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Under current Generally Accepted Accounting Principles (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. However, in other cases, 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 of financial information highlighted that the aforementioned accounting process is complex and they would instead prefer to apply a single accounting model to recognise credit losses for all purchased financial assets.

In this regard, on 27 June 2023, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU), Financial Instruments – Credit Losses (Topic 326): Purchased Financial Assets. The proposed ASU would address the concerns raised by the stakeholders by requiring that all acquired financial assets, (with certain limited exceptions), would follow the existing gross-up approach.

The comment period is open up to 28 August 2023.

To access the text of the proposed ASU, please click here

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