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Purchased financial assets in banking under CECL

Derek Hipp, CPA
April 26, 2023
Read Time: 0 min

M&A implications of FASB decisions

Some recent, tentative FASB decisions on the accounting treatment of purchased financial assets will impact acquisitive institutions when finalized. 

You might also like this whitepaper, "Valuation and purchase accounting in a dynamic environment."


M&A implications

Purchase accounting changes for financial assets

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.


PFA accounting requirements

Key tentative decisions and timelines are shown below. The FASB’s description of proposed changes can be found in this link to the tentative board decisions.

  1. PFA expansion would apply to all acquisitions completed after the adoption of ASC 326. Therefore, the expansion would NOT apply to any deals completed before a company adopted CECL. For example, if a company did a deal on Dec. 29, 2019, and adopted CECL on Jan. 1, 2020, its capital would be lower, and it would have higher interest income than if it had done the deal Jan. 1, 2020.
  2. The expansion would be required to be adopted on a Modified Retrospective Approach, which means prior period activity would need to be reassessed.
  3. The exposure draft would be issued in Q2 2023.
  4. After issuing the draft, FASB would provide a 60-day comment period.
  5. After the comment period, FASB would take any comments and make changes for the final standard to be released.

Timing of accounting changes

When does the PFA change take effect?

Our best guess on the timing for the release of the final standard is that it would be in the third or fourth quarters of 2023. Under that timeframe, we expect companies will be required to adopt the changes for reporting periods following Jan. 1, 2024.

We assume early adoption will be permitted, and we expect any company completing a deal in the third or fourth quarters of 2023 would take advantage of this to gain relief through the codification improvements.

While replaying prior period activity could prove operationally challenging, this is a huge win for companies involved in M&A activity. 

The change will bring capital back to the balance sheet more quickly by eliminating the “double count” that occurs under current CECL accounting. The ongoing effect would be that future interest income would be lower.

Dive deeper into valuation and purchase accounting under CECL with this whitepaper.

PFA actions

What will companies be required to do?

Financial institutions that have made acquisitions since CECL will need to take action to comply with the proposed changes. For example:

  1. Income Recognition/Discount Accretion will need to be rerun for all periods following acquisitions since CECL adoption. It should be noted that many valuation analysts, including those at Abrigo, consider PCD vs. Non-PCD status in their valuation inputs. We would NOT expect adjustments to be needed to the actual valuation results.
  2. Each allowance for credit losses (ACL) that has been run since the acquisition(s) would need to be updated to reflect those loans going through the “gross up” process (i.e., Purchased Financial Assets/PFAs should be measured for allowance at principal vs. amortized cost.)
  3. Companies would not need to refile financial statements for all prior periods after adopting the amendments. However, prior period presentation would need to be updated in the filing. Assuming the timing outlined above holds true, companies would likely need to disclose the changes around future accounting pronouncements in their footnotes in Q3 and Q4 filings.

The Abrigo advisory team is already in active discussions with many of our clients about helping them develop a plan of action to navigate this transition related to purchase accounting. Many companies that will be affected by the planned changes don’t have the staffing bandwidth or in-house expertise to make them efficiently, either due to the complexity or because of current tools or processes.

Abrigo’s consultants can help with the following:

  • Re-running Income Recognition/Discount Accretion to account for acquisitions since adopting CECL
  • Updating the ACLs accordingly, and
  • Updating the prior presentations in the filing.

Begin planning now for these expected changes and stay tuned for more information as the exposure draft is published.

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About the Author

Derek Hipp, CPA

Director, Advisory Services
Derek has over 12 years of experience in public accounting and consulting, specializing in financial institutions. He is a co-founder of the ValuCast™ suite of software solutions and is a leader on Abrigo’s, formerly Valuant, consulting and product delivery services. Derek specializes in Day 1 valuation and due diligence services,

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