[Global Financial Insights] FASB Amends Guidance on Accounting for Purchased Loans and More

Editorial Team – [2025] 180 taxmann.com 366 (Article)

Global Financial Insights is a weekly feature for the Accounts and Audit Module subscribers of Taxmann.com. It provides you with the latest updates on financial reporting and auditing practices from across the globe. Here is this week’s financial update:

1. Financial Accounting Standard Board amends guidance on accounting for purchased loans

The Financial Accounting Standard Board (FASB) has published an accounting standard update wherein it has amended the previously issued guidance for accounting of purchased loans. Under the existing guidance the distinction between purchased credit-deteriorated (PCD) assets and non-PCD assets used to create complexity and reduced comparability.

1.1 Pre Amendment Guidance

The acquired financial asset that has a “more-than-insignificant” deterioration of credit quality since its origination is accounted for as a purchased financial asset with credit deterioration (PCD assets). Prior to the amendment, the PCD assets were accounted for using the “gross-up approach” which requires recognition of allowance for expected credit loss at the acquisition date. Thus, the initial allowance for PCD assets were recorded through an adjustment to the initial amortised cost.

Further, the acquired financial asset that does not have “more-than-insignificant” deterioration of credit quality since its origination is accounted for as a purchased financial asset with non-credit deterioration (Non-PCD assets). Prior to the amendment, the initial allowance for Non-PCD assets were directly charged to credit loss expense.

1.2 Post Amendment Guidance

The amended guidance has broaden the scope of accounting under the “gross up approach”. As per this guidance, the loans (other than credit cards) that are acquired without credit deterioration but are considered “seasoned” will be treated as purchased seasoned loans and accounted for using the gross-up method at the time of acquisition. Thus, if an entity determines that a loan is “Non-PCD asset” then it must assess whether the loan qualifies as seasoned under the new guidance. If it does, the entity should apply the gross-up approach to record it.

Seasoned Loan

All non-PCD loans (excluding credit cards) that are acquired in a business combination are deemed seasoned. Other Non-PCD loans (excluding credit cards) are seasoned if they were purchased at least 90 days after origination and the acquirer was not involved in the origination of the loans.

1.3 Effective Date

The amendments in this update are effective for all entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods.

Source – Financial Accounting Standard Board

2. Financial Reporting Council sanctions penalty and debarment on public accounting firm

The Financial Reporting Council (FRC) has imposed sanctions against the public accounting firm and two of its former audit engagement partners. Subsequent to the investigation, FRC identified a dishonest course of conduct on numerous audits between 2015 and 2019. Further, the instances of creating false audit evidence, causing auditor’s reports to be issued without approval from the relevant audit engagement partner, and inserting electronic copies of the audit engagement partner’s signatures in auditor’s reports without their approval were also identified. Considering the proven misconduct FRC has sanctioned both the accounting firm and concerned engagement partner with hefty monetary penalty and debarment.

The accounting firm is sanctioned with a monetary penalty of £58,50,000 and the engagement partners are sanctioned with a monetary penalty of £1,89,000 and £90,000 respectively. Further, one of the engagement partner is debarred for a period of 6 years and another partner is debarred for a period of 3 years form performing any audit work.

Source – Financial Reporting Council

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