Harnischfeger Corporation

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Harnischfeger Corporation

Teaching Note


The purpose of the "Harnischfeger Corporation" case is to expose students to the managerial motives for making major financial reporting policy changes.

Generally accepted accounting principles (GAAP) allow companies wide latitude in the choice of accounting policies. After a firm chooses a set of accounting policies, current accounting rules permit changes from one alternative policy to another at the discretion of the management. Since reported accounting figures are widely used by a number of external parties, managers of firms have incentives to choose accounting policies in order to influence the behavior of these parties. A variety of managerial motives for accounting policy decisions have been identified in the accounting literature. The Harnischfeger case is designed to encourage students to explore these motives.

Harnischfeger Corporation, a large New York Stock Exchange company, faced a financial crisis in 1982. New management was appointed to turn the company around. As part of its restructuring strategy, the new management team made a number of financial reporting policy changes in fiscal 1984. Together, these changes accounted for most of Harnischfeger's reported 1984 profits. More significantly, these changes represented a substantial switch from the company's earlier conservative reporting philosophy to a more aggressive one.

The case describes the company's financial crisis, the turnaround strategy of the new management team, and the accounting policy changes that took place in 1984.

This case is a by-product of my field research, which is described in the paper, "The Anatomy of an Accounting Change." This paper is published in Accounting and Management: A Field Study Perspective, edited by William Bruns and Robert Kaplan (Harvard Business School Press, 1987).

This teaching note was prepared by Krishna G. Palepu.

Copyright ( 1987 by the President and Fellows of Harvard College. Harvard Business School teaching note 5-187-152.

This case can be used in several different ways. At the Harvard Business School, the case has been used as part of a module dealing with the accounting policy decisions of firms and the stock market's ability to "see through" these decisions. The sample assignment described below assumes that the case is used by itself in a second-year MBA course on financial statement analysis or a course on financial reporting.


The following set of questions are in the textbook and are designed for use in a class where the instructor prefers to provide a minimum level of structure to the students:

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

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?

3.Assess the company's future prospects given your insights from questions (1) and (2) and the information in the case on the company's turnaround strategy.

For instructors who prefer to use a more structured approach to teaching the case, the following questions will guide students through the material:

1.Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements (pages 212-213 of the text).

2.What is the effect of the depreciation accounting method change on the reported income in 1984? How will this change affect profits in future years?

3.What is the effect of the depreciation lives change? How will this change affect future reported profits?

4.The depreciation accounting changes assume that Harnischfeger’s plant and machinery will last longer and will lose their value more slowly. Given the business...
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