FASB guidance 101: New impact on purchased loans

On November 12, 2025, the FASB issued an amendment to the accounting guidance for purchased loans (ASU 2025-08). In this month’s newsletter, we explain what this update means for loan participations and how institutions can prepare for the upcoming changes. The guidance will be effective for fiscal periods beginning after December 15, 2026, with early adoption permitted.

First, the ASU introduces a new category of loans: Purchased Seasoned Loans (PSL). PSL are defined as loans purchased more than 90 days after origination. To qualify, the purchaser must not have been involved in the loan’s origination—for example, a credit union purchasing loans from a non-bank originator that underwrites using the credit union’s buy box would likely not meet this criterion. The ASU establishes a new accounting model for PSL, which will materially change how credit losses are reflected in an institution’s financial statements.

Under the prior model, there was no distinction in how allowance for credit losses was recorded for originated loans versus PSL. In both cases, expected credit losses were required to be estimated and recognized immediately as a credit expense, resulting in a day-one hit to the income statement. The only exception was for Purchased Credit Deteriorated (PCD) assets (loans acquired after credit quality had already declined). For PCD loans, the purchase price was assumed to reflect the diminished credit quality, so the allowance for credit losses was added to the loan’s basis and amortized over time rather than expensed immediately.

Pursuant to the new ASU, PSLs receive similar treatment to PCD loans under the previous framework. The allowance for credit losses is added to the purchase price of the loan and amortized over its life rather than recognized as an immediate expense. Conceptually, this makes sense: when purchasing seasoned loans, the buyer pays a market price that already reflects expected credit losses. For example, an institution may pay a price of 102 for a pool of loans with embedded credit risk, whereas the same loans might command a price of 103 absent that risk. The one-point difference represents the embedded credit loss allowance, requiring an additional upfront provision would effectively double-count the expected losses.

Back in February 2025, we discussed the impact that CECL has on participation decisions. The view was that many institutions were averse to participations that require a high CECL reserve because of the impact on their income statement, even if the purchase makes sense from a risk-return perspective. The new ASU addresses this concern, removing the large income hit buyers incurred when purchasing loans which required a large loss allowance.

Let us examine the same example we used back in February of last year, a purchase of an RV pool vs an auto pool.

In the above example, we noted that the buyer would need to set up a $2.03MM reserve on day one, which would impact their income statement. While the RV pool offered a better risk-adjusted return, the initial reduction to income might be tough to swallow.

Under the new guidance, the $2.03MM in loss allowance would be added to the purchase price of the loan pool and amortized down over time. If we assume the pool was purchased at par (100%), the loss reserved would add roughly 6.67% to the purchase price, increasing it to 106.67%. From there, the price would be amortized over time using the method the credit union chooses, let’s use a straight-line over the WAL method, for illustrative purposes. Taking the 106.67% price and amortizing it evenly over 4 years results in an annual loss expense of 1.67%, or approximately $500k, instead of the approximate $2MM which was recognized day one in the previous model.

As the loans further season, the loss expectations might change, and those changes would flow directly to the net income as a credit loss expense. This would continue to follow the existing CECL framework.

With this addendum, having a process in place to accurately measure the appropriate loss expectations is as important as ever. As we’ve discussed in the past, sellers should provide static loss data in order to give buyers the most complete pictures of how loans of different vintages have performed. Based on the static data, buyers will need to make adjustments based on the specific pool they are purchasing. Lastly, ongoing monitoring of the purchased loans is required in order to make the necessary adjustments to the original reserve.

While CECL implementation reshaped the types of loans institutions purchase, this new addendum takes a more nuanced approach. With this update, we expect buyer focus to return to risk-adjusted yield, rather than the day-one impact to the income statement from CECL.

For a more in depth look at the new guidance, register for our webinar, where representatives from PwC will provide additional details and answer questions.