IMA FRC comment letter response to proposed ASU on purchased financial assets

Monday, September 11, 2023

The IMA^® (Institute of Management Accountants) Financial Reporting Committee (FRC or Committee) issued a comment letter in response to the Financial Accounting Standards Board (FASB or Board) Proposed Accounting Standards Update (ASU) No. 2023-ED400, Financial Instruments—Credit Losses (Topic 326): Purchased Financial Assets (Proposal or Exposure Draft).

The FASB issued the Proposal with the objective of responding to stakeholder interest in clarifying the way a reporting entity must account for acquired financial assets under Topic 326, Financial Instruments—Credit Losses, that the FASB adopted by issuing ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. More specifically, stakeholders observed that this guidance created confusing and inconsistent accounting for financial assets that satisfy the criteria for designation as “purchased with credit deterioration” (PCD) and financial assets that fall outside the PCD definition (non-PCD).

In its response, the Committee shares its general agreement with the Proposal’s objective of eliminating differences in the use of the gross-up approach, which is currently permitted for recording PCD financial assets in an acquisition but not for non-PCD financial assets. This position aligns with the FRC’s expressed concern regarding the recognition of credit losses at the time of acquisition (Day 1) during the due diligence process that resulted in the adoption of ASU No. 2016-13.

In addition, the Committee suggests that the Board consider additional clarifications regarding the Exposure Draft. This includes addressing:

• The threshold for determining whether a loan is “seasoned” and, therefore, subject to characterization as purchased (rather than originated).
• The unit of account and applicability of the proposed guidance to “substantially all” of an acquired pool of loans vs. individual assets.
• The applicability of the Proposal to revolving credit arrangements, including credit card receivables.
• The exclusion of corporate debt securities acquired at a significant discount and classified as available for sale (AFS).

In addition, the FRC disagrees with the proposed mandate of a modified retrospective transition approach. Instead, the Committee favors making the modified retrospective approach permissible but allowing the use of a prospective approach.