Case Study: | Harnischfeger Corporation | | |

Q1: Changes in accounting policy and accounting estimates. (i) Inclusion of full sales price of construction and mining equipment purchased from Kobe Steel, Ltd. (later resold by the Corporation) in net sales
If the Corporation continued with the prior recognition, which was to recognize gross margin, a loss of $5.7 million would be reflected in net sales. However, under the new recognition method no loss would be recorded, instead, revenue increased by $28 million arising from such sales. No impact would be on pre-tax profits as the cost of purchase of the equipment would be recorded in Cost of Goods Sold (COGS), hence $5.7 million loss resulted from such sales was still accounted for in pre-tax profits. Consequently, operating cash flow would be unaffected.

(ii) Inclusion of the financial statements of certain foreign subsidiaries
This change had the effect of increasing the Corporation’s revenue and pre-tax profits by $5.4 million. As a result, operating cash flow faced the same amount of increment.

(iii) Change in accounting for depreciation of plants, machinery and equipment (PPE)
The Corporation made alteration to its accounting for depreciation of PPE from accelerated method to straight-line method. For this reason, net income for fiscal year 1984 was increased by $11,005,000, thus the same amount reflected in the operating cash flow. Correspondingly, $17,205,000 was deducted from the operating cash flow, owing to the reduction in accumulated depreciation resulted from this change in accounting policy. Yet, there was no impact on revenue and pre-tax profits due to retrospective restatement of prior years’ accounts.

(iv) Change in estimated depreciation lives and residual values of PPE
The Corporation reviewed its depreciation policy in FY 1984, resulted in the increase in