FASB CECL Update: What Bank Boards Need To Know

With the publication of Accounting Standards Update (ASU) 2025-08, “Financial Instruments – Credit Losses (Topic 326): Purchased Loans” on Nov. 12, 2025, the Financial Accounting Standards Board (FASB) addressed an accounting issue that has been complicating bank mergers and acquisitions for several years. The update changes the accounting for loans acquired in an M&A transaction and other purchased loans. Overall, the changes better align the accounting for a transaction with the economic realities of the deal.

While the ASU is not required to be adopted until 2027 for calendar year-end banks, directors and senior executives who have completed or expect to complete a transaction in 2025 or 2026 might want to evaluate early adoption of the new standard. Moreover, because it aligns the initial capital impact and ongoing financial reporting with the economics of the transaction, the new ASU also could influence how banks price and negotiate future deals, thus presenting boards with an opportunity to reevaluate their long-term growth strategies and acquisition approaches.

A Long-Awaited Fix
Under the current expected credit loss (CECL) model, issued in 2016, banks must carry an allowance for lifetime expected credit losses for all financial assets carried at amortized cost, regardless of whether they were originated or acquired. For acquired or purchased loans that had not deteriorated in credit quality since origination, this meant acquirers had to record a fair value adjustment reflecting expected credit losses (otherwise known as the credit discount). Banks also had to record a separate allowance through a provision expense for those same expected losses. Furthermore, the credit component of this fair value adjustment was accreted through interest income over the life of the acquired loans, distorting the yield.

The standard corrects these distortions by expanding the use of the gross-up method, which previously was limited to purchased loans with more than insignificant credit deterioration since origination. Under the new ASU, banks apply the gross-up method to loans, excluding credit cards, acquired via a business combination or purchased more than 90 days after origination if the acquiring bank had no involvement in the origination or was not exposed to the economic risks and rewards of the originated loan.

This will allow banks to record these loans at their purchase price, grossed up for the allowance for credit losses at acquisition, without recognizing a loss provision expense. The prospective yield on these loans will now be comparable to newly originated loans, as the premium or discount on purchased seasoned loans will exclude any credit mark.

Why It Matters
Banks on both sides of a transaction should understand how the accounting standard changes could make some transactions more feasible or financially attractive than they appeared under the old guidance.

From a buyer’s perspective, the new approach better aligns the balance sheet and income statement impacts with the economics of the deal. From a seller’s perspective, it removes an artificial complication that buyers have often cited in price negotiations.

In the end, however, the fundamental economics of a deal remain unchanged. The new accounting aligns the numbers with the economics, but it does not change the economics themselves. Boards still must focus on underlying value and the strategic rationale of every transaction.

Effective Dates and Early Adoption
The new ASU must be applied prospectively for fiscal years beginning after Dec. 15, 2026, including interim periods, but early adoption is permitted. Banks could choose to adopt in 2025 (either at the beginning of the fourth quarter or at the beginning of the fiscal year) and apply the new accounting to any M&A and qualifying purchased loans completed during the quarter or year.

Boards should consider that decision carefully, weighing both the benefits and the operational demands. Banks that anticipated the change and prepared their systems to accommodate it could find early adoption to be relatively straightforward, but others might find it difficult to manage this late in an already busy reporting year.

In some cases, the benefits of early adoption might not outweigh the cost and complexity, particularly if the transaction closed months ago and the results have been communicated to investors.

Questions Bank Boards Should Ask
Questions to consider include:

• Should we early adopt? What are the advantages and potential risks? Can our systems, data and internal controls support early adoption?
• Regardless of early adoption, how could the new guidance affect transactions now being negotiated for 2026 or later? How will it influence pricing assumptions?
• What are the expected effects on future capital planning, financial reporting and investor communications
• Above all, are our strategic decisions still driven by sound economics rather than accounting outcomes?

Ultimately, boards must continue to evaluate potential transactions based on their long-term strategic and economic merits, not the mechanics of the accounting treatment.