Harnischfeger Case

Overview of Harnischfeger Case

The Harnischfeger Case illustrates how a company identified financial distortions that in 1984 determined to make some sound analysis to improve the company's financial standing for success. In order to understand where a company can improve the accounting structure, a sound accounting analysis must be constructed to hopefully improve the reliability on the conclusions from the analysis and perform a sound financial statement analysis. The Harnischfeger case analysis touches on the six steps in accounting analysis, identify policies and estimates, determine the degree of flexibility, understand the managers motives in the accounting strategy, assess the company disclosures, identify red flags, and lastly reinstate accounting numbers to offset any bias from accounting rules/decisions (Palepu & Healy, p. 14). Harnischfeger case describes the use of mergers and acquisitions via capital expenditure to better position itself. But how often do we say: "Let's do some financial analysis to see if this strategy is any good" (Geoffrey & Harrison, 1995). In this analysis, Harnischfeger financial changes, accounting estimates, and motives for changes in the financial reporting policies will be assessed to see if the business reality was truly captured (Palepu & Healy, p. 2).

1. Financial Changes and Accounting Estimates

In Note 2, Harnischferger company 1984 had computed depreciation expenses on the company equipment and machinery by using straight line method for financial reporting purposes. Just before 1984 in the operating plants in the US, the corporation used fast principals to have a cumulative effect of this change by applying a retro active impact to all assets, previously adjacent to accelerated depreciation increased net income for 1984 by $11. 0 million or $.93 per common and common equivalent share (Note 2). This new method on income for the year 1984 before the cumulative effect was not significant. Also, noted in Financial Note 2 we know that as a result of the financial review of its depreciation policy the Harnischfeger effectively November 1, 1993 had changed its estimated depreciation lives on certain US plants machinery and equipment, and also residual values on certain machinery and equipment which increased net income for 1984 by $3.2 million or $.27 per share. There was no income tax effect was applied to this change