Changes in accounting principles can have direct and indirect effects on a company's financial statements. The treatment of these effects is crucial for transparent and accurate financial reporting. This case study explores the scenario where indirect effects of a change in accounting principle are discussed, emphasizing the appropriate reporting procedures.

Background: XYZ Corporation

XYZ Corporation, a multinational manufacturing company, has decided to change its method of inventory valuation from the LIFO (Last In, First Out) method to the FIFO (First In, First Out) method. This change will affect the reported cost of goods sold and inventory values in the financial statements.

Direct and Indirect Effects:

Direct Effects:

The direct effects of the change are the immediate adjustments to the cost of goods sold and inventory values. These direct effects are reported retrospectively, meaning they are adjusted to the earliest period presented in the financial statements, if practicable. This ensures that stakeholders have a clear understanding of the immediate impact on historical financial data.

Indirect Effects:

The indirect effects refer to the broader financial implications resulting from the change in accounting principle. For XYZ Corporation, this could include changes in financial ratios, tax implications, and potential impacts on contractual agreements with suppliers or customers. These indirect effects, which may not be as readily quantifiable as the direct effects, are reported in the period in which the accounting change occurs. This provides a comprehensive view of the overall consequences of the change.

In the context of a change in accounting principle, when should the indirect effects be reported?