Harnischfeger Case
Case Study Harnischfeger Corporation
1. Identify all the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate, as accurately as possible, the effect of these on the company’s 1984 reported profits.
Net sales products purchased overseas and sold by the corporation.
Change in the depreciation method. Before 1984 the company conducted accelerated method for its operating plans and after 1984, the straight-line method is used (Note 2). As a result, this increased net income for 1984 by $3.2 million or $0.27 per share.
The R&D expense in 1984 reduced significantly compared the previous years (Note 9). R&D expense was $5.1 million in 1984; however, 12.1 million in 1983 and $14.1 million in 1982.
All the above changes in accounting policies were made to increase the amount of company’s net income and total assets. On one hand, the company was taking foreign operations into account in order to get a higher net income and a higher total assets record. On the other hand, the company reduced funds for R&D activities and employee benefits to reduce the expenses in the profit and loss statement. Hence, these led to growth in revenue. Besides, the company also negotiated with bankers and lenders for the debt obligations into longer terms and changes the credit record methods. Such activity would reduce its outstanding liabilities in nearer years and increased the net asset figure.
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?
Manages made these changes for several reasons. Managers changed the policy to show up positive signal of the company’s operation which reduced the company’s risk of default from outsiders’ view. As accounting statement could reflect the associated managers’ performance, managers changed the policies in order to present more revenue and increase their performance.
1. Identify all the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate, as accurately as possible, the effect of these on the company’s 1984 reported profits.
Net sales products purchased overseas and sold by the corporation.
Change in the depreciation method. Before 1984 the company conducted accelerated method for its operating plans and after 1984, the straight-line method is used (Note 2). As a result, this increased net income for 1984 by $3.2 million or $0.27 per share.
The R&D expense in 1984 reduced significantly compared the previous years (Note 9). R&D expense was $5.1 million in 1984; however, 12.1 million in 1983 and $14.1 million in 1982.
All the above changes in accounting policies were made to increase the amount of company’s net income and total assets. On one hand, the company was taking foreign operations into account in order to get a higher net income and a higher total assets record. On the other hand, the company reduced funds for R&D activities and employee benefits to reduce the expenses in the profit and loss statement. Hence, these led to growth in revenue. Besides, the company also negotiated with bankers and lenders for the debt obligations into longer terms and changes the credit record methods. Such activity would reduce its outstanding liabilities in nearer years and increased the net asset figure.
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?
Manages made these changes for several reasons. Managers changed the policy to show up positive signal of the company’s operation which reduced the company’s risk of default from outsiders’ view. As accounting statement could reflect the associated managers’ performance, managers changed the policies in order to present more revenue and increase their performance.