What this ASU does

ASU 2025-08 resolves inconsistency in how entities account for acquired loans under the credit losses guidance (Topic 326). Previously, entities applied two different methods depending on whether an acquired loan had experienced "more-than-insignificant" credit deterioration since origination: the gross-up approach for purchased financial assets with credit deterioration (PCD), or a separate allowance approach for non-PCD assets. This dual approach created complexity, reduced comparability across entities, and resulted in double-counting of expected credit losses (since fair value already reflects these losses). The ASU requires non-PCD loans deemed "seasoned" to use the gross-up approach instead, eliminating the inconsistency and improving the decision usefulness of financial reporting.

Key provisions

• Purchased Seasoned Loans definition: Non-PCD loans (excluding credit cards) acquired in a business combination are automatically deemed seasoned. Other non-PCD loans are seasoned if purchased at least 90 days after origination and the acquirer was not involved in origination.

• Gross-up approach required: Purchased seasoned loans must be accounted for using the gross-up approach at acquisition, meaning the allowance for credit losses (ACL) is recognized with an offsetting adjustment to the purchase price rather than charged to credit loss expense.

• Scope: Applies to all entities under Topic 326 (public entities, private companies, not-for-profits); excludes credit card loans.

• Interest income recognition (ASC 310-10-35-53B/-53C): Entities shall not recognize as interest income the discount embedded in the purchase price attributable to expected credit losses; only non-credit-related discounts/premiums are accreted or amortized as interest income.

• Prospective application only: Changes apply only to loans acquired on or after the initial application date; no retrospective restatement of prior periods.

Effective date

The amendments are effective for annual reporting periods beginning after December 15, 2026, and interim periods within those years. Early adoption is permitted in any interim or annual reporting period before financial statements are issued or made available for issuance. Entities adopting early must apply the amendments as of the beginning of that interim period or the annual period containing it.

Who is affected

• All entities subject to Topic 326 credit losses guidance: public business entities, private companies, and not-for-profit organizations.
• Lenders, asset acquirers, and investment firms purchasing seasoned loan portfolios (particularly those engaged in M&A, business combinations, or variable interest entity consolidations).
• Financial institutions acquiring residential or commercial mortgage loans, commercial loans, and other seasoned financial assets.
• Industries with significant loan acquisition activity: banking, finance, insurance, and alternative asset managers.

What preparers should do

1. Assess your loan portfolio: Identify all non-PCD loans acquired through business combinations, asset acquisitions, or VIE consolidations and determine which qualify as "seasoned" under the 90-day and non-involvement criteria. Document the assessment and origination dates.

1. Update accounting policies and systems: Modify ACL calculation processes, fair value measurement procedures, and interest income recognition logic to apply the gross-up approach to purchased seasoned loans. Reprogram loan accounting and allowance systems to offset ACL against the purchase price rather than charging to credit loss expense.

1. Plan disclosure and transition communication: Prepare disclosures explaining the change, coordinate with auditors on transition procedures, and train finance and accounting teams on the new classification and measurement requirements before the January 1, 2027 effective date.