The Financial Accounting Standards Board (FASB) plans to issue a proposal in the near term that would change how entities initially record an allowance for expected credit losses (ECL) for acquired financial assets.
In under a minute
- At its March 29, 2023, board meeting, the FASB finished deliberations and voted to proceed on a forthcoming proposal that would change how reporting entities initially recognize an allowance for credit losses (ACL) on acquired financial assets subject to Topic 326, “Financial Instruments – Credit Losses.”
- Under the proposal, financial assets in the scope of Topic 326 acquired in either a business combination or an asset acquisition would be accounted for under the purchased financial assets (PFA) model. The scope of the PFA model also would include acquired revolving credit arrangements with active borrowing privileges (such as credit cards and home equity lines of credit), trade receivables, and acquired financial assets not initially recorded at fair value in a business combination (for example, contract assets arising from contracts with customers).
- Under the PFA model, reporting entities would recognize a Day 1 allowance with the offsetting entry recorded as an adjustment to the initial carrying amount of the PFAs. This accounting outcome is consistent with the purchased credit deteriorated (PCD) model currently in Topic 326.
- The PFA model would not apply to purchased financial assets that are in-substance originations or that are originated within 90 days of the acquisition date. For these assets, a reporting entity would be required to recognize its Day 1 allowance by recording a charge to earnings.
- The FASB decided to propose application on a modified retrospective basis. Under that approach, reporting entities would apply the proposed guidance retrospectively to all acquisitions of financial assets occurring in or after the first reporting period in which an entity adopted Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”
