- Earn-back periods shorten because the upfront hit to income goes away and then is recognized slowly over the life of the pools.
- Deal optics improve with smoother earnings profiles and no artificial volatility.
- Pricing flexibility increases since buyers no longer absorb an extra accounting charge upfront.
Unlike prior rules, there’s no Day 1 provision creating a cushion for later income releases. Earnings will be steadier, which most institutions prefer for transparency – even though ACL still affects capital over the life of the loans.
As Alan Lloyd, Principal at Wolf & Company, noted in Bank Director: “It does shorten that earn-back period in the dilution. It’s a little sweetener for deals that maybe were very close but couldn’t quite come to an agreement.”
This change won’t turn a bad deal good – but it can help close the gap on borderline transactions.
Effective Date and Transition
- Mandatory adoption: Fiscal years beginning after Dec 15, 2026 (Q1 2027 for calendar-year institutions).
- Prospective application: Applies only to loans acquired after adoption – no restating prior deals.
- Early adoption: Allowed now for any period where financials aren’t issued.
| Scenerio | Impact |
|---|---|
| Adopt Q4 2025 (Full-Year) | Apply from Jan 1, 2025 — only possible if prior financials haven’t been issued (typically non-public entities). |
| Adopt Q4 2025 (Prospective) | Apply from Oct 1, 2025 — only future acquisitions use new method. |
| Adopt Jan 1, 2026 | Clean start for 2026 acquisitions — simplifies reporting. |
| Mandatory Jan 1, 2027 | All institutions apply new rules going forward. |
Preparing for Implementation
- Update policies: Incorporate PSL criteria and exclusions into CECL documentation.
- Train staff: Help acquisition teams understand the revised approach.
- Check systems’ readiness: Confirm capability to process gross-up entries for all acquired loans.
- Plan strategically: Factor the new rules into M&A models and investor communications.
- Industry perspective: Hayes Murray, CFO of PeoplesBank, notes: “For us, the revised accounting isn’t a strategic shift – it’s a practical improvement. Early adoption lets us avoid the old Day 1 hit to earnings and instead recognize credit marks in a way that better reflects the economics of our acquisition.”
Bottom Line: ASU 2025-08 Brings Clarity and Simplifies Loan Accounting for M&A
ASU 2025-08 is a practical fix that simplifies purchased loan accounting and removes a distortion that frustrated acquirers for years. By eliminating the Day 1 double count, FASB improves transparency and makes deal economics clearer. For institutions considering mergers or loan purchases, this change is good news – and early adoption may be worth exploring.
Wolf & Company is ready to help you navigate this update. From CECL model validation to financial statement audits, our team can guide you through implementation and planning.
Contact us to discuss how ASU 2025-08 impacts your institution.
Related Content
Keep the momentum going with more expert insights.
Subscribe to our Newsletter
Stay informed with priority news and key updates shaping your industry, all in one place.
Get the insights that matter
How Can We Help You?
Fill out the form below and we’ll be in touch as soon as possible.
