FASB Seeks Public Comment on Proposal to Improve the Accounting for Purchased Financial Assets

Norwalk, CT—June 27, 2023—The Financial Accounting Standards Board (FASB) today published a proposed Accounting Standards Update (ASU) intended to improve the accounting for purchased financial assets. Stakeholders are encouraged to review and provide input on the proposed ASU by August 28, 2023.

Since the issuance of the credit losses standard in 2016, the FASB has monitored and assisted stakeholders with implementation through the post-implementation review (PIR) process. Through that process, the FASB heard feedback, particularly from investors, regarding the accounting for financial assets acquired in a business combination or asset acquisition; namely that the FASB should reconsider the accounting for purchased financial assets.

Under current GAAP, if a purchased financial asset has experienced a more-than-insignificant deterioration in credit quality since origination, it is accounted for under the purchased credit deteriorated (PCD) model (referred to as the gross-up approach) with no credit loss recorded on acquisition. If instead the purchased financial asset has not experienced a more-than-insignificant credit deterioration since origination, it is accounted for in a manner consistent with an originated financial asset (referred to as non-PCD accounting). Under non-PCD accounting a day one credit loss is recorded in addition to any credit discount reflected in the fair value of the acquired assets.

Investors and preparers provided feedback that having two accounting models for purchased financial assets is unnecessarily complex and they would prefer to apply a single accounting model to recognize credit losses for all purchased financial assets. These stakeholders noted that assessing whether credit has deteriorated since origination is subjective and inconsistently applied, which creates comparability issues and diminishes the decision usefulness of financial information. In addition, they were particularly concerned with the non-PCD accounting model and the requirement to record a day one allowance in addition to any credit discount reflected in the initial fair value.

The proposed ASU would address these concerns by requiring that all acquired financial assets, with certain limited exceptions, would follow the existing gross-up approach. The proposed ASU, including information on how to submit comments, is available at www.fasb.org.