CECL — Purchased Credit-Deteriorated (PCD) Loan Acquisition (ASC 326 Day 1 Grossed-Up)
Recording the acquisition of a loan portfolio that has experienced credit deterioration since origination — using the PCD gross-up method where the allowance is established at acquisition without a Day 1 charge to the income statement.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Loan Receivable — PCD Portfolio (Amortized Cost = Purchase Price + ACL) | Asset (+) | 95,000,000.00 | - |
| Allowance for Credit Losses — PCD (Gross-Up — No P&L Impact) | Asset (-) Contra | - | 15,000,000.00 |
| Cash (Purchase Price Paid for PCD Loans) | Asset (-) | - | 80,000,000.00 |
💡 Accountant's Note
When a bank acquires a loan portfolio that has experienced credit deterioration since origination (Purchased Credit-Deteriorated or PCD loans), ASC 326 requires a unique 'gross-up' treatment: (1) Determine the allowance for credit losses at acquisition date (the expected losses on the purchased portfolio), (2) Set the amortized cost basis = purchase price + the acquired ACL (gross-up), (3) NO income statement charge at acquisition — the ACL is established through a gross-up of the loan balance, not through credit loss expense. This is fundamentally different from non-PCD loans (which would have a Day 1 ACL established through credit loss expense). PCD treatment prevents double-counting of losses: the purchase price was already discounted for credit deterioration — recognizing an additional Day 1 loss would be double-counting. Banks acquiring distressed loan portfolios (after bank failures — FDIC-assisted transactions, or portfolio sales from stressed lenders) typically acquire PCD loans.
Practitioner & Systems Framework
💻 ERP Architecture
PCD identification requires assessment at acquisition: has each loan or pool of loans experienced a more-than-insignificant deterioration in credit quality since origination? The assessment uses: delinquency status at acquisition, credit score migration, payment modification history, and collateral value decline. Once classified as PCD: the gross-up calculation requires estimating the ACL at acquisition — the same CECL models used for originated loans are applied to the acquired portfolio.
⚠️ Audit Flags
PCD vs. non-PCD classification has significant P&L implications. Incorrectly classifying PCD loans as non-PCD creates a Day 1 credit loss expense (for the acquired expected losses) that could be avoided under PCD treatment. Auditors test the completeness of the PCD assessment and the reasonableness of the ACL established through the gross-up. For FDIC-assisted bank acquisitions: the loan portfolios are almost always PCD — the gross-up treatment is standard.
📄 Required Documentation
Loan-level assessment of credit deterioration since origination (delinquency, credit score, modifications), PCD classification documentation, gross-up ACL calculation (lifetime expected losses on acquired portfolio), purchase price allocation, amortized cost basis calculation (purchase price + acquired ACL), and comparison to non-PCD treatment (demonstrating no double-counting).
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