Direct effect of an accounting change

Changing an inventory-cost principle may change inventory, cost of goods sold, retained earnings, and deferred tax. Those are direct because the new principle requires them. A profit-sharing payment that becomes payable because historical reported profit is now different is an indirect consequence.

The direct-effect schedule names each account, period, tax basis or supplied tax effect, statement location, and sign. It rejects a single net retained-earnings plug. The independent control is that corrected assets equal corrected liabilities plus equity in every comparative column.

Include only required changes

ASC 250-10-45-8 limits retrospective application to direct effects, including related income-tax effects. A direct effect is a change in an asset or liability needed to apply the new principle.

Suppose a supported inventory-method change increases opening inventory by $100,000 and creates a $25,000 deferred tax liability under supplied tax facts. The opening direct effects are the $100,000 asset increase, $25,000 liability increase, and $75,000 equity increase. A later bonus based on reported income follows its own recognition facts and stays outside that opening bridge.