What is GAAP Codification?

GAAP Codification

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GAAP Codification

The GAAP Codification is an organized system of Generally Accepted Accounting Principles (GAAP) in the United States, maintained and regularly updated by the Financial Accounting Standards Board (FASB).

Before the GAAP Codification was established, U.S. GAAP standards were spread across many different publications, including those from FASB, the American Institute of Certified Public Accountants (AICPA), the Emerging Issues Task Force (EITF), and others. The GAAP Codification was a project taken on by FASB to simplify this system and integrate these many standards into one, comprehensive and searchable database.

The Codification does not change GAAP; rather, it organizes GAAP pronouncements by accounting topic. Each topic is assigned a number, and each number can have up to four hierarchical levels. The highest level gives the broadest guidance, and the lower levels provide more specific guidance. For instance, within Topic 330 “Inventory”, there might be subtopics for valuation methods, lower of cost or market rules, and so on.

The GAAP Codification is designed to be the single, authoritative source of U.S. GAAP, making it easier for users to understand and apply the principles. As new Accounting Standards Updates (ASUs) are released by FASB, they are incorporated into the Codification.

This system has greatly simplified the task of researching accounting issues and has helped to ensure that the resulting accounting treatments are more consistent across companies.

Example of GAAP Codification

Let’s look at an example of how you might use the FASB Accounting Standards Codification to find specific GAAP guidance.

Suppose you are an accountant for a manufacturing company and you need to find the proper accounting treatment for the company’s inventory costs.

The FASB Accounting Standards Codification organizes GAAP standards by topic, so you’d start by looking under Topic 330, which is the section for “Inventory.”

Within Topic 330, you’d find various subtopics, sections, and paragraphs that provide detailed guidance on the accounting treatment of inventory costs. For instance, under Subtopic 330-10 (Overall), you might find relevant sections like:

  • 330-10-30 (Initial Measurement)
  • 330-10-35 (Subsequent Measurement)

You’d read through these sections to understand how to account for inventory costs according to U.S. GAAP. You might find information about costing methodologies (like First-In, First-Out or Last-In, First-Out), the lower of cost or net realizable value rule, and more.

This is a simplified example, but it gives you an idea of how the Codification systematizes and simplifies the process of finding relevant GAAP standards. The actual process of researching and applying GAAP can be quite complex, depending on the specific accounting issue at hand.

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