FASB issues proposal for purchased financial assets

The proposed ASU would eliminate the need for companies to determine if purchased financial assets have experienced a ‘more-than-insignificant’ credit deterioration. This change would expand the population of financial assets, other than AFS debt securities, that would be subject to the purchased financial assets accounting model (i.e. the gross-up method) in ASC 326. The gross-up method records an allowance at the date of acquisition with an offsetting entry to the asset’s amortized cost basis.

The changes proposed in the ASU would:

• Largely eliminate the Day-1 credit loss expense related to the purchase of financial assets in the scope of ASC 326-20 (e.g. loans and trade receivables) and reduce the interest income recognized for those assets in subsequent periods.  
• Eliminate the use of the gross-up method for purchased available-for-sale debt securities with a credit loss at the date of acquisition.

The proposed ASU does not include any amendments related to disclosures and/or the presentation of purchased financial assets. 

The gross-up method would apply to all acquired financial assets that are in the scope of the credit impairment guidance (excluding AFS debt securities) and are considered ‘seasoned’.

Financial assets would be considered ‘seasoned’ if they are either:

1. part of a business acquired in a business combination under ASC 805, or
2. acquired more than 90 days after origination and the acquirer did not have involvement in the origination.

The proposal includes examples of facts and circumstances that companies should evaluate when assessing whether they had involvement in the origination. 

The effective date and whether early adoption will be permitted will be decided after the FASB considers feedback on the proposals.

The proposed amendments would be applied on a modified retrospective basis as of the beginning of the fiscal year in which a company adopted the amendments in the credit impairment standard. This approach would result in a cumulative-effect adjustment to retained earnings as of the later of (1) the beginning of that reporting period or (2) the beginning of the earliest period presented.