What is the FASB US GAAP Codification?

Financial reporting in the United States is governed by Generally Accepted Accounting Principles (GAAP). For decades, these principles were spread across a complex collection of documents issued by various accounting bodies, including Statements of Financial Accounting Standards (SFAS) and APB Opinions. This created a confusing system for accountants and financial professionals to navigate.

To resolve this complexity, the Financial Accounting Standards Board (FASB) undertook an initiative to consolidate authoritative GAAP for nongovernmental entities into a single source. The result was the FASB Accounting Standards Codification, which became effective for interim and annual periods ending after September 15, 2009. The Codification is the authoritative source for standards issued by the FASB. It is not a new set of standards but a reorganization of existing U.S. GAAP into a logical structure. For public companies, guidance from the U.S. Securities and Exchange Commission (SEC) is also an authoritative source of GAAP, and the Codification incorporates relevant SEC content for reference.

The Structure of the Codification

The FASB Accounting Standards Codification is organized in a hierarchical structure that allows users to systematically drill down from broad concepts to specific guidance. The entire body of literature is organized into about 90 accounting topics, which are grouped into nine overarching Areas. This topical arrangement ensures that all related guidance is housed in one location.

A standard reference to guidance within the Codification follows the format: Topic-Subtopic-Section-Paragraph. A common example is ASC 330-10-35-1, which pertains to inventory valuation. In this reference, “ASC” identifies the citation as coming from the Accounting Standards Codification. The number “330” represents the “Inventory” Topic, “10” points to the “Overall” Subtopic, “35” indicates the “Subsequent Measurement” Section, and the final “1” directs the user to a specific paragraph.

The nine major Areas form the highest level of the Codification’s hierarchy. The “General Principles” Area (100-level) covers broad concepts, and the “Presentation” Area (200-level) deals with how information is displayed in financial statements. The next three Areas are tied to the elements of the balance sheet: “Assets” (300-level), “Liabilities” (400-level), and “Equity” (500-level).

Following the balance sheet Areas are the “Revenue” (600-level) and “Expenses” (700-level) Areas. The “Broad Transactions” Area (800-level) contains guidance for transactions that can affect various financial statement accounts, such as business combinations. Finally, the “Industry” Area (900-level) provides specialized accounting guidance for specific sectors like airlines, software, and healthcare.

Within each Area are Topics, which are the core of the Codification’s structure. Topics are further broken down into Subtopics, which provide more granular guidance. The next level is the Section, which provides the actual accounting guidance. Sections are standardized across all Topics; for example, Section 30 always relates to “Initial Measurement,” while Section 35 covers “Subsequent Measurement.” The final and most specific level is the Paragraph, which contains the detailed rules and criteria.

Navigating the Codification System

Accessing the specific guidance within the FASB Codification is primarily done through the official Codification Research System website. There are two main approaches to finding information: browsing the topical hierarchy and using the keyword search function.

The first method, browsing, is ideal when a user has a general idea of the accounting issue and where it might fall within the Codification’s structure. A user would start by selecting one of the nine main Areas, which would reveal all the Topics within that Area. From there, the user continues to drill down by clicking on a Topic, then a Subtopic, and finally a Section to view the specific paragraphs that detail the rules.

The second primary navigation method is the search function. This tool is useful for very specific inquiries or when the appropriate Topic is not immediately obvious. The search bar allows users to enter keywords, phrases, or even specific Codification references. For instance, searching for “inducements” would yield a list of all paragraphs across the entire Codification that contain that term.

When using the search function, the system returns a list of results ranked by relevance. Each result shows the Codification reference and a snippet of the text containing the search term. Users can then click directly on the reference to be taken to that specific paragraph within the Codification’s hierarchical view. This allows the user to see its context by easily navigating to surrounding paragraphs or sections.

The Codification Maintenance Process

The FASB Accounting Standards Codification is not a static document; it is continuously updated to reflect changes in the business environment and to address new accounting issues. The Financial Accounting Standards Board (FASB) is the organization responsible for maintaining and improving the standards within the Codification. This maintenance process is deliberate and transparent, involving multiple steps to ensure changes to U.S. GAAP are well-vetted.

The process begins when an accounting issue is identified. Issues can be brought to the FASB’s attention by various stakeholders, including investors, auditors, or companies. The FASB staff researches the issue and presents its findings to the Board. The Board then deliberates on whether to add a project to its technical agenda, weighing the potential benefits of a new standard against the costs of implementing it.

Once a project is added to the agenda, the FASB begins its formal deliberations. This phase involves extensive research, roundtable discussions with experts, and public board meetings where members debate the technical merits of various potential solutions. This process culminates in the issuance of an “Exposure Draft,” which is a preliminary version of the new or amended standard.

The Exposure Draft explains the proposed changes to the Codification and the Board’s reasoning. It is released to the public for a comment period. During this time, the FASB actively solicits feedback from all interested parties. After the comment period closes, the FASB staff analyzes all the feedback received and the Board redeliberates on the proposed standard, making adjustments based on the input provided.

After considering all public feedback and completing its redeliberations, the FASB votes on a final standard. If a majority of board members approve, the new guidance is issued as an “Accounting Standards Update” (ASU). An ASU is the document that communicates the changes—the additions, deletions, and modifications—to the authoritative content of the FASB Codification. The ASU will specify the amendments and provide the effective date for the new guidance.