Harnischfeger Case Study Essay Example
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.
• Refer to Note 2, Harnischfeger included in net sales products purchased from Kobe Steel. Also, Financial Statements of certain foreign subsidiaries were included on the basis of their fiscal years ended 31 July 1984. Although it had no significant impact on net income, it did increased net sales by $5.4 million.
• Also from Note 2, Harnischfeger had changed the method for computing depreciation expenses on plants, machinery and equipment (PPE) from principally accelerated method to straight-line method during 1984. This change resulted in a net income increase for 1984 by $11.0 million.
• In Note 2, as a result of the review of its depreciation policy, Harnischfeger had changed its estimated depreciation lives and residual values on certain US PPE, which increased net income for 1984 by $3.2 million.
• Refer to Note 7, Harnischfeger changed the inventories method from FIFO to LIFO in 1984, which increased net income by $2.4 million.
• Refer to Note 11, during 1984, Harnischfeger terminated the existing Salaried Employees’ Retirement Plan and established a new plan, which is identical to the prior plan except for an improvement in the minimum pension benefit. The change in the investment return assumption rates for all US plans, and the Salaried Employees’ Plan restructure reduced pension expense by approximately $4.0 million, and the actuarial present value of accumulated plan benefits by approximately $60.0 million.
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?
There are the following reasons to motive Harnischfeger’s management:
• Boost stock price to raise new capital. Harnischfeger relied increasingly on debt
• Refer to Note 2, Harnischfeger included in net sales products purchased from Kobe Steel. Also, Financial Statements of certain foreign subsidiaries were included on the basis of their fiscal years ended 31 July 1984. Although it had no significant impact on net income, it did increased net sales by $5.4 million.
• Also from Note 2, Harnischfeger had changed the method for computing depreciation expenses on plants, machinery and equipment (PPE) from principally accelerated method to straight-line method during 1984. This change resulted in a net income increase for 1984 by $11.0 million.
• In Note 2, as a result of the review of its depreciation policy, Harnischfeger had changed its estimated depreciation lives and residual values on certain US PPE, which increased net income for 1984 by $3.2 million.
• Refer to Note 7, Harnischfeger changed the inventories method from FIFO to LIFO in 1984, which increased net income by $2.4 million.
• Refer to Note 11, during 1984, Harnischfeger terminated the existing Salaried Employees’ Retirement Plan and established a new plan, which is identical to the prior plan except for an improvement in the minimum pension benefit. The change in the investment return assumption rates for all US plans, and the Salaried Employees’ Plan restructure reduced pension expense by approximately $4.0 million, and the actuarial present value of accumulated plan benefits by approximately $60.0 million.
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?
There are the following reasons to motive Harnischfeger’s management:
• Boost stock price to raise new capital. Harnischfeger relied increasingly on debt