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Personal Creed

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Case Write Up Harnischfeger Corporation

Questions

1. Identify the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate the effect of these changes on the company's 1984 reported profits.

Changes made and the effects of these changes:

· In the financial notes, note 2, in 1984 the corporation calculated depreciation using the straight line method. In previous years they were using an accelerated methods of depreciating. By changing this method the company increased its net income in 1984 by $11 million.

· I also saw in financial note 2 a change in the estimate of the useful life on certain U.S Plants and Equipment. This change increase 1984 income by another $3.2 million.

· In financial note 7 I saw a change in the Salaried Employees’ Retirement Plan. In 1984 the reconstructed the plan. It was mostly identical to the old plan except for the changes made in the minimum pension benefit. These changes helped reduce the pension expense by $4 million in 1984 and $20 million in 1983.

2. What do you think are the motives of Harnischfeger's management in making the changes to its financial reporting policies? Do you think investors will "see through" these changes?

Motives for management to make the changes:

· From exhibit 1 we can see that most of the management have certain amounts of shares in the company. So any positive changes will increase the stock price.

· The new executive plan that was established for 1985 included an incentive compensation opportunity of 40% of annual salary for 11 of the top executives if the company reached a specific net after tax profit goal. Also included was another 40% of salary for 7 of the top executives if they exceeded the goal.

When investors read the changes that were made the will see that the company wants to continue. They are making positive changes

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