Case Study: Harnischfeger Corporation

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Business Analysis & Valuation
Harnischfeger Corporation
Harvard Business School Case #186-160 Question No. 1:
During the year 1984, Harnischfeger changed the following accounting policies and estimates:
• Revenue recognition criteria of some parties changed during the year that resulted in change of revenue. From November, 2013 purchases form Kobe Steel, Ltd. started to be included in net sales. The products from the given company are resold by Harnischfeger. Formerly, only the margins on the given products formed part of financial statements. This escalated the sales during the fiscal year by $ 28 Million.
• The company changed Fiscal year of one of the foreign subsidiary, ending period on 30th September rather than 31st July.
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Depreciation method was changed to straight line method from accelerated method. This policy change increased the income of year 1984 by $ 11 Million.
• The Last in first out (LIFO) liquidation Inventory valuation method was changed as Inventory level in1984, 1983 and 1984 was decreased by Harnischfeger. By adopting this process, inventory that was purchased at lower cost in previous years was sold at higher prices.
• The company reworked the allowance for doubtful accounts. The allowance was decreased 10% of sales for 1983 to 6.7% of sales for 1984.
• The company curtailed its Research and Development expense by 98.7%. To be exact, expenses were decreased from $ 412.1 Million in 1983 to $ 5.1 Million in 1983
• Harnischfeger modified employees’ pension plans. A new salaried employees’ retirement plan was designed and the old one was aborted.
The changes in the above given accounting policies and estimates, affected the reported profits as follows:
• Change in revenue criteria increased both sales and cost of sales by $ 28 Million. The profit margin was decreased from 1.55% to
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• The decrease in research and development expenses increased operating profit by $ 9.1 Million.
• Modified employees’ pension plan resulted in positive cash flows, decreased pension expense by $ 14 Million and increased net income by $ 3.9 Million.

Question No. 2:
Harnischfeger management intent to show profits in 1984, that’s the prime reason behind the change in accounting policies. Company is going to celebrate its century of business inception. Company want to validate the investors that company is operating in a better way.
Executive incentive plan has motivated the management to bring changes as the plan says that if the company achieves the target of net after tax profit, 11 senior executive officers will be given incentive compensation of 40% of annual salary.
The other motives of changes in accounting policies are: To improve their goodwill and reliability; To inflate the prices of shares that would lead to the possibly increase capital; Avoiding debt covenant restrictions as the lender’s agreement states a minimum limit of term loan of cash and unpledged receivables, working capital and net worth.
Question No.
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