FASB Takes Steps to Eliminate Day 1 Double Count

Home News & Insights FASB Takes Steps to Eliminate Day 1 Double Count

Background: CECL & Acquired Financial Assets

Since the issuance of Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the FASB has worked to support stakeholder implementation of the Current Expected Credit Loss (“CECL”) standard. As part of these efforts, the FASB performed a detailed Post-Implementation Review (PIR) of the standard.

One area highlighted in the PIR is the complexity of accounting for acquired financial assets. Under the current guidance, acquired financial assets are distinguished between purchased credit-deteriorated (“PCD”) and non-PCD. These acquired financial assets are currently accounted for using separate recognition models, as described below:

  • PCD Assets: These assets have experienced “more-than-insignificant” deterioration in credit quality since origination based on an assessment by the acquirer as of the acquisition date. Under the PCD model, the acquirer records an allowance for credit losses (“ACL”) related to the PCD assets and also records an offsetting entry as an addition to the purchase price of these assets. In other words, the initial amortized cost basis that would be recorded for PCD assets is equal to the sum of the purchase price and the ACL. This method is typically referred to as the gross-up approach. Furthermore, any remaining purchase discount or premium that is not credit-related is accreted or amortized to interest income over the life of the assets.
  • Non-PCD Assets: These acquired assets do not meet the PCD criteria and are accounted for in a manner consistent with originated financial assets. Specifically, the acquirer must provision for these assets on Day 1 as a charge to credit loss expense. Additionally, the institution would record the amortized cost basis of these assets at the purchase price paid for them. Thereafter, any purchase discount or premium is accreted or amortized to interest income over the life of the assets. As a result of the Day 1 charge to credit loss expense and lack of a step-up in basis for expected credit losses, many industry participants describe this accounting as the “Day 1 double count.”

Stakeholders have expressed that the dual approach is operationally complex, inconsistent, and unintuitive. Investors, preparers, and other stakeholders have advocated for a uniform treatment of all acquired financial assets. In particular, they prefer the gross-up approach applied to PCD assets, citing improved comparability, reduced complexity, and alignment with economic substance.

Key Developments: FASB’s Continued Deliberations

In response, the FASB proposed transitioning to an updated framework by issuing an exposure draft of Proposed ASU, Financial Instruments—Credit Losses (Topic 326): Purchased Financial Assets, in June 2023. This proposed ASU would have eliminated the distinction between PCD and non-PCD assets, applying a single gross-up approach to all acquired financial assets. However, comment letter feedback from industry stakeholders was lukewarm, with the feedback highlighting many challenges that would arise from applying the gross-up approach to every acquired financial asset. As a result, the FASB continued its deliberations on how to account for purchased financial assets (“PFAs”).

Following its deliberations, the FASB made tentative decisions at a recent meeting on April 30, 2025. The key decisions that were made are detailed below:

  • Project Objective: The FASB decided to retain the current accounting for PCD assets, but revised the objective of the proposed ASU to be one that improves the accounting for PFAs that do not fall under the current PCD scope. As a result, the current PCD accounting model would be left unchanged.
  • Scope: The scope of the proposed ASU was amended to be narrower, as now only acquired loans except for credit cards would be subject to the PFA standard. Additionally, the FASB chose to exclude held-to-maturity debt securities from the scope of this proposed ASU.
  • Seasoning: All loans, except for credit cards, would be considered seasoned and fall under the scope of the PFA standard if they are acquired through a business combination. In an instance where a pool of loans is purchased via an asset acquisition, the acquirer must then perform a seasoning test to determine whether the acquired loans would qualify to be accounted for under the gross-up approach.
  • Recognition and Measurement: The acquiring entity would record the initial amortized cost basis of the seasoned loans as the purchase price plus the initial ACL, which is the gross-up approach. Thereafter, the acquiring entity would use the interest method to recognize as interest income the non-credit discount or premium on the seasoned loans.
  • Disclosure, Transition, and Effective Date: The FASB decided to not amend any of the CECL standard’s disclosure requirements. Additionally, the FASB decided that the PFA standard should be applied prospectively for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods. However, early adoption would be permitted for any annual or interim periods beginning in 2026.

A Welcome Change

As a result of these decisions, all loans acquired in a business combination, excluding credit cards, would follow the gross-up approach:

  • ACL Recognition: The expected credit losses on the acquired loans would be recorded directly to the combined institution’s ACL on Day 1.
  • Income Accretion: The non-credit purchase discount or premium would be accreted or amortized to interest income over the life of the asset.

This simplifies acquisition accounting by eliminating the Day 1 double count, as now all acquired loans in a business combination except for credit cards would be accounted for using the gross-up approach. Furthermore, the proposed ASU now aligns the accounting treatment of acquired loans under a single accounting model, reducing the complexity around PCD and non-PCD accounting.

Looking Ahead: Timeline & Implications for Institutions

The FASB expects to finalize the PFA framework in the third quarter of 2026. We believe that the PFA framework would provide institutions with significant benefits compared to the current guidance. The PFA framework would address stakeholder concerns about the inconsistencies and complexities of the current PCD/non-PCD model. Additionally, by eliminating the double counting of the credit losses on Day 1, the PFA framework enhances operational efficiency and the intuitiveness of financial reporting.

To prepare for these changes, institutions should:

  • Engage with the FASB process to stay informed on updates.
  • Collaborate with auditors and advisors to assess the impact of the PFA framework.
  • Plan for potential operational adjustments for when the final ASU is issued.

For more information and support with the CECL standard, we encourage you to visit wilwinn.com/services/cecl. Additionally, given the interplay between CECL and purchase accounting under the PFA framework, we also encourage you to visit wilwinn.com/services/mergers-acquisitions to learn more about the services we provide related to acquisition accounting. Our expertise in these areas can help you navigate these evolving standards.

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