FASB Takes Step Toward Eliminating CECL “Double Count”

Since Financial Instruments — Credit Losses (Topic 326), better known as CECL, became effective for non-public filers on January 1, 2023, it has had a significant impact on the accounting for bank and credit union acquisitions.

Under the standards governing acquisition accounting, all assets and liabilities acquired in a business combination are brought onto the acquirer’s books at fair value (with certain exceptions). The fair value of loans acquired includes an adjustment for interest rate changes, and a discount for expected credit losses.

How Current CECL Accounting Works

Under current CECL, the acquiring entity is also required to book an allowance and related provision for the expected credit losses for all loans acquired, other than those determined to be purchased with credit deterioration.

This means that a financial institution buying a hypothetical entity with a $500 million loan portfolio and a $5 million allowance for credit losses for $495 million (assuming no interest rate fair value mark needed) would bring the loans onto their books at $495 million ($500 million loan balance less $5 million discount) and then immediately record a $5 million provision (assuming the allowance approximates the credit risk component of the fair value mark). In this simplified example, the acquirer now has $5 million less capital immediately after the acquisition. The double-counting of the credit mark would come back into income as the loans pay down and the allowance is reduced, but the immediate impact on capital can be a deal-breaker and requires buyers to come to the table with more capital than they otherwise would need to remain well capitalized post-acquisition.

Updates to CECL

On June 27, 2023, the FASB issued Proposed Accounting Standards Update (ASU), Financial Instruments — Credit Losses (Topic 326): Purchased Financial Assets, with comment letters due several months later. On April 30, 2025, the FASB met to redeliberate the and make decisions related to accounting for loans in a business combination.

The FASB made tentative decisions allowing seasoned loans receivable, excluding credit cards, to be accounted for under a gross-up approach. This would eliminate the need for a provision immediately following an acquisition. While tentative decisions only become final after a formal written ballot, it appears we may finally have a fix coming soon.

Next Steps with CECL

It is expected that the standard will indicate that the amendments should be applied prospectively for annual reporting periods beginning after December 15, 2026. Early adoption is expected to be permitted, and if elected, the entity would apply the amendments as of the beginning of that interim reporting period or the beginning of the annual reporting period that includes that interim period. The FASB directed the staff to draft a final Accounting Standards Update for vote by written ballot. Issuance of the update is anticipated during the third quarter of 2025.

Our team can help you make sense of changing CECL regulations and ensure compliance.