Harnischfeger Case Summary
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.
1. Products purchased from Kobe Steel were included in net sales, as opposed to only reporting the gross margin on Kobe equipment. These net sales amounted to $28 million in 1984, although the amount was insignificant on net income.
2. Financial statements of some foreign subsidiaries (fiscal July 31) were included, thus increasing sales amount by 3 months (August –October), at $5.4 million.
3. Depreciation expenses of plants, machinery and equipment using straight-line method, instead of accelerated methods as used previously. …show more content…
Estimated depreciation lives on certain plants and equipment, as well as residual values on certain machinery, were changed, increasing net income by $3.2 million.
5. Liquidation of LIFO inventory increased net income by $2.4 million before tax.
6. Pension plan was restructured to change minimum pension benefit, capturing $39.3 million in remaining plan assets, to be amortized to income over 10 years. Coupled with changes in the assumed investment rate (increased to 9%), pension expense was reduced by $4 million.
2. What do you think are the motives of Harnischfeger’s management in making changes in its financial reporting policies? Do you think investors will see through these changes?
1. The management wants to more accurately report the performance and situation of the firm, for example including purchases from Kobe in net sales.
2. Since most changes are positive, management might be looking to boost stock prices before the new public offering in order to raise more capital. ($150 million to pay debt)
3. Maintain certain performance levels to avoid defaulting on new covenants of restructured loans, so as to maintain credit worthiness and credit lines.
4. New management wants to perform up to expectations and targets of company’s
1. Products purchased from Kobe Steel were included in net sales, as opposed to only reporting the gross margin on Kobe equipment. These net sales amounted to $28 million in 1984, although the amount was insignificant on net income.
2. Financial statements of some foreign subsidiaries (fiscal July 31) were included, thus increasing sales amount by 3 months (August –October), at $5.4 million.
3. Depreciation expenses of plants, machinery and equipment using straight-line method, instead of accelerated methods as used previously. …show more content…
Estimated depreciation lives on certain plants and equipment, as well as residual values on certain machinery, were changed, increasing net income by $3.2 million.
5. Liquidation of LIFO inventory increased net income by $2.4 million before tax.
6. Pension plan was restructured to change minimum pension benefit, capturing $39.3 million in remaining plan assets, to be amortized to income over 10 years. Coupled with changes in the assumed investment rate (increased to 9%), pension expense was reduced by $4 million.
2. What do you think are the motives of Harnischfeger’s management in making changes in its financial reporting policies? Do you think investors will see through these changes?
1. The management wants to more accurately report the performance and situation of the firm, for example including purchases from Kobe in net sales.
2. Since most changes are positive, management might be looking to boost stock prices before the new public offering in order to raise more capital. ($150 million to pay debt)
3. Maintain certain performance levels to avoid defaulting on new covenants of restructured loans, so as to maintain credit worthiness and credit lines.
4. New management wants to perform up to expectations and targets of company’s