Harnischfeger Corporation made various changes in its accounting policies that affected their consolidated income statement in the year 1984. A critical study of the financial statements and the company’s notes indicates a lot of changes got portrayed and their effects translated to the financial statements.

The Accounting Principles and Policies that Changed to Affect Incomes and Expenses of 1984

Change in depreciation policy

Prior to 1984, Harnischfeger Corporation used accelerated methods of depreciation for its United States operating plants but after 1984, the corporation started using the straight-line method of depreciation. All assets subjected to the former method of depreciation were affected by the change in policy. As a result, net income in 1984 increased by $11.0 million or $0.93 per common equivalent share (Bragg 16-19). As a result of the change in depreciation policy, depreciation lives of assets were changed and net income increased by $3.2 million or $0.27 per share

Change in inventory policy

Inventory reductions were made in the periods 1982, 1983, and 1984 by liquidation of LIFO inventory quantities carried at lower costs. The effect of the liquidation was an increase in net income by 2.4 million dollars or $.20 per common share and the net loss got reduced by $15.6 or $1.27 per share in 1983 (Bragg  17-19).

Change in consolidated accounting principle

Prior to 1984, financial statements of foreign consolidated subsidiaries had  not been included in the organization’s statements because their financial years ended at 30th July contrary to 30th September ending of Harnischfeger Corporation. After adjusting the subsidiaries’ financial year dates, a more timely consolidation was possible. In 1983, the corporation started including the net sales products that had been purchased from a subsidiary, Kobe Ltd and sold by the corporation. Previously, the gross margin had been the only item included. In November 1st 1983, financial statements of foreign subsidiaries were included and due to the change, net sales increased by $5.4 million for the year ended 31st October 1984 (Bragg 17-20).

Change in pension policy

In 1ST August 1984, the corporation terminated the Salaried Employees Retirement Plan and adopted a near similar plan except that there was reduced minimum pension benefit. As a result, pension expense got reduced by approximately $4 million in 1984. Pension expenses also reduced by $2.1 million and life assurance expenses of $2.6 million got incurred in the same year.

The main motive of Harnischfeger Corporation’s change in its policies was to provide favorable financial reports with improved earnings per share. All the above changes had an effect of either reducing operating costs or increasing revenues thus leading to an increase in earnings per share. Depreciation, inventory, and pension policies all had a big impact in the raising of earnings per common share. An increase in earnings per share would have led to investors at the particular time to have faith in the management and therefore the directors’ jobs would have been secure. An increase in earnings per share would have also attracted potential investors to buy shares from the company and the increased demand would translate to increased share prices. Most of the changes in policies Harnischfeger Corporation made were reasonable and investors would be content with them (Bragg 33-35). However, changes in depreciation policies might have raised alarm to investors and the change could have been viewed as a creative accounting technique because depreciation is an intangible expense.  Reduction in intangible expenses could lead to increase in net income therefore favorable earnings per share but in real life, the profit earned would have been different. Other policy changes were tangible and investors may be attracted to the company by them (Bragg 41-43).

Works Cited

  1. Bragg, Steven M. Accounting Policies and Procedures Manual: A Blueprint for Running an Effective and Efficient Department. Hoboken, N.J: Wiley, 2007. Print.
  2. Harvard Business School. Harnichsfeger Corporation. 1997. Web.
Jan 30, 2018 in Accounting
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