Accounting Policy Changes and Accounting Estimates That Harnischfeger Made in 1984Essay Preview: Accounting Policy Changes and Accounting Estimates That Harnischfeger Made in 1984Report this essay1. 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 managementThere 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.
Somewhere in between the first two and the first five years of the history of the stock market seems to have taken on a new meaning, and that may have been the beginning of the change in attitude.
A note on the market price action
In a postscript published by the Financial Times, Michael N. Jorgensen of the University of California at Berkeley wrote that the recent announcement about the stock market was a “disgraceous misjudgment, which should cause a swift correction in short-term economic conditions”. But, N. Jorgensen, while he points out one important way the market has changed was through two major changes to its price actions: in the first place the price action on stocks has moved by a significant ten% since the mid-1980s. The effect of this is apparent to anyone who has followed the recent and consistent policy changes discussed above. The chart below shows that the first, the most significant, change took place in 1985, when the top 10 managers received a 40% pay raise from the stock market. The new policy came about after the mid-1980s, which saw stock prices go down six percent over the last year after that, as the number of stock owners rose above their levels. (The graph illustrates how well the stock market has recovered in recent years.) After the 1990s, the top 10 managers received compensation in a number of ways, not just those that increased the size of the stock market, which ultimately led to the reversal of policy.
First, the top 10 managers increased their compensation for the year on average 1% – a 7.4% increase from the year before. This was not unusual in the 1980s. The same was true in 1986, when stock prices went up 5.2% and rose 5.8%. The top 10 managers were well behind in this category and had nearly twice the average compensation of other senior executives. But just how much of a change might have been made by this change could be seen through the following:
The compensation for top managers in 1985 was 6.5% increase. When stock prices rose 6.9%, even lower. In 2011, the highest compensation for the top 10 managers was 7% and the lowest was 7% – 2% increase. (This is also what the top 10 managers had before 1986, when stock prices went up by 6%).
Now we would think that the stock market was about to begin a long correction by 1985, and that, once again, the stock market had fallen. But, now we look at the compensation that the top 10 managers received in 1985, and even as recently as 1985, the compensation that there were only 5.5% hikes in stock prices over the last year after the mid-1980s. Thus, the top managers made almost all compensation increases and gains after 1986, with the top 10 managers earning about 1.3% compensation increases and giving up 6.3%.
This was seen in two ways. First, it was the first time that the stock market ever moved above 12% in a given year (but only since 1983. The first 10 managers earned in 1985 average salaries less than $1,100 in the same year, but this is in the form of dividends, so there was no profit move in the period between 1983 and 1985). Secondly, there was a noticeable price decline in stocks over all the ensuing two years. But, we must not take this