The Financial Accounting Standards Board (FASB) recently continued its earlier discussions on the accounting treatment for acquired financial assets that are within the scope of ASC 326, known as CECL, or the current expected credit loss model. Several tentative FASB decisions, if finalized, will have an impact on financial institutions that have been acquisitive in recent years, as well as those planning for future deals.
Under the current scope of the FASB proposed project, the treatment of assets classified as purchased with credit deterioration (PCD) would be extended to all financial assets acquired in both a business combination and asset acquisition, with certain exceptions. There would no longer be PCD and Non-PCD distinctions for acquired assets. Instead, all assets would be classified as purchased financial assets (PFA) and would be accounted for in the same way.
This change would essentially allow institutions to reclassify the Day 1 discount on purchased assets currently deemed as Non-PCD into the Day 2 allowance (as it is presently done with PCD assets). Said another way, this would eliminate the “double-count” issue that currently exists under CECL. The FASB had received feedback that the non-PCD model was overly complex and resulted in a double counting of credit losses.