To minimize these accounting problems, the FASB decided that PCD accounting should be expanded to a broader population of acquired assets. Five topics were discussed in this recent meeting, and the following tentative decisions were made:
1. Amending the terminology
Amending the terminology from PCD to Purchased Financial Assets (PFA) provides clarity to financial statement preparers and users, as credit quality is no longer a consideration in the ongoing purchase accounting.
2. Defining the seasoning period
The FASB decided on a principles-based approach to labeling assets that considers the acquirer’s involvement prior to the acquisition with a bright-line period of 90 days.
This approach identifies whether an acquired financial asset is an “in-substance origination” or is “seasoned.” Purchased assets determined not to be seasoned would be accounted for in the same manner as non-PCD assets are today under CECL. The new PFA model would specifically make changes in accounting for seasoned assets.
All assets acquired in a business combination would receive PFA treatment automatically. Financial assets acquired in a business combination would also be presumed seasoned, meaning that all assets in a business combination would have a CECL allowance applied at purchase through the purchase accounting journal entry. Defining a seasoning period means far more assets will be under the seasoned PFA model, and the risk of double counting on non-PCD assets would be reduced significantly.
3. PFA active revolving privileges
Credit cards, home equity lines of credit, and other revolving arrangements with active borrowing privileges would be included within the scope of the PFA model when acquired through both business combinations and asset acquisitions.
4. Trade accounts receivable
Trade accounts receivable would be included within the scope of the PFA model. As with revolving arrangements, the FASB decided that operational concerns do not outweigh the “bad” accounting that accompanies the double count issue currently present in PCD accounting.
5. Assets not recognized at fair value
Assets not recognized at fair value in a business combination (mainly contract assets and a lessor’s net investment in leases) should be included within the scope of the PFA model. Much like the last two items, the consensus was that it would be preferable to use a single model foa all seasoned assets receiving PFA treatment.