Embodiments are directed to a companding method and system for reducing coding noise in an audio codec. A method of processing an audio signal comprises receiving an audio signal, classifying the audio signal as one of pure sinusoidal, hybrid, or pure transient signal using two defined threshold values, and selectively applying a companding operation by switching between a companding off mode, a companding on mode, and an average companding mode, comprising selecting between the companding on mode and the average companding mode for a classified hybrid signal using a companding rule that uses a temporal sharpness measure in a frequency domain.