Harnischfeger Corporation

ACC 725

Harnischfeger questions

Guang Lu

Feb. 24, 2017

1. Prepare a brief description of the company and its environment.

Harnischfeger Corporation was a machinery company and leading producer of construction, mining and electrical equipment who suffered a tremendous loss since early 1980s because of the worldwide recession that caused a significant drop in demand for the company's products starting in 1981 and culminated in a series of events that shook the financial stability of Harnischfeger. In order to survive in this financial crisis, Harnischfeger Corporation decides to develop a corporate recovery plan and restructure its strategy for forthcoming years. Some of the major strategies adopted are changes in top management, cost reductions to lower the break-even point, re-orientation of the company’s business, debt re-structuring and re-capitalization.

1. Identify and briefly explain all accounting policy changes, accounting estimates, or transaction structuring that affected Harnischfeger’s revenue or earnings in fiscal 1984. Estimate, as accurately as possible, the effect on the company’s 1984 reported revenues and net income.

1. Harnischfeger included net sales figure from Kobe Steel Ltd. Previously it only included the gross margin in the financial statement. Thus, net sales figure increase of $28 million.
2. Foreign consolidated subsidiaries are included in the financial statement in fiscal year 1984. Thus, net sales figure increase of $5.4 million.
3.  Harnischfeger liquidated its inventory under LIFO method for 1984. This liquidation process led to an increase in net income by $2.4 million.
4.  Harnischfeger adjusted its estimate on allowance for doubtful accounts. The ratio for doubtful debt provision has changed from 9.12% to 6.3% from 1983 to 1984, which resulted in $2.9 million in operating income for 1984.
5. Harnischfeger implemented some changed on its pension policy, which resulted in a gain in net income by $3.93 million for 1984.
6. Harnischfeger changed in the depreciation accounting method from accelerated to straight line method. This change resulted in an increase of net income by$ 10 million attributed to the change of depreciation method and $3.2 million resulted from the change on depreciation lives.

1. Given the information in the case, what are the possible motives for Harnischfeger’s management in making the changes to its financial reporting policies?  

The principal motive for the Harnischfeger management was to show profit in 1984. These changes are directly related to the profit of the financial year. Management was hoping to prove to investors that the company will get better because of those changes. And a positive profit will drive the stock price high which would lead to the opportunity to raise new capital. In addition, three-year term loan agreement with its lenders required specified minimum levels of cash and unpledged receivables, working capital and net worth. Those changes also can improve customer loyalty and help brand improvement.