The Boundaries That Keep Gross-Up From Becoming a Shortcut

The difficult cases in acquired-loan accounting are the ones that look close to the main rule but cross one of its boundaries. Credit cards are excluded from the new PSL category, a severely distressed card portfolio can still be PCD, and a fair-value mark cannot simply be split into a “credit portion” to reduce the ACL on a non-PCD/non-PSL loan. The focus here is to distinguish those exception paths from one another and to separate acquisition double counting from a second error: measuring the same loan both in a pool and individually.

These distinctions support a practical judgment. Gross-up is a defined accounting model for a defined acquisition path. It does not eliminate later credit-loss measurement, make every discount an allowance, or permit a bank to choose the most favorable-looking entry after the facts are known.

The credit-card exception is a scope boundary, not a free pass

ASU 2025-08 excludes credit cards from the new PSL definition. FASB’s reasoning is operational as well as conceptual: credit cards are open-ended, active lines of credit with high transaction volume, and applying the gross-up approach to unmodified performing cards would raise difficult questions about the unit of account and the treatment of funded and unfunded amounts.

The exclusion is narrow. It means an acquired credit card cannot become PSL under the new seasoning route. It does not mean credit cards are outside Topic 326 or outside all acquired-loan accounting. If an acquired credit-card loan has experienced more-than-insignificant deterioration since origination, it can still be PCD and use the existing PCD gross-up model. If it is not PCD, it follows the remaining applicable path rather than receiving PSL treatment by default.

The OCC’s severe credit-card example shows why that distinction matters. A bank pays $1 million for a portfolio with an aggregate unpaid outstanding balance of $10 million. Every loan is more than 180 days past due at the purchase date. The bank determines that all the loans are PCD, evaluates them collectively because they share similar risk characteristics, and estimates that it will ultimately collect $1.5 million.

The acquisition entry is:

The numbers reconcile in two directions. The purchase price of $1 million plus the $8.5 million ACL produces a $9.5 million initial amortized-cost basis. The $10 million unpaid balance less the $500,000 noncredit discount produces the same $9.5 million basis. The entry therefore preserves the separation between the expected credit loss and the noncredit portion of the purchase adjustment even in an extremely distressed portfolio.

The example then changes the level of analysis. Because each credit-card loan is more than 180 days past due, the bank should charge off each loan on an asset-by-asset basis consistent with the OCC’s retail credit classification policy. That charge-off does not mean the bank must pretend the pool has no possible recovery. The bank can still measure the group collectively for ACL purposes when the loans share similar risk characteristics and the expected recovery can be reasonably estimated.

The OCC gives an example of the charge-off and recovery logic.