CECL Double Count Eliminated: ASU 2025-08 Brings Relief to Acquisition Accounting

With the release of Accounting Standards Update (ASU) 2025-08, the Financial Accounting Standards Board (FASB) has resolved the long-standing “double-count" issue in Current Expected Credit Loss (CECL) acquisition accounting. This change will have a significant impact on banks, credit unions, and other financial institutions involved in mergers and acquisitions.

Understanding the Double Count Problem

After CECL became effective for non-public filers in January 2023, acquisition accounting required all assets and liabilities to be recorded at fair value. For loans, this meant a fair value discount for expected credit losses. However, CECL also required the acquirer to immediately record an allowance for expected credit losses — effectively double-counting the credit mark. This resulted in an immediate reduction in capital post-acquisition, often complicating deal economics and requiring buyers to bring more capital to the table.

Main Provisions of ASU 2025-08

ASU 2025-08 introduces the concept of Purchased Seasoned Loans (PSLs) and expands the use of the "gross-up" approach, previously limited to purchased credit-deteriorated (PCD) assets.

Key provisions include:

• All loans (except credit cards) acquired in a business combination automatically qualify as PSLs and are recorded using gross-up accounting.
• For asset acquisitions outside of business combinations, loans purchased at least 90 days after origination (and not originated by the acquirer) qualify as PSLs.
• Credit cards, debt securities, and trade receivables are excluded.
• The Day-1 credit loss expense is eliminated for PSLs. Instead, expected credit losses are recognized as an adjustment to the amortized cost basis at acquisition, not through immediate expense.
• Interest income recognition is clarified: Only non-credit discounts or premiums are accreted into interest income, improving consistency in yield reporting.

Effective Date and Transition

Effective for annual reporting periods beginning after December 15, 2026. Early adoption is permitted in any interim or annual period where financial statements have not yet been issued or made available for issuance. Prospective application only — no retrospective restatement required. If an entity adopts the amendments in an interim reporting period, it should apply the amendments as of the beginning of that interim reporting period or the beginning of the annual reporting period that includes that interim reporting period.

Why This Matters

ASU 2025-08 resolves one of the most significant pain points in CECL implementation. By eliminating the Day-1 provision for most acquired loans, the update simplifies acquisition accounting, improves comparability across institutions, aligns reported results more closely with economic reality, and removes a major headwind to merger and acquisition activity.

Next Steps for ASU 2025-08

ASU 2025-08 marks a significant improvement in the accounting for purchased loans, bringing clarity and consistency to acquisition reporting. Financial institutions should begin planning for implementation and consider early adoption to benefit from the streamlined approach.

To prepare for implementation, institutions should:

• Review acquisition strategies and update CECL models.
• Ensure systems can accurately capture loan origination and acquisition dates.
• Prepare for new disclosure requirements, including separate rollforward breakouts for initial allowances on PSLs.

Eide Bailly’s team of audit and assurance professionals can help you begin planning for implementation and early adoption to benefit from the streamlined approach of ASU 2025-08.