Latest FASB Proposal Makes Merger Accounting Simpler Under CECL


FASB Moving Closer to Simplifying the Purchased Credit Deteriorated Model (PCD)

Currently, the CECL standard requires the acquirer of financial assets, whether in a business combination or purchased separately, to determine if there has been a more than insignificant deterioration in credit from origination. This has proved to be challenging in many ways. FASB has made a tentative decision to rename the Purchased Credit Deteriorated (PCD) accounting treatment to Purchased Financial Assets (PFA). This would, in essence, eliminate the distinction between PCD and Non-PCD financial assets in certain purchase transactions. Thus, making the purchase decision process less cumbersome. However, purchase accounting will still require significantly more effort than in the past. This is due to a CECL allowance being calculated either at or immediately after purchase for all purchased assets.

Pre-CECL Merger Process – Purchase Credit Impaired (PCI):

  • Calculate the FMV (Fair Market Value) of the financial instruments (example: loans and investments)
  • FMV includes a premium or discount and a credit mark
  • No allowance for credit loss recorded at purchase

Current CECL Merger Process:

  • Calculate the Fair Market Value (FMV)
  • Include a premium or discount
  • Include an allowance for credit loss (CECL Allowance) on assets determined to be PCD
  • Non-PCD assets allowance applied at purchase date through acquirer’s income statement
  • Allowance of the combined institution for both the acquirer and acquiree

Proposed Changes to PCD Accounting

The difference between Purchased Credit Deteriorated (PCD) and Purchased Financial Assets (PFA) is that only purchased assets determined not to be seasoned would be required to be accounted for in the same manner as Non-PCD assets are today under CECL. To make the decision, FASB incorporated the new concept of seasoning, which is defined as whether an acquired financial asset is an “in-substance origination” or is “seasoned”. The new PFA model would specifically make changes in accounting for seasoned assets. The result of this is far more assets will be under the seasoned PFA model and the concept of double counting on Non-PCD assets is reduced significantly.

FASB’s New Principles-Based Criteria for Defining Seasoning of Financial Assets in Business Combinations

FASB noted that seasoning would be defined using principles-based criteria that consider the acquirer’s involvement with the asset prior to acquisition with a bright-line period of 90 days. Financial assets acquired in a business combination would be presumed seasoned. Therefore, all assets in a business combination will have a CECL allowance applied at purchase through the purchase accounting journal entry. This would be similar to current PCD accounting today; however, under PFA, none of the assets in a business combination would be accounted for as Non-PCD or all assets would be seasoned.

This change does not eliminate the need to know the CECL allowance that will be applied to loans at the date of merger. It only moves the accounting for Non-PCD assets from the income statement to the purchase accounting journal entry.

Impact of FASB’s New PFA Standard on Accounting for Financial Assets in Business Combinations and Asset Acquisitions

This leaves the remaining assets to be determined as PFA assets, including purchases of held-to- maturity (HTM) securities and loan/asset pool purchases. Available-for-sale (AFS) securities have been eliminated from the new PFA standard and you will no longer need to consider PCD accounting at the time of purchase. If an entity acquires financial assets deemed to be in- substance loan originations, the entity will generally recognize an allowance for credit losses upon initial recognition of the assets, with the provision adjustment going through earnings, even if the purchase price is considered to be fair value. For assets that are not in-substance originations, the PFA standard would apply a CECL allowance to be recorded as part of the assets purchase accounting entry.

Under the new PFA model, assets not recognized at fair value (primarily contract assets and a lessor’s net investment in sales-type and direct financing leases), trade accounts receivable, credit cards, home equity lines of credit, and other revolving arrangements with active borrowing privileges would be included within the scope of the PFA model when acquired through both business combinations and asset acquisitions.

In conclusion, the changes will have a significant positive impact on business combinations, but only a minor impact on other asset purchases. It is assumed that FASB will issue an exposure draft in the coming months.

How ARCSys Can Help

The merger and purchase process will require significantly more time and effort than previous processes utilized. A CECL allowance will need to be calculated before purchase on all assets in order to determine correct purchase price and PFA accounting. The greatest change may be for purchase pool accounting, where the CECL allowance must be recorded as part of or after purchase of a loan pool. This will require the purchase amount to be adjusted correctly for the associated credit risk within the portfolio. Management will need to understand the credit risk of a purchase pool before purchasing.

Remember, the new PFA accounting continues to require a CECL allowance on all assets purchased, and adjusted monthly like all other financial assets, based on credit risk changes. An institution needs to have the correct credit risk calculated at purchase to ensure proper accounting.

ARCSys can support these acquisitions as follows: 

  • Calculate the Fair Market Value (FMV), including premiums and discounts for mergers, acquisitions, and other purchased financial assets
  • Calculate the CECL allowance on assets to be purchased, including business combinations and individual pool purchases
  • Support the credit risk assessment for the segmentation combination of the purchase portfolios

Contact ARCSys if your institution is considering a merger/acquisition or if you purchase loan pools. We are here to help!


About The Author


Micheal Umscheid

President & CEO

Mike has been providing accounting, consulting and auditing services to financial institutions for over 30 years. Considered the “CECL Guru”, Mike was selected by the AICPA to create and deliver their 8-hour CPE course on CECL. He is a past member of the Auditing Standards Board and a published author on Accounting and Auditing for Financial Institutions. Mike has spoken at numerous AICPA conferences as well as other national and local financial institution associations. Mr. Umscheid is also the author of the 8-hour CPE course published by the AICPA for CECL.Mike is currently the President and CEO of ARCSys, a consulting firm that specializes in Allowance for Credit Loss software and CECL.