It occurred when Harnessing was in the midst of negotiating its debt restructuring process with the banks. And since changing to a straight line method will improve the company’s financial strength In the short run, It strongly suggests that move was performed by the management to artificially Improve the balance sheet In favor of the negotiations. 2. As a result from the change in depreciation method, there was also an adjustment of the residual values and a change in the estimated depreciation lives on certain machinery and equipment (Note 2).
This change resulted in an increase of net income by $3. 2 million. Together with the increase of $1 1 million from change In depreciation method, this total increase of $14. Million represented 93. 5% (=14. Mall/15. Mm”) of the net Income. These reflected Incentive for profit realization. However, this move involved risks. Firstly, the extension of depreciation lives would increase maintenance costs in the coming years and also reduce future profits. In addition, there was low liquidity for the machinery in the heavy-machine manufacture 3.
Note 2 of the financial statement also shows that net sales products purchased by Kobo Steel Ltd and sold by Harnessing were included in the 1984 financial statement. Previously only the gross margin was added. As a result of this hang, both aggregate sales and cost of sales Increased by $28 million, 4. Moreover, Harnessing also included in the financial statements of some foreign subsidiaries. Foreign consolidated subsidiaries are effectively included in the financial statement in fiscal year 1984. This change increased the net sales by $5. 4 million. . Note 7 shows that Harnessing reduced its inventory level in 1984, 1983 and 1982, resulting in a liquidation of LIFO Inventory. This liquidation process led to gains when inventory, acquired at a lower cost in the earlier years, were sold at a higher price, resulting from higher Inflation. The effect of these liquidations Increased net Income by $2. 4 million in 1984 and liquidity was also improved on the balance sheet. This can be considered as sound business decision as the management can reduce operating costs by decreasing inventory level. . Harnessing also adjusted its allowance for doubtful accounts (Note 8) to 6. 7% of sales for 1984 from 1 of sales in 1983. This Is very suspicious as Harnessing gives no explanation for the change. Extra amount of $2. 63 million doubtful debts in 1984. 7. In addition, there was restructuring of the US salaried pension plans and changes made to the investment assumption return rates for all US pension plans (Note 11). This pension plan change has three significant effects on the financial statements.
Firstly, pension expense was reduced by $million. Secondly, the adjustment resulted in a net gain in net income increased by $3. 93 million (from the $39. 3 million actuarial gain amortized to income over a period of 10 years) for fiscal year 1984, which represented 25. 896% (=3. Mill/1 5. Mill) of the net income. Lastly and most importantly, the company was able to show a positive cash flow for the year. Without this one time injection, cash flow would have been negative $7. 6 million. 8.
Hereinafter cut its research and development expenses to $5. 1 million in 1984 from $12. 1 million in 1983. In 1984, operating profit was pumped up by $9. 1 million when Harbinger’s didn’t follow the same level of R&D activities in 1983, reflected in the percentage of R&D as of sales. This is contradictory to management’s strategy of focusing on the high technology part of it business and will damage its strength in the future. Thus, it strongly suggests that the management reduced the R&D expenses on purpose to increase the profit.
