Case Study on Harnischfeger Corporation

1. Identify all the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate, as accurate as possible, the effect of these on the company’s 1984 reported profits.

Accounting policy changes made on core business activities:

• Harnischfeger included net sales figure from Kobe Steel Ltd. Previously, only net gross margin generated from transactions with Kobe Steel Ltd was included.

 This change resulted in a net sales figure increase of $28 million.

• Harnischfeger incorporated certain foreign subsidiaries’ financial statements with fiscal year ending 31st July.

 The adjustment resulted in a net sales figure increase of $5.4 million for the year ended on 31st Oct.

• Harnischfeger liquidated its inventory under LIFO method for 1984 fiscal year.

 The liquidation resulted in an increase in net income by $2.4 million.

• Harnischfeger had a discretionary change of its estimate on Allowance for Doubtful Debts. The ratio for doubtful debt provision has changed from 9.12% to 6.30% from 1983 to 1984.

 If the rate from 1983 had been applied, the company would have reported an extra amount of $2.63 million doubtful debts.

Accounting changes made on non-core business activities:

• Harnischfeger adopted straight-line method for financial reporting purposes and abandoned previously used accelerated method for its US operating plants. As result of the change in depreciation policy, they reviewed on depreciation lives on certain PPE in US.

 This change resulted in an increase of net income by $11.0 million attributed to the change of depreciation method and $3.2 million resulted from the change on depreciation lives. The increase in total represented 93.5% of the net income.

• Harnischfeger implemented some changed on its pension policy.

 The adjustment resulted in a gain in net income by $3.93 million for fiscal year 1984, which represented 25.9% of the net income.

2. What do you think are the motives of Harnischfeger’s management in making the changes in its financial reporting policies? Do you think investors will see through these changes?

The motives of Harnischfeger’s management in changing its financial reporting policies are:

1. Meet the earnings expectation from the analysts to enhance confidence from its investors as well as from its customers, suppliers and employees. This also helps the firm to regain its business reputation and strengthen its public image.

2.