ASC stands for the FASB Accounting Standards Codification. It is the source of authoritative generally accepted accounting principles (GAAP) recognized by the Financial Accounting Standards Board to be applied by nongovernmental entities, and rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative GAAP for SEC registrants (FASB Statement No. 168). All guidance contained in the Codification carries an equal level of authority, so no paragraph in it outranks another (FASB Statement No. 168).
A nongovernmental entity is one that is not required to issue financial reports under guidance promulgated by the Governmental Accounting Standards Board or the Federal Accounting Standards Advisory Board (FASB Statement No. 168). That is the private companies, nongovernmental not-for-profits, and SEC registrants a US firm works on.
How a Codification Reference Reads
The Codification uses one classification code throughout, and it reads left to right: Topic, then Subtopic, then Section, then Paragraph, with an S in front of the Section number where the content is SEC material (FASB, About the Codification).
Take paragraph 105-10-65-1, which carries the Codification’s own transition and effective date information. Topic 105 is Generally Accepted Accounting Principles, Subtopic 10 is Overall, Section 65 is Transition and Open Effective Date Information, and the last number is the paragraph sitting inside that Section (FASB Statement No. 168).
Every Subtopic uses the same Sections, so the Section number tells you what kind of guidance is coming before you read a word of it (FASB, About the Codification). In that same Subtopic, 105-10-05 is Overview and Background, 105-10-15 is Scope and Scope Exceptions, and 105-10-20 is the Glossary (FASB Statement No. 168).
The Topic is the level that gets named out loud. Topic 740 is Income Taxes (FASB Accounting Standards Update 2023-09), and ASC 740 sets out what that Topic requires.
Updates Amend the Codification Rather Than Stand Beside It
New guidance arrives as an Accounting Standards Update (ASU). The Board does not consider Accounting Standards Updates authoritative in their own right, and they serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the changes in the Codification (FASB Statement No. 168).
So a firm cites the Codification paragraph for the rule, and reaches for the Update only to see what changed and why the Board changed it.
What the Codification Replaced
FASB Statement No. 168 established the Codification as the source of authoritative GAAP, effective for financial statements issued for interim and annual periods ending after September 15, 2009, and as of that date all then-existing non-SEC accounting and reporting standards that had been included in levels (a) through (d) GAAP were superseded, except for a short list of named Statements that stayed authoritative until each was integrated into the Codification and except for the guidance Section 105-10-70 describes as grandfathered (FASB Statement No. 168).
What went with them was the ranking. The hierarchy Statement No. 162 had arranged came down to two levels, authoritative and nonauthoritative, and non-SEC literature left outside the Codification became nonauthoritative unless it was grandfathered (FASB Statement No. 168).
Grandfathered is narrow, and Section 105-10-70 sets out the two situations it covers. An entity that had followed, and still follows, a treatment sitting in category (c) or category (d) of that old hierarchy, its two lowest levels, as of March 15, 1992 need not move to a treatment in a higher category whose effective date was before that day (FASB Statement No. 168). Separately, where a standard had allowed an entity to keep applying superseded guidance to transactions that have an ongoing effect, that guidance was left out of the Codification and stays authoritative for those transactions (FASB Statement No. 168).
Where a US Firm Meets an ASC Citation
FASB separates the two audiences that read a reference. In notes to financial statements it encourages plain English describing the broad Topic, so the note names the Topic of the FASB Accounting Standards Codification instead of reciting a code (FASB, About the Codification). For working papers, articles, and other documents outside the Codification, it suggests the form FASB ASC followed by the reference, with the level named: Topic, Subtopic, Section, paragraph, or subparagraph (FASB, About the Codification).
So a client’s footnote points at the Topic, because a statement reader wants the subject and not the address, while a workpaper or a position memo points at the paragraph, so the next reviewer opens one screen instead of repeating the search.
Two Things ASC Gets Confused With
GAAP and the Codification are not two names for one thing: GAAP is the body of accepted principles, and the Codification is where the authoritative ones were gathered and published.
An ASC reference and an ASU number are not interchangeable either: the Codification reference is the address of the rule as it stands now, and the Update is the document that moved it there.
Common Questions
Close, but not identical. The Codification is the source of authoritative GAAP recognized by FASB for nongovernmental entities, so for a private company or a nongovernmental not-for-profit the two line up almost exactly (FASB Statement No. 168). A public filer also answers to SEC rules and interpretive releases, which are separately sources of authoritative GAAP for registrants, and the SEC content sitting inside the Codification is provided for convenience rather than as the authoritative source of that content (FASB Statement No. 168).
Topic 842 of the Codification, Leases (FASB Accounting Standards Update 2016-02). The work that Topic created after transition is covered in ASC 842 lease accounting.
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