Name G ID Sect|on

Sr|sht| M|tta| 61210608 ISAN_126_8

Assignment # 1
Harnischfeger Case

QUESTIONS

1. IdentiIy all the accounting policy changes, accounting estimate changes, and other
accounting changes that HarnischIeger made during 1984. Estimate, as accurately as
possible, the eIIect oI these on the company`s 1984 reported proIits.

The Iollowing accounting policy, accounting estimate and other accounting changes were made
by HarnischIeger during 1984:
O Changes in sales calculation: The Company entered a long term agreement with Kobe
Steel Ltd. It bought equipment Irom Kobe and sold in the domestic market. To
incorporate this change in the accounts, eIIective November 1, 1983, the corporation
includes in its net sales Iull sales price instead oI gross proIit margin. As a result sales
aggregated $28 mn in 1984 and increase in net sales resulted in $23.9 mn increase in
gross proIit.
Also, Financial statements oI certain consolidated subsidiaries, principally Ioreign, were
included in Iiscal year 1984 ending September 30, instead oI previous years ending July.
This change had the eIIect oI increasing net sales by $5.4 mn Ior year ended October
31,1984. (Pg.3-35 , Note 2)
O inventory liquidation: #eductions oI certain LIFO inventories increased gross
proIit by $2.4mn in 1984 and liquidity was improved.
O #eduction in pension expenses: The salaried Employees` #etirement Plan, was
restructured during 1984 due to overIunding oI the plan. EIIective August 1, 1984 , the
corporation terminated the existing plan and established a new plan. This reduced the
pension expenses to $1.9 mn , thus saving over $4mn . Also the restructuring helped
show a $39.3mn actuarial gain in accrued pension costs in the balance sheet and is being
amortized to income over a ten-year period commencing in 1984. This shows a positive
cash Ilow Ior the year.
O Change in depreciation method: In 1984 , the corporation has computed depreciation
expense on plants, machinery and equipment using the straight-line method Ior Iinancial
reporting, while prior to 1984, the corporation used principally accelerated methods Ior
its US operated plants. The cumulative eIIect oI this change, increased net income Ior
1984 by $11mn or $0.93 per common and common equivalent share.
As a result of the review of its depreciation policy, the corporation changed its
estimated depreciation lives on certain US plants, machinery and equipment and residual
values on certain machinery and equipment, which increased net income Ior 1984 by
3.2mn or $0.27 per share. No income tax change was applied to this change. Also this
would revise the maintenance costs accordingly and aIIect the net income.
O # expenses: The agreement with Kobe involves a joint research and development
program under which the corporation has agreed to spend at least $17mn over a three-
year period and provided it does so, Kobe agreed to pay this amount to the corporation.
There is a reduction in # expenses to 5.2 mn in 1984 as compared to $10.5mn in
1983.



2. What do you think are the motives oI HarnischIeger`s management in making the changes in
its Iinancial reporting policies? o you think investors will see through these changes?

The incentives in making changes are as Iollows:
O Increase in top line
O Improve stock price to raise capital
O eet earnings targets Ior better compensation and perIormance
O Improve good will and corporation`s image
O Show improved eIIiciency and reduction in costs
The motives oI HarnischIeger`s management in making changes in its Iinancial reporting
policies are as Iollows:
O The changes in sales calculation and bringing all subsidiaries in one calendar seems
logical to reIlect the business reality in accounts.
O #eduction in pension expenses also seems to reIlect the corporation`s attempt to reduce
costs and has been authorized by Pension BeneIit Guaranty Corporation.
O However the revision in depreciation method and policy seems more like a gimmick to
make the accounts look better as the depreciation method now adopted and increase in
depreciation lives will increase net income.
O The reduction in # expenses seems contradictory to the Iuture reIorm plans oI the
corporation and seems like a temporary attempt to reduce expenses and improve the
accounts.
The investors may or may not see through these changes, however it seems more likely they
will because oI the corporations attempt to raise capital and the changes Irom 1983 to 1984
does raise a curiosity to investigate Iurther in the accounts.

3. Assess the company`s Iuture prospects, given your insights Irom questions 1 and 2
and the inIormation in the case about the company`s turnaround strategy.

#ather than a turnaround the 1984 statements seem more oI a desperate attempt to show
improvement and it seems to be a temporary patch up. It might be possible that the
corporation might have negative cash Ilows in Iuture; however their turnaround strategy
and Iew decisions seem to be appropriate, Ior instance shutting down oI Iew
manuIacturing plants and a long term arrangement with Kobe Steel Ltd. Seems to be a
logical decision. Second, the company to emphasize the high technology part oI its
business by targeting Ior Iuture growth the material handling equipment and systems
business acquire new products, technology and equipment seems to be the appropriate
strategy to improve business.

#estructuring and negotiating debt obligations seems to be the right move Ior now
however in the long run the sources oI revenue and proIitability needs to be improved Ior
continuing cash Ilows. Also, temporary tricks such as revising depreciation method and
policy would not help; in Iact it would only increase the Iuture depreciation costs and
maintenance costs.

#educing workIorce might cut expenses however it might have a negative eIIect on their
morale and seems contradictory to their growth strategies. The same is the case with
reduction in # expenses.

The Iuture oI the Iirm also depends on the eIIective implementation oI the right strategy.
The current scenario seems risky and uncertain. We need more inIormation about the
Iirm to predict the Iuture prospects.