Summary of the ASU Regarding Purchased Seasoned Loans (PSLs)
This document outlines a new Accounting Standards Update (ASU) impacting how companies account for loans acquired in business combinations or thru other transactions. HereS a breakdown of the key points:
1. defining “Seasoned” Loans:
* Automatically Seasoned: Loans acquired in a business combination are automatically considered seasoned.
* Seasoned via Criteria: Loans acquired outside a business combination (e.g., portfolio purchases) are seasoned if both of these conditions are met:
* acquired more than 90 days after the loan’s origination date.
* The acquirer had no involvement in the loan’s origination (not the originator, no prior commitments, etc.).
2. Accounting Treatment Based on Seasoning:
* Seasoned Loans: Accounted for at fair value, with an allowance for credit losses recognized at acquisition. Subsequent measurement follows standard CECL (Current Expected Credit Loss) principles.
* Non-Seasoned Loans: Accounted for as if the acquirer originated the loan. This means:
* Recorded at purchase price (fair value).
* No initial allowance.
* A CECL allowance is promptly recorded through provision expense. (Similar to current “non-PCD” treatment).
3. Subsequent Measurement (for Seasoned Loans):
* Accretion of discount/Premium: The difference between the loan’s par value and its grossed-up basis is accreted into interest income over the loan’s remaining life.
* Allowance Updates: The allowance for credit losses is updated at each reporting date under standard CECL accounting.
* Option Credit Loss Estimation (Election): Companies can elect, on an acquisition-by-acquisition basis, to use methods other than discounted cash flow to estimate credit losses at acquisition (e.g., based on unpaid principal balance). if elected:
* Transition to using amortized cost basis for subsequent credit loss estimates.
* A “true-up” adjustment (through provision expense) will be made in the period following acquisition.
4. Disclosure Updates:
* No new disclosure requirements are being added.
* Existing ASC 326 disclosures will now include allowances for acquired PSLs.
* ASC 326-20-50-13 rollforward requirements are expanded to include a line item for the initial allowance on purchased seasoned loans.
5. Key Takeaways & Recommendations:
* Evaluate Acquisitions: companies should assess recent and upcoming acquisitions to understand the impact of the ASU.
* Early Adoption Benefits: Early adoption can eliminate Day-1 credit loss expense for eligible loans and simplify accounting.
* Improved Comparability: The ASU aims to improve consistency and comparability in financial reporting for purchased loans.
In essence,this ASU aims to standardize the accounting for purchased loans,notably those considered “seasoned,” and reduce the immediate impact of credit loss recognition at the time of acquisition for qualifying loans.
