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Accounting Policy Changes and Accounting Estimates That Harnischfeger Made in 1984

Essay by   •  March 14, 2018  •  Case Study  •  397 Words (2 Pages)  •  963 Views

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1. Accounting policy changes and accounting estimates that Harnischfeger made in 1984.

There were several changes in accounting policy of Harnischfeger.

A. Effective November 1, 1983, the Corporation included its net products purchased from Kobe steel and sold by the Corporation whereas only the gross margin on Kobe originated equipment was included prior to November 1, 1983. With this change, the net aggregate sales and cost of sales increased $28 million in 1984.

B. There was a change in the fiscal year for some foreign subsidiaries. With this change, net sales increased $5.4 for the year ended Octorber 31, 1984.

C. There was a change from accelerated method to straight-line method for computing depreciation expense on plants, machinery and equipment: With this change, the net income increased $11 million in 1984.

D. There was a change in estimating depreciation lives on U.S plants, machinery and equipment and residual values on certain machinery and equipment. With this change, net income for the year 1984 increased $3.2 million.

E. Inventory reductions in 1984, 1983, and 1982 resulted in a liquidation of LIFO inventory qualities carried at lower costs compared with the current cost of their acquisitions. With these inventory reductions, net income increased $2.4 million.

F. There was a new retirement plan called “The Salaried Employment plan” introduced, and it was considered to be a continuation the old plan. Accordingly, the $39.3 million actuarial gain which resulted from the restructuring is included in Accrued Pension Costs in the balance sheet and is being amortized to income over a 10-year period commencing in 1984. The overall pension expense was reduced by approximately $4 million.

2. Motive of Harnischfeger’s management

There were two main motives for Harnischfeger’s in making accounting policy changes. First, 1984 was a year to celebrate 100 years since Harnischfeger started its business operation. So, the management were motived to make the company look more profitable. Second, an Executive Incentive Plan was established for 1985, which provides an incentive compensation opportunity of 40% of annual salary for 11 senior executive officers if the company achieves the profit goal. This was certainly the motive for the management. I think changes about financial policy as well as information about management’s salary are available to all investors since examinations of financial statements were made in accordance with generally accepted auditing standards by Price Waterhouse which is one of the most prestigious auditing firm in the world.

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