Critical Perspectives on Accounting (1992) 3, 1-43

A CASE STUDY IN CORPORATE FINANCIAL

REPORTING: MASSEY-FERGUSON’S VISIBLE
ACCOUNTING DECISIONS 19704987
J. AMERNIC
University of Toronto

Far from being merely a means to inform, financial reporting has the
potential to serve as one of the mechanisms by which management
attempts to exert control. In this paper, the annual report is looked upon as
a medium through which top management strives to impose its perspec-
tive. Specifically, important accounting decisions revealed by a multina-
tional over the 18-year period of its decline and strategic retrenchment, are
examined within a framework which regards such decisions as part of the
partisan history written by those in charge. Even with standards, rules and
auditors, the case study provides evidence that top management will
vigorously attempt to “get its story out”. The way such a story is told, the
words that are chosen, and the accounting principles and concepts that are
used, seem to provide more insights into management than the simple
surface structure of the financial reports would suggest.

Introduction

Pronouncements asserting that financial reporting, including information in

the annual report, is intended to provide information for decision-making
(FASB, 1978; CICA, 1980) seem unduly restrictive. Critics who chastize
accounting for not being useful enough for economic decision-making
(Benston, 1982; Sterling, 1972) appear to have a similarly narrow focus; both
groups ignore the wide array of actual uses of financial reporting. For
example, annual reports can be viewed as mass communication devices
(Parker, 1982), a snapshot of top management’s mind-set (Neimark, 1983),
providing insights into corporate strategy (Bowman, 1976, 1978), source
material for business historians (Marriner, 1980; Mason, 19821, as a means of
reducing agency costs (Watts & Zimmerman, 19831, as a social construction of
reality (Hines, 19881, as a means of providing an illusion of control in a hostile
environment (Salancik & Meindl, 19841, as a reflection of top management’s
“cultural values and dominant world-view” (Seigel, 19841, as a stimulus to
action (Swieringa & Weick, 19871, etc. Further, the accounting measurement
and disclosure choices revealed in Annual reports may provide insight into the
quality of earnings and thus management attitudes (Hawkins, 1986; Mathias,
1989). Indeed, some research suggests that management can use annual
reports in tactical ways to influence users’ by means of varying information
Address for correspondence: Professor J. H. Amernic, University of Toronto, Faculty of
Management, Division of Accounting, 130 Bloor Street West, Toronto, Ontario, Canada M5S lN5.
Received 71 June 7990; revised 28 July 7990, 10 November 7990, 1 June 1991; accepted 26
Bctober 1991.
1
1045-2354/92/01000? +43$03.00/0 0 1992 Academic Press Limited
2 J. Amemic

form between numeric and non-numeric (Bell, 1984). Thus, appropriately

interpreted, annual reports have the potential for acting as a variety of traces
by which certain dominant groups in the corporation may be at least partially
understood.
The work reported upon in this paper focuses on the annual report as a
means of gaining some insight into the behaviour of the corporate leadership.
The annual report is looked upon as a language medium by which top
management attempts to impose its perspective. Specifically, the “visible
accounting decisions” disclosed by Massey-Ferguson Limited, a major
Canadian-based multinational, during the 18-year period of its retrenchment
and strategic restructuring, are examined within the context of the company’s
environment and also its internal decisions.
“Visible accounting decisions” include discretionary accounting changes
(for example, a discretionary change in the application of accounting prin-
ciples), as well as top management shifts in attitude towards accounting
principles or constructs. As an example of this latter type of visible accounting
change, a company may begin to encourage readers of its external financial
reports to base their decisions on certain accounting measures (cash flow
from operations, for instance), and not on others (net operating income, for
example).

Theoretical Framework
Despite claims that annual reports (and related accounting practices) are
largely unread (Girdler, 1963), and though complex are merely technical
(Bernstein, 1988), they are far from the socially innocuous output of a
mythological “messenger of economic facts” (Tinker, 1985, p. xix). Annual
reports are the signed public record of a corporation’s dominant managerial
group and, thus, represent a view of corporate life as written by top
management. Such records must be examined with a skeptical attitude, since:
I, . . . annual reports, like the writing of history and other systems of
meaning, are not passive and neutral, but are partisan reconstructions
through which individuals and institutions define themselves and are
defined by others.. these definitions and self-knowledge cannot be taken
for granted, but are themselves social constructions which need to be
challenged and reinterpreted.” (Tinker and Neimark, 1988, p. 56).
As others have observed (for example, Hines, 1989), the accepted notion
that accounting information reflects “economic reality” and is, accordingly,
objective, combined with the flexibility and ambiguity of accounting, make it a
most valuable means of “multiple interpretation, explanation, and hence
rationalization.” (Hines, 1989, p. 67). Thus, the “history” written in the annual
report is an interesting candidate for examining and gaining insight into
management’s story, as told by management.
The more traditional conception that financial accounting is based upon a
“reporter” analogy (Bedford & Baladouni, 1962) or is in some way “neutral”
(Solomons, 1991), seems inappropriate. Annual reports may be expected
rarely to provide faithful renderings of “the facts”, but rather laspects of the
reality as top management would have it. Hines (1988) summarrzes the power
 Massey-Ferguson’s visible accounting system 3

that this aspect of the accounting craft entails when she writes (p. 257)

“It seems to me, that your power is a hidden power, because people only
think of you as communicating reality, but in communicating reality, you
construct reality.“.

Viewed in a slightly different way, accounting constructs have the potential to

create structure out of an equivocal environment, and thus engender the
possibilities for action (Swieringa & Weick, 1987).
Thus, similar to Chua (1986), particular concepts of “accountings” may be
acceptable in certain circumstances since they serve to further the interests of
dominant groups. This may be observed in a society-wide sense (witness the
intense lobbying by management against FASB 8), or within the ambit of
single organizations as, for instance, a management group strives to “create”
the reality within which it “ought” to be held accountable. These attempts by
management at creating a reality may become more apparent and thus visible
during times of induced change or crises (Laughlin, 1987). Examination of
such “visible accounting decisions” has the potential, then, to offer insights
into management’s story.
Accounting systems and their resulting outputs-for example, annual
reports-purport to be important means by which management discharges its
accountability. If current systems of accounting are (unobtrusively ?) based
upon particular power relations, and if managers have considerable influence
over these systems of accounting, then accounting educators have been
performing a systematic disservice to their students, as well as to those
groups in society who are bearing undue costs of the present arrangements.
This is so because accounting education tends to focus on the technical issues
of implementing and fine-tuning the existing ways of accounting, and largely
ignores the possibility of more socially desirable systems of accountability
(Tinker, 1985). Indeed, even when accounting educators shift their focus from
technical virtuosity to the development of their student’s cognitive abilities
through case analysis (Amernic, 1986), such a shift occurs only within an
existing, mainly unobtrusive, set of power relations and assumptions.
The focus on the corporate annual report in the present study is appropri-
ate, therefore, not only for the potential such reports have for revealing
management’s view of corporate history, but also because expertise in
preparing the financial statement content of annual reports tends to be
viewed as an important ultimate goal in accounting education, and educators
urge that such reports should play a greater role in the classroom (Harkins &
Mills, 1985). To use annual ,reports thus, and not to attempt to unmask them-
in their socio-historical context-would be to perpetuate the current mislead-
ing “technical” view of accounting among yet another generation of students.
This unmasking involves a closer examination of the “language” analogy.
In everyday discussion, accounting is often referred to as “the language of
business”; this description of accounting has been viewed as innocuous, until
recently. A language, however, has the potential for being a significant
dominating force, since “sharing a language . . . provides the subtlest and
most powerful of all tools for controlling the behavior of.. . other persons.. .
(Morris, 1949, p. 214). Ogden and Bougen (1985) make this point in the context
4 J. Amernic

of their analysis of accounting disclosures to trade unions. Similarly, Batstone

(1979) observes that accounting systems and procedures may be viewed as
“vocabularies of motive” (Mills, 1967), and thus
,, reflect the priorities of the dominant groups.. . They set the terms of
debate . . . managers often attempt.. . to provide accounts of their actions
in terms of the dominant vocabularies of motive.” (p. 258).

Batstone (1979) argues that accounting systems can be thus employed

because in part “they determine the terms of legitimate debate”. (p. 256). He
further points out that “manipulation of accounting systems is perhaps the
best indication of their role as vocabularies of motive, for the act of
manipulation recognizes that the system of cost controls constitutes the main
means of legitimating activity.” (p. 258). Although Batstone was primarily
concerned with internal (cost) accounting systems, his view may be quite
readily extended to financial accounts in the annual report, which are a means
by which the overall performance of the organization, and thus top manage-
ment, is “accounted for”. If top management can influence the means of
defining the “vocabularies” of such accounts, then they will have achieved an
important means of exerting control.
The study of accounting changes (with which this study is partially
concerned) has been the subject of previous research, and is closely
associated with the literature on income smoothing. Almost all of this
research is centered on the statistical testing of models on cross-sectional
data (Moses, 1987; Imhoff, 1981, are examples of the smoothing literature; an
example of a cross-sectional study focusing on accounting changes is Lilien et
a/., 1988), which concluded that less successful firms are more prone than
more successful firms to make accounting changes that improve income). In
contrast, the study by Palepu (1987) adopted a more grounded approach to
studying a number of accounting changes made by one company over a
2-year period. Although Palepu’s paper did not develop formal
hypotheses’, it did compare the factors proposed as important determinants
of accounting policy choice’ with those factors revealed as important in
interviews with the company’s management. Palepu (1987, pp. 90-91)
concluded that debt covenant restrictions and management compensation
plans based upon accounting numbers-which are both important theoretical
factors from the positive literature-“. . . seem to have played only a minor
role in the company’s accounting policy decisions.” Rather, management’s
apparent concern about the comparability and interpretability of its financial
information seemed to be behind the accounting changes. The company tiad
traditionally followed a “conservative” approach to its financitil’reporting, and
made a series of changes to more “liberal” accounting to be consistent with
its industry.
Management has considerable discretion within generally accepted ac-
counting principles, and indeed may implement a chosen principle in a variety
of ways. Given this discretion of selection and implementation, management
may select a portfolio of both accounting principles and means of
implementation3 consistent with its attempts to retain control. Such a
selection is made within the constraints imposed by both the firm’s envirdn-
 Massey-Ferguson’s visible accounting system 5

ment and its strategy. Thus, selection of accounting principles and ways of
implementing them are important management decisions. It follows, then,
that if management makes discretionary changes in accounting principles, or
implementation, then such changes are themselves a priori important
decisions.
When a firm makes a discretionary accounting change or other visible
accounting decision, the following happens:

0 the decision and its impact on the financial statements is publically

announced;
. management usually rationalizes the decision in the shareholders’ letter
or elsewhere in the annual report;
0 if the visible accounting decision is a change in the application of
accounting principles, analytical details of the change are disclosed in the
footnotes;
* the interpretation of the firm’s historical trend of financial results must be
adjusted to accommodate the change (if feasible);
* since the change is discretionary, management’s rationale must be
directed to convincing interest groups of the reasonableness the
change (that is, there must be some perceived benefit to interest UPS
flowing from the change).

Some of the issues that might be pertinent when management makes a

visible accounting decision include:

0 Why does management make a discretionary accounting change or other

visible accounting decision when it does (the timing issue)? Do chang
tend to be made in good years or bad? What are the characteristics
accounting changes and their explanations which are made during
“‘crisis” years? Presumably, since the change is discretionary, manage-
ment has at least some control over the timing, especially if it is really the
adoption of a new principle to account for an existing class of
actions.
0 does management reveal its reasons for the change as it does? HQW
detailed is the explanation? How prominent is it? Where is it located? Are
there any systematic characteristics of the explanation (i.e. does it talk
about “improved measurement of results”, “‘better disclosure”, etc?;
oes it attribute initiative for the change?).
* What are the financial impacts of the change, in the year of the change,
for historical trends (as restated), and in the future? Is there any
systematic impact of the change (i.e. do discretionary changes tend t
improve financial accounting outputs such as income numbers, key
ratios, etc.; are other indicators affected in a systematic manner?

Method
The approach taken in this paper is first to describe the accounting decisions
taken by top management, and theh to evaluate them for reasonableness
given Massey-Ferguson Limited’s situation at the time of the decision. This is
6 J. Amernic

done as a description and commentary in the Visible Accounting Decisions-

Descriptions and Commentary section of the paper.
A second aspect of the analysis of Massey’s visible accounting decisions is
an examination of the apparent patterns of the decisions. For example, since
the company is not subject to US FASB pronouncements, are FASB statements
adopted selectively? Such apparent opportunistic adoption of the US
standards by Canadian companies for reporting areas in which there is no
corresponding Canadian standard has been criticized by the chief accountant
of the Ontario Securities Commission (Mathias, 1989). Further, are certain
visible accounting decisions associated with “‘good times” or “bad times” in
an organization’s history? This analysis is in the Evaluation of Visible
Accounting Decisions-Patterns of Decision-making section of the paper.
The approach outlined above does not represent formal hypothesis testing.
Rather, it is consistent with a more exploratory, data-intensive stage of
research. Such an approach is exemplified by Ansari and Euske’s paper (1987)
which attempted to examine the extent to which information use over time in
a military organization corresponded to one of three conceptual mod,els of
information use (technical-rational, socio-political and institutional).

The Company

Established in 1847, Massey-Ferguson Limited (known as Varity Corporation

since 1986; the company will be referred to as “Massey” or “MF” in this
paper) has been the subject of three books in the last 45 years (Denison, 1947;
Neufeld, 1969; Cook, 1981), has undergone three major restructurings in the
last 8 years, and has shrunk its workforce from approximately 68 000 in 1978
to 18000 in 1986. It had been a world leader in farm machinery and diesel
engines and, according to historian Michael Bliss (19881, “was Canada’s
greatest and most historic manufacturing company . . . [and was] one of
Canada’s first billion-dollar businesses and saw itself as the nation’s first true
multinational corporation, a leader in the most advanced principles of
international management.. .“, but had become a “dinosaur” by the late
1970s. Table 1 summarizes some relevant characteristics of the company over
the period from 1970 to 1987, while Figure 1 tracks the collapse of the
company’s common equity.

Visible Accounting Decisions-Description and Commentary

A listing of visible accounting decisions made by Massey’s top manage-

ment over the period 1970 to 1987 is provided in Table 2. The items will be
described and evaluated in the order in which they appear in that table. In
order to place the accounting changes and other items into context, reference
will be made to Appendix 1, which provides a year-by-year chronology of
Massey-Ferguson’s important environmental, strategic and operating
changes, as revealed in the company’s annual reports.
 Massey-Ferguson’s visible accounting system

Table 1. Massey-Ferguson/Varity Corporation 1970-1987

Fiscal Total Long-term

year assets* debt* Net sales* Net income* Workforce?

1970 1011.7 160.0 937.9 (19.7) 47 386

1971 1011.0 187.0 ‘I 029.3 9.3 43 349
1972 1057.3 195.8 1190.0 40.3 45 888
1973 1249.0 243.9 1506.2 58.2 51 267
1974 1614.0 325.7 1784.6 68.4 60 822
1975 1982.0 452.3 2513.3 94.7 64 572
1976 2305.1 529.4 2771.7 117.9 68 200
1977 2594.2 616.4 2805.3 32.7 67 151
1978 2647.2 651.8 2925.5 (256.7) 57 983
1979 2745.4 624.8 2973.0 36.9 56 233
1980 2827.6 562.1 3132.1 (225.2) 41 690
1981 2503.4 1031.3 2646.3 (194.8) 39 789
1982 2069.2 1024.6 2058.1 (413.2) 29 749
1983$ 1581.0 653.4 1535.0 (68.0) 23 751
1984 1449.2 636.7 1468.6 7.2 20 262
1985 1257.2 334.9 1409.7 17 251
1986 1504.1 473.8 1359.3 (2:::) 18 969
1987 1623.4 374.5 1948.9 4.5 16330

*All money amounts in millions of US dollars.

t At fiscal year end.
$ Beginning in fiscal 1983, fiscal years ended 31 January of the next
year; prior to 1983, they ended on 31 October.
Note: the financial statement data is as reported in the appropriate
annual reports.

Years
Figure 1. MF’s stock price 1970-1985. Massey-Ferguson common stock price per share-closing
monthly price for June and December.
 J. Amemic

Table 2. Visible accounting decisions 1970-1987”

Accounting
decision Year Brief description

1 1970 Discretionary change in method of dis-

playing operating results of wholly-
owned unconsolidated finance sub-
sidiaries accounted for by the equity
method.
2 1970 Discretionary change in reporting unit
from Canadian to US dollars.
3 1972 Non-discretionary change to equity
method for associated companies
in which significant influence
exercised.
4 1973 Discretionary change in recognizing
revenue on North American floor-
plan sales.
1973 Discretionary change to deferring un-
realized translation adjustments.
1976 Voluntarily adopted FASB 8.
1978 Management harangue against FASB 8.
1979 Discretionary change in recognizing
revenue on North American floor-
plan sales back to pre-1973 method.
9 1979 Adopt concept of “operating income”
for top management evaluation in
Annual Report.
10 1979 Treats reversal of UK tax stock relief as
extraordinary item, contrary to FASB
31.
11 1979 Partially circumvented FASB 8.
12 1981 Reclassified certain obligations for
employee pensions and benefits
from current liabilities.
13 1982 Discretionary change in definition of
“funds” to cash from working capi-
tal, along with a strong emphasis in
the Annual Report on cash flow
achievements.
14 1982 Change in year end.
15 1985 Deconsolidation of Combines Division,
and non-accrual of share of losses.
16 1978 Treatment of write-off investment in
former Combines Division as an ex-
traordinary item.

*Just the visible (and formal) accounting changes and

other relevant accounting-related items are set out in this
table. The company may have made less visible accounting
changes through unemphasized changes in estimates, etc.
Also, methods of implementing accounting policies may
have altered over the years. For instance, the provisions
against receivables declined from $67 million in 1982 to $24
million in 1987, but sales in both years were about $2 billion.
 Massey-Ferguson’s visible accounting system 9

Accounting Decision 1 (Evolution of Accounting for Unconsolidated Finance

Subsidiaries)
This decision is really a set of related decisions involving the evolution of how
Massey’s wholly-owned unconsolidated finance subsidiaries were accounted
for. in the 1970 Annual Report’s footnote 1 (p. 19), top management noted that
the three finance subsidiaries (two in North America and one in the UK) were
not consolidated “because of the different nature of their business”. Massey’s
investment in these companies was “carried in the consolidated balance sheet
at the equity in their net assets”. Further, prior to 1970 “the income and
expense accounts of the finance subsidiaries were fully consolidated in the
consolidated statement of income”. In addition, a combined statement of the
assets and liabilities of these subsidiaries was set out separately.
In 1970, however, this combination consolidation/equity method was
voluntarily changed, so that (footnote 1, 1970 Annual Report, p. 19), “the
equity in earnings of these companies is shown instead as a single amount in
the consolidated statement of income.. .I’. In other words, the change was to
more conventional equity method. The rationale for this change is n
rovided in the footnotes, but rather in a section of the Annual Report entitl
“‘Financial Review” (pp. 24-25), in which management stated:
“In prior years, the income and expenses of the North American finance
companies has been spread throughout the income statement in the
appropriate lines. In 1970, for the purpose of a clearer statement, we show
the net income of the finance subsidiaries after taxes as a one-line item
immediately prior to the net loss.” (emphasis added).
This rationale for the change is consistent with management’s reason for not
fully-consolidating the finance subsidiaries in the first place, as mentioned
above. The question remains, however, as to why the previous method of
income statement-only consolidation was ever thought to be appropriate. The
audit report is essentially unqualified, and reads:
,I* . . ail in accordance with generally accepted accounting principles applied
on a basis consi+& w’ith that of the preceding year after giving retroactive
effect to th6 change in the manner in which the net income of finance
subsidiaries is shown in the consolidated statement of income (Note 1). . .‘I.
In the 1973 Annual Report, the reason for not consolidating the finance
subsidiaries changed (footnote 1, p. 23): “‘ln accordance with industry
practi’ce, the combined statekents of the finance subsidiaries are set out
separ&ely rather than being consolidated. u .” (emphasis added). In 1974, M
began the practice of ihcluding supplementary fully-consolidated summarized
finan&l statements, and elaborated more completely on its reasons for not
consolidbting the finance companies (footnote 1, p. 25):
“‘The investment in these subsidiaries is carried in the Consolidated Balance
Sheet at the equity in their net assets and theirearnings have been included
iti~the Consolidated Statement of Indome. The company considers that this
basis of presentation with respect to finance companies is more informative
than full consoliddtion since (a) it affords a ballis of.comparison with other
majdr companies in the industry, th$Jarger of which are’ U.S. based and do
nbt ;cq;nsolidate their ‘finance’: sybsldiaries, (b) it recognizes that these
subsldlaries’ ocerations are financed on a different basis from that ap-
10 J. Amemic
plicable in the case of manufacturing and trading operations, with substan-
tially greater restrictions on the transfer of assets from the finance
companies, .and (c) it avoids the inference that the concept of working
capital may be appropriately applied to the finance companies’ operations,
or that the assets of the finance companies are readily available to the
manufacturing subsidiaries.“.

This reason remained substantially as it appeared in the 1974 Annual

Report, until 1980, when it was shortened to (footnote 1 (b), p. 26):
“The Company considers that this basis of presentation is more informative
than full consolidation since, among other reasons, it affords a basis of
comparison with other major companies in the industry, the larger of which
are U.S. based and do not consolidate their finance subsidiaries.“.

The 1980 wording remained virtually intact until 1987, when it became simply
(footnote l(a), p. 22): “. . . the Company considers that this basis of presenta-
tion is more informative than full consolidation.”

Accounting Decision 2 (Change in Reporting Unit)

In 1970, top management voluntarily changed the reporting unit from
Canadian dollars to US dollars. Footnote 2 (entitled “Change to U.S. Dollar
Reporting”), containing approximately 300 words, was devoted entirely to
discussing this accounting change, as was a single paragraph in the “Finan-
cial Review” section.
In the footnote, management asserted that up to May 1970 (that is, when the
Canadian-US exchange rate was fixed), reporting in Canadian dollars “did
not result in any major distortions due to exchange adjustments!‘. However,
the Canadian dollar’s floating in May, 1970 led to “significant variations in
the exchange rate [which results] in exchange differences that are unrelated to
actual operations and would: have a distorting effect”. Management went on
to note that “applying the exchange rate that existed at October 31 1970, a
reduction of 1970 ‘earnings of approximately $10 000 000 would have resulted
due sim$y to the change in valuation of the company’s net assets outside
Canada.“. This rationale-an: economic reality argument-was buttressed by
the following’(again from the footnote):
“Assets outside Canada represent 86 per cent of the consolidated total, and
with substantially more assets in the United States than in any other
country including Canada and because of the position of the U.S. dollar in
international trade, the probability of exchange fluctuations affecting in-
come is substantially reduced by reporting in U.S. dollars. In the light of
these factors, the company has concluded that reporting in U.S. dollars
rather than Canadian dollars would provide a more consistent and mean-
ingful measurement of consolidated operating results.“.

The method which management chose to translate the financial statements

of companies outside the US was to translate working capital accounts and
long-term debt at end-of-perjod rates, investments, fixed assets and deprecia-
tion at the rate at date of acquisition, and revenues and non-depreciation
expenses at average rates for the year. Translation gains or losses were to be
taken to income. The 1970 audit opinion was essentially unqualified, with the
wording “. . . all in accordance with generally accepted accounting principles
 Massey-Ferguson’s visible accounting system BB

applied on a basis consistent with that of the preceding year after givin
retroactive effect to. . . the change to U.S. dollar reporting (Note 2),“.
The rationales that management employed above seem to be consistent
with the view that financial statements should portray “economic reality”, or
at least management’s espoused version of it. The fact that the accountin
change was not made until affer the Canadian dollar was permitted to float is
consistent with this interpretation. However, since

‘I. the change was made in the first net loss year in years;
2. net earnings would have been $10 million less had the Canadian dollar
been used; and
. the overall exchange adjustment line item on the consolidated income
statement was positive;

management’s rationale might be viewed by some observers as lacking

credibility.

Accounting Decision 3 (Change to Equity Method)

This accounting change from the cost to the equity method for certain
investees, which may be regarded as a non-discretionary change in order to
comply with newly-issued Canadian accounting standards, is included in the
list for reasons that will become more apparent below. Footnote l(d) of that
1972 Annual Report (p. 21) discusses this accounting change in approximately
200 words. The change is not accounted for retroactively (presumably
because the ‘“effect of this change . . . cumulatively to October 31, 1971 is not
material.. .” ), and thus a version of the American “catch-up” technique is
used. Further, the comparative accounts are left on the old cost basis. The
footnote description is as follows:

“In 1971 and prior years, investments in Associated Companies (i.e., those
in which the company owns 50% or less of the voting shares) were
accounted for at cost and dividends were reflected in income when
received. In 1972, in accordance with recent trends in financial reporting,
the company adopted the equity method of accounting for its investments
in those Associate Companies in which it has a significant influence over
operating and financial policies. Under this method, the company’s share of
the net income of these Associate Companies is included currently in the
Consolidated Statement of Income rather when realized through dividends,
and the investments are carried on the Consolidated Balance Sheet at
original cost plus the company’s share of undistributed earnings since
acquisition.. ..
The effect of this change on consolidated net income in any prior year
and cumulatively to October 31, 1971 is not material, and has been included
in 1972 income. As a result of the change, consolidated net income for 1972
is $487 000 higher than on the previous basis (of which $45 000 represents
the cumulative effect to October 31, 1971).” (emphasis added).

Interestingly, the audit report makes no reference to this accounting change,

other than to ‘include the phrase “in all material respects” just before “with
that of the preceding year”.
12 J. Ameraic

Some observations about this accounting change:

l the only management rationale is that the change was made “in
accordance with recent trends in financial reporting”, that is, to comply
with authoritative pronouncements;
l the impact on 1972 net income is an increase of $487 000, or just over 1%
of 1972 net income. Given the fact that MF incurred a loss 2 years
before the change (1970) and only showed a profit of $9.3 miliion the
previous year, the potential for a material impact on a longitudinal basis
was present. The Statements of Changes in Financial Position for the next
5 years indicate the following:
Equity in earnings of associate
Year companies above dividends Net income Percent
1973 $745 000 $58 213 000 1.3
1974 $1 880 000 $68 413 000 2.7
1975 $3 552 000 $94 677 000 3.8
1976 $2 287 000 $117914000 1.9
1977 $3 657 000 $32 720 000 11.2

Accounting Decision 4 (Change in Method of Revenue Recognition)

In fiscal 1973, Massey made an accounting change in its external financial
statements that it had made in its internal management control system in
197~that is, changing the method it used to record revenue on North
American floor plan sales from the wholesale method to the retail -(or
“settlement”) method (see Appendix 1 discussion for 1970). Fiscal 1973 was a
strong performance year, with sales increasing by 26% over the previous year
to $1.5 billion, and net income climbing to its third-highest level ever,
$58 213 000.
Top management discussed the accounting change in the 1973 Annual
Report’s shareholders’ letter by referring back to the discussion of inventory
control in the 1970 Annual Report, and asserted that the “reporting problems
encountered at that time have since been resolved.“. It was also noted that
1973 EPS had been boosted 12 cents by the change to settlement accounting.
The audit report enthusiastically endorsed the change as follows (in the
middle paragraph of the audit report, p. 18):
“As explained in Note 2 the company has changed its method of
accounting for sales to North American dealers to a basis where sales and
profits on transactions involving deferred floor plan arrangements are not
reflected in the accounts until such time as settlement is received from the
dealer. This change has been adopted retroactively and the effects on
reported net income and on retained earnings are set out in Note 2. We
agree with the company’s view that the new method of accounting
provides a more useful and meaningful basis of reporting, and the change
has our approval.” (emphasis added).
(This very positive endorsement,of the change to settlement accounting must
have been somewhat ironic from the auditor’s perspective 6 years later when
the company switched back to the wholesale method.)
Footnote 2 (1973 Annual Repqrt, pp. 24-251, which takes up the equivalent
of an entire page in the Annual Report, is devoted entirely to describing this
 Massey-Ferguson’s visible accounting system 13

major accounting change. The footnote begins by explaining the difference in

Massey’s North American versus its other financing arrangements (see the
Appendix 1 1970 discussion of retail control in North American operations
for an almost identical discussion), then goes on as follows:

“The company has been concerned with the traditional method of record-
ing sales because of the difficulties inherent in this system in achieving a
proper matching of revenues and expenses and also because changes in
the volume of shipments to dealers, which are not accompanied by
corresponding variations in sales by the dealer, have an effect on reported
profit. The basis of reporting followed in the past is also inconsistent with
the internal management system which, as explained in the 1970 Annual
report, was revised so as to emphasize retail sales by the dealer to the final
customer, rather than wholesale sales by the company to the dealer.
In light of the above factors, and follo6ing a detailed study of its sales
reporting methods for published accounts, the company has concluded that
a more useful and meaningful basis of accounting for transactions with
North American dealers under deferred floor plan arrangements would be
to defer recognition of sales and resulting profits until such time as
settlement is received from the dealers. This new method of reporting has
accordingly been adopted by the company in 1973 for purposes of its
published financial statements.“.

The amounts receivable from dealers under the new method were to be
segregated on the balance sheet, and reported at the lower of cost or net
realizable value. In effect, these amounts were accounted for as inventory on
consignment. For income tax purposes, however, the wholesale method
would still be used-thus, deferred taxes were created upon the adoption of
the new accounting method:

MF’s revenue
recognition

Financial
reporting X

Income
taxes X

The accounting change was accounted for retroactively, with the 1972
comparatives restated on the new basis (the Canadian methodfor accounting
change treatment, not the US “catch-up” method). The journal entry which
MF apparently booked, at the start of fiscal 1973 (i.e. on 1 November 1972),
14 J. Amernic

was as follows:

Dr Deferred taxes 12 054 000

Dr Retained earnings* 23 846 000
Cr Products sold to North
American dealers under
deferred floor plan
arrangements? 35 900 000

Based upon the above journal entry, it appears that cumulatively-up to the
start of the year of the change-wholesale sales were greater than retail sales.
However, the company decided to make the change in 1973, a year in which
shipments to ultimate customers (i.e. farmers) significantly increased. Thus,
the impact of the accounting change on the 1973 fiscal year is as follows: As
footnote 2 points out (p. 25), “The effect of this accounting change has been to
increase slightly sales and income for 1973.. .“= That is, in 1973 retail sales
exceeded wholesale sales, and the impact on profits due to the accounting
change was:

1973 If no change Impact

Increase in recorded
sales $9 388 000
Increase in income $2 170 000 $56 million 4%
Increase in EPS 12 cents $3.08 4%

Had the accounting change taken place in 1972, the impact would have only
been 2 cents per share, or about 1%. In fact, in a special section of the 1973
Annual Report entitled “Settlement Accounting” (p. 36), top management
indicates that the timing of the change was a consideration, when they write,
,I . . . the relatively small differences between wholesale sales and settlements
in 1973 and 1972 make 1973 a particularly appropriate year to make the
change.“.

Accounting Decision 5 (Change to Deferring Unrealized Translation Adjustments)

It is difficult to decide whether this accounting decision is a discretionary
accounting change, or merely the application of accounting principles to
changed circumstances. There is no reference to this accounting decision in
the auditor’s report, which supports the latter view. Footnote l(b) (1973
Annual Report, p. 23), notes the following:
“In prior years the gains or losses resulting from such translation practices
were reflected in the Consolidated Statement of Income along with other
exchange gains and losses. Because of the abnormal circumstances
prevailing in world currency markets during 1973 and the substantial
fluctuations that are now occurring in exchange rates expressed in terms of
a floating U.S. dollar (which was weak relative to most other major
currencies at October 31, 1973), it has been deemed appropriate to defer
the 1973 unrealized exchange translation gains (net) of $7 605000. This
deferral will be used to absorb translation adjustments, as appropriate,
resulting from future strengthening of the U.S. dollar.“.

* Represents the cumulative adjustment up to the start of the fiscal year for the accounting
change.
i-This credit brings the balance sheet account down to the lower of cost or net realizable value,
from retail.
 Massey-Ferguson’s visible accounting system

uestions raised by this accounting decision include:

* Is this an accouriting change. 7 Or are the “abnormal circumstances”

referred to in the footnote really “new circumstances” so that the nature
of the translation adjustments are now different than before, and thus
merit different accounting treatment?
8 Management, in footnote l(b) above, expects “future strengthening of the
U.S. dollar”‘. Is the new accounting method a method of income
smoothing, the adoption of which in 1973 was facilitated by the fact that:
(a) 1973 was a substantial profit year; and (b) deferring a credit seems to
be more acceptable than deferring a debit? The evidence could be viewed
as being consistent with this contention. Note that next year (in fiscal
1974) because of the strengthening of the US dollar, a $6.6 million
translation debit was charged against the deferred credit. The 2-year
impact of the deferral decision is interesting:

1974 1973
Net income, as reported $68.413 million $58.213 million
Deferred translation G/L (6.600) 7.605
Net income, under flow-through $61.813 $65.818

With the new deferral method, income continues its 4-year upward climb.
However, had the now-discarded flow-through method been employed, the
upward trend would have come to an end. This, of course, is merely
suggestive; knowing when top management made the deferral decision
wou$d be useful. Since the shareholders’ letter is dated 31 January 1974, and
the audit report is dated 18 December 1973, did management know that the
S dollar would increase relative to other currencies bedore the audit date?
n the section of the Annual Report entitled “Financial Review” (p. 321, the
following indication is provided:
“The decision to establish this deferral was made as a result of the
significant fluctuations in world currencies during 1973 after the collapse of
the Smithsonian agreement in February. Since October 31, 1973 there has
been a significant recovery of the U.S. dollar in relation to certain other
major currencies.“.

Accounting Decision 6 (Voluntary Adoption of FASB 8)

In the absence of a Canadian authoritative pronouncement in the area of

foreign Currency translation, Massey was permitted considerable discretion in
choosing a method. Thus, its adoption of FASB 8 is a discretionary accountin
change., This change was apparently considered to be quite important by
management since it was referred to in the second paragraph of the
shareholders’ letter (out of 32 paragraphs), and 3/4 of a complete page was
devoted’ to the change in a special 2-page section of the Annual Report
entitled :‘Recent Trends in Accounting” (this is in addition to the footnote
disclosuie). (The rush to adopt FASB 8 by Massey top management must
have seemed unduly shortsighted just 2 short years later, when top manage-
ment used the Annual Report to launch a harangue against FASB 8).
In the ~special section referred to above, Massey top management writes
16 J. Amemic

(Annual Report, p. 19):

“Since the accounting principles of Statement No. 8 are acceptable under
Canadian accounting practices, we have adopted them so that our state-
ments may continue to be comparable with those of our major North
American competitors.“.
In the same section, the following interesting comment is made (interesting
because it implies that MF manages its foreign exchange exposure using
accounting-based reports). “Since the FASB method of reporting the impact
of exchange fluctuations does not change their effect on our operations, it will
not cause a change in the way the company manages its exchange
exposure.“.
The auditor’s report, in the opinion paragraph, sanctioned the accounting
change as follows (Annual Report, p. 22): “. . . all in accordance with generafly
accepted accounting principles applied (after giving retroactive effect to the
change, which we approve, in the method of currency translation as referred
to in Note 2 to the consolidated financial statements) on a consistent basis
during the period.“.
The accounting change, whose impact “did not have a material effect in the
1976 accounts. . .” (shareholders’ letter, p. 31, was apparently accounted for as
follows (footnote 2, p. 28):
Dr Various asset accounts 10259000
Cr Retained earnings 10 259 000
The accounting change increased 1976 income by $3 899 000, or 21 cents per
share.

Accounting Decision 7 (Management Harangue Against FASB 8)

This accounting decision was made during a year (fiscal 1978) that income
collapsed from $32.7 million in 1977, to a loss of $256.8 million. As a result of
the loss, common dividends were suspended because of a dividend restriction
in a senior note issue.
The accounting decision taken this year was to use the Annual Report as a
forum from which to criticize FASB 8, which top management had voluntarily
adopted just 2 years before. In the “Analysis of Operations” section of the
1978 Annual Report (p. 8), the FASB 8 translation adjustment was identified as
one of “two major adverse items” affecting 1978 operating results. Top
management then went on to describe their current view of FAST 8 as
follows:
“Included in our operating results for 1978 is an exchange loss of $90.0
million. . . . In order to evaluate the results of operations of a multinational
corporation such as Massey-Ferguson, it is important to understand the
reasons why such a large loss has been recorded. In 1978, the substantial
exchange loss arose principally from the translation of foreign currency
financial statements rather than from actual transaction exchange
losses.. . .
Massey-Ferguson applies the controversial exchange translation prin-
ciples enunciated in Statement No. 8 of the Financial Accounting Standards
Board (FASB 8) . . .This means, in the case of a manufacturing company
such as Massey-Ferguson which maintains and finances by foreign
currency borrowings a large investment in fixed plant and inventories, that
 Massey-Ferguson’s visible accounting system

foreign exchange adjustments are being recorded on more liabilities than

assets. If the exchange value of the U.S. dollar is weakening, which was the
case in 1978 . . . then large foreign exchange translation losses will
occur....
Massey-Ferguson’s management remains skeptical of the FASB 8 theory
of translation as a practical tool for the management of a multinational
corporation.“.

Accounting Decision 8 (Switch Back to Previous Method of Recognizing

Revenue)

In 1979, top management switched its method of recognizing revenue on

North American floor plan sales from the settlement method back to its
pre-1973 method of recognizing revenue when the machinery was shipped to
the dealer. In the “Management Discussion and Analysis of Operations” (1979
Annual Report, p. 5), top management rationalized the switchback in the
following way:

“We presumed (in 1973) that our competitors would also adopt the
settlement accounting method. This did not happen and in 1979 the
Company returned to wholesale accounting which allows easier com-
parison with the results achieved by our major competitors, consistent
internal comparisons and simplifies external reporting”.

Footnote 2 in the formal audited financial statements was devoted entirely

to this accounting change, and was entitled “Change in Method of Accounting
for Sales to North American Dealers”. The above rationale was expanded as

“Although the Company believes there are certain advantages to the

settlement method, a detailed review of the overall impact of using the
settlement method has indicated that the wholesale method of accounting
is preferable in the Company’s circumstances primarily because (a) it
affords a better basis of comparison with other major companies in the
industry who follow the wholesale method, (b) it increases uniformity in
methods of accounting among the Company’s subsidiaries and (c) it
eliminates the need for maintaining dual accounting systems due to the
requirements for reporting on the wholesale method to debt holders.”

The journal entry apparently booked at the start of FY 1979 was:

Dr Deferred income taxes 520000
Dr Inventory 281000
Cr Retained earnings 801000

Again from footnote 2, the impact of the accounting change on 1979 and the
comparative year was as follows:
Impact of accounting change
favourable (unfavourable)
(million US dollars)
1979 1978
Net sales increased +$88.224 +$30.646
Impact on continuing operations +20.399 $( 5.608)
Income or (loss) per common share +$1.13 RO.31)
The above impact on 1979 results implies that wholesale sales were greater
than retail sales (i.e. sales to the farmer by the dealer); thus, making the
18 J. Amernic

accounting change in 1979 helped improve reported 1979 results, especially

during what was at best a break-even operating year. Further, the auditor’s
report indicated agreement with the change by use of the phrase”. , . with
which we concur.” (Annual Report, p. 38).

Accounting Decision 9 (Adopt Operating Income Concept)

In the shareholders’ letter (Annual Report, p. 3), Conrad Black (chairman of the
board and chief executive officer) and Victor Rice (president and chief
operating officer) commented that:
“1979 proved to be a year in which the Company established the
foundation for profitable growth. . . . After the major loss.. . in 1978 we
ended 1979 with a net income of $36.9 million.
This, however, is not the significant figure by which to judge the
Company’s performance. The net income figure includes adjustments for
exchange, unusual one-time provisions and an extraordinary tax credit.
Some of the items, such as exchange, are not entirely within our control
and all others are non-recurring.
A more accurate measure is the Company’s operating results.. .“.

Top management, in the “Management Discussion and Analysis of Opera-

tions” section (Annual Report, p. 51, went on to illustrate how this income
concept is derived:
“To help clarify 1979’s results, we have established the concept of
operating income as a measure of management’s performance. We define
operating income as total revenue less all recurring expenses which are
within the control of management.
In determining operating income, we exclude extraordinary items, and
net exchange adjustments and reorganization expense pertaining to con-
tinuing operations.
On this basis, operating income for 1979 is $30.2 million in contrast to
1978’s operating loss of $132.5 million.. ..
1979 1978
Operating income (loss) $30.2 $(132.5)
Provision for reorganization expense (95.0) (72.6)
Extraordinary item 95.4
Net exchange gain (loss) 6.3 (57.3)
Net income (loss) $36.9 $( 262.4)”

Such an important redefinition of what top management “should” be held

accountable for seems strikingly consistent with the view that management is
continually striving to control that which is admissible as the language of
accountability. Once management’s conception of “operating income” moves
to centre’ stage, then the following intimately related notions are (perhaps
unobtrusively) accepted as well:
l The notion that top management should be only held accountable for
items largely within its control.
l The acceptance of those items defined by management as being control-
lable and, conversely, non-controllable. For example, in the 1979 Annual
Report, “net exchange gain (loss)” is explicitly excluded from operating
income, and thus defined as non-controllable by management. Accord-
 Massey-Fecguson’s visible accounting system 19

ingly, management appears to urge the readers of the Annual Report not
to hold management accountable for such exchange gains or losses. The
upshot is that a disputable contention (i.e. the degree to which manage-
ment is indeed able to control such items and be held accountable for
them) is resolved by management fiat.

Accounting Decision 10 (Reversal of UK Tax Stock Relief Treated as

Extraordinary Item)
As may be seen in top management’s discussion of 1979 operating income
(above), the $95.0 million provision for re-organization expense was offset by
an extraordinary gain in 1979 of $95.4 million. This extraordinary gain is
entirely a tax credit, and is explained in the “Management Discussion and
Analysis” section of the 1979 Annual Report (p. 8) as follows:
“Since 1972, the U.K. has allowed tax relief for gains realized as the result
of inflation on inventories which must be replaced at higher costs. To the
extent that inventories each year increase by more than a certain per-
centage of the profits, U.K. companies are allowed to defer the taxes on the
increases. These deferrals continued through 1978 and grew to con-
siderable amounts. The U.K. Chancellor of the Exchequer, in his 1979
Budget, proclaimed that after a six-year period, these amounts would never
become payable. However, if within the six-year period a company’s
inventory values should fall below certain defined levels, part or all of the
tax relief is subject to recapture.
Subsequent accounting pronouncements stated that such provisions
should be removed in their entirety if management could show that these
sums were unlikely to ever be payable. Massey-Ferguson has concluded
that it is extremely unlikely that it would ever reduce inventories t,o the
point where any portion of this deferred tax would be payable because of
inflation in the U.K. Under these circumstances, it is permitted to eliminate
this deferred tax accumulated in 1972 through 1979. Accordingly, the 1979
statements show an extraordinary income item of $95.4 million. This tax
credit exceeds the provision for reorganization expense charged to continu-
ing operations by $353,000.“.

Under FASB31 (“Accounting for Tax Benefits Related to U.K. Tax Legisla-
tion Concerning Stock Relief”), “the tax benefit previously deferred shall be
recognized by a reduction of income tax expense in the period in which
circumstances ch’ange.” (p. 3). That is, treatment as an extraordinary item is
not allowed. ,While Massey is a Canadian company, it had adopted US GAAP
in the pasf,,in areas in which there was an absence of Canadian standards (for
example, ,FASB 8)., The following observations may thus be raised about this
accounting’ decision:
* There is an emphasis in the 1979 Annual Report on “operating income”
(see Accounting Decision 9, above).
* This extraordinary credit is linked to the $95.0 million provision for
re-organ@ation expense in several places in the 1979 Annual Report: in
the “Maha’gement Discussion and Analysis of Operations” (p. 8), in the
shareholders’ letter (p. 3), and by means of an asterisked footnote on the
face of the income statement (p. 23), which reads: “the net impact on
results iof’operations of the extraordinary item and the 1979 provision for
20 J. Amemic

re-organization expense charged to continuing operations is $353

favourable.“.
l Why was US GAAP ignored?
l Why was the credit booked this year?

Accounting Decision 11 (Partially Circumvents FASB 8)

Under Accounting Decision 7, above, it was noted that MF management’s
voluntary adoption of FASB 8 had-at least from top management’s
perspective-gone sour, and that MF management had engaged in a ha-
rangue against FASB8 in the 1978 Annual Report. In 1979, MF management
was moved to take positive action.
In the “Management Discussion and Analysis of Operations” (1979 Annual
Report, p. 8), management wrote:
“We believe that statement number eight of the Financial Accounting
Standards Board (FASB) in the U.S. does not properly cope with the need to
report the impact of floating exchange rates on the operations of a
multinational company.. ..
FASB8 requires that inventory when sold be translated in cost of goods
sold at historical exchange rates. This requirement results in a distortion of
the income statements since the related sales revenue is translated at
average exchange rates. Beginning in 1979, we showed this exchange rate
difference as a separate item in Cost of Goods Sold and, as well,. have
highlighted the net exchange impact on continuing operations to assist
shareholders in making a meaningful analysis.“.

The “Consolidated Statements of Income” in the 1979 Annual Report (p. 23)
displayed cost of goods sold as follows:
(Thousands of US dollars)
1979 1978
Cost of goods sold, translated
at average exchange rates for
the year 2 381 778 2 134094
Effect of foreign currency
exchange rate changes 18630 (15 100)
2 400 408 2 118994

In the “Management Discussion and Analysis of Operations” (Annual Report,

p. 8), the $18 630000 (which is described in a footnote to MF’s income
statement (Annual Report, p. 23) as “. . . the difference between cost of goods
sold translated to U.S. dollars at average exchange rates and such costs
translated at historic rates.“) is grouped with other “exchange factors” as
follows:
1979 1978
Effect of foreign currency
exchange rate changes
on cost of sales $18.6 N15.1)
Exchange adjustments (24.9) 72.4
$0 $57.3
-
 Massey-Ferguson’s visible accolnting system 21

The final line in the above schedule is also placed prominently on the 1979
income statement.
In the “Management Discussion and Analysis of Operation” (Annual Report,
. El), top management further elaborates on their views of translation:
“We believe management’s performance can best be judged when costs
are calculated at the year’s average foreign exchange rates. On this
traditional basis, we reduced 1979’s cost of goods sold to 80.1 per cent of
sales compared with 1978’s 81.8 per cent.. . .
FASB8 requires us to measure the impact of fluctuating exchange rates
in a different way. On this basis, our costs of goods sold increased
marginally from 80.5 per cent in 1978 to 80.7 per cent in 1979.“.

Accounting Decision 12 (Reclassify Certain Current Liabilities as Long-term)

In 1981, a year in which management noted that MF’s “turnaround (was)
delayed by a major market deterioration late in the year.. .” (1981 Annual
report, p. I), certain obligations were reclassified out of current liabilities.
Footnote 14 of the Annual Report read as follows:
“A portion of the obligation for pension and other employee benefits
recorded by the Company is not expected to be paid within a year.
Commencing in 1981, the Company has excluded the non-current portion
of this accrual from current liabilities. This reclassification, made retroac-
tively, has increased working capital at October 31, 1981, by $45.5 million
(198~$43.0 million, 1979-$40.9 million, 1978-$45.0 million).“.

This Accounting Decision must be interpreted within the following:

a Footnote 3 of the 1981 Annual Report (p. 18) summarizes the covenants
and undertakings that MF agreed to as part of the first of its t.hree major
refinancings. It notes that “The Company has agreed to maintain
. m. minimum levels of consolidated working capital,. .“. Also, the share-
holders’, letter highlights the improvement in various financial ratios,
noting that (Annual Report, p. I) “Key balance sheet ratios are much
improved over 1980 . . . the ratio of current assets to current liabilities was
2.2 toil bin.1981) versus 1.1 to 1 (in 1980)“.
* The reclassification ‘was accounted for retroactively. This is difficult to
understand; if the principles !of classification were applied incorrectly in
prior years, then this should be treated as an error correction, which it is
not. If circumstances had changed from prior years, then a retroactive
accounting for the change seems inappropriate.
* No reference to this :change is made in the auditor’s report.
e The impa&‘of the;reclassification on two key ratios is as follows:
As reported If no reclassification
1981 1980 1981 1980
Current ratio 2.1811 1.14: 1 2.07 : 1 l.ll:l
Debt/equity ratio 2.1 : 1 4.6 : 1 2.0 : 1 4.5 : 1

Accounting Decision l3 (Change “Funds” Definition)

Just as top management adopted the “operating income” concept in their
1979 Annual Report as a “better” reflection of performance, in 1982 they
22 J. Amemic

began focusing on cash flow achiever-nents. In the shareholders’s letter, the

following was noted:
“1982 was an extremely difficult and challenging year during which your
Company, along with others in the industry, suffered severe financial
pressures. However, unlike the rest of the industry, Massey-Ferguson was
able to benefit substantially from a cash conservation and asset use-
maximization program initiated in 1978 and progressively intensified since
then. In keeping with this, while most companies in the industry tended to
increase dealer inventories, your Company reduced production to maintain
a better balance between inventory and industry sales levels. Thus, for the
second consecutive year, despite overall losses of U.S. $413.2 million in
year ended October 31,1982, your Company was successful in generating a
positive cash flow from operations, with $21.4 million in 1982 and $27.3
million in 1981.“.

Top management formalized this new emphasis on cash flow by changing

the definition of “funds” from working capital to cash, as set out in footnote 3
of the Annual Report (p. 19):
“3. CHANGE IN DEFINITION OF FUNDS
In 1982, the Company has redefined funds as cash instead of working
capital. This definition is preferable because it reflects the results of its
operating, investing and financing activities more clearly. The Consolidated
Statements of Changes in Financial Position for the three months ended
January 31,1982 (unaudited) and for the years ended October 31, 1981 and
1980 have been restated on a comparable basis.“.

There was no mention of this change in the auditor’s report.

It is not hard to understand why management turned to cash flow from
operations as a measure of achievement in 1982. The following summary for
the 3 years ended 31 October indicates that working capital from operations
was highly correlated with the strongly negative net loss measure, and could
be expected to be negative until traditional markets rebounded. Cash flow
from operations, however, was positive for 1982 and 1981 (although it was
strongly negative in fiscal year 19801, and was probably more under the
control of management-at least in the short run-than accrual related
measures such as net income (loss) and working capital from operations. That
is, management could make operating decisions about, say, production
efficiencies and inventory control, that would show up almost immediately in
positive cash flow but have a depressing effect on income.
Cash and accrual flows:
(Millions of US dollars)
Years Ended 31 October
1982 1981 1980
(Loss) from continuing operations (413.2) (194.8) (199.7)
Working capital from operations (311.6) (146.3) (166.3)
Cash flow from operations 21.4 27.3 (420.2)

Massey adopted a cash definition of funds several years before the new
US and Canadian pronouncements were issued. Thus, in one sense the
company was innovative in financial reporting. However, the question
remains about the underlying motivation for the change.
 Massey-Ferguson’s visible accounting system 23

AccounGng Decision 14 (Change Year End)

In the shareholders’s letter dated March 21, 1983 (Annual Report, pi
management wrote:
“NEW FISCAL YEAR
Last November, with new agreements with lenders imminent and the
resulting restructure of the balance sheet, management determined that a
change in fiscal year end would enable us to present to shareholders a
more meaningful Report covering the impact of the refinancing. Therefore,
this Report covers the 12 months period from November 1, 1981 to
October 31, 1982 and, additionally, deals with the quarter commencing
November I,1982 and ending January 31, 1983. The new fiscal year began
February 1, 1983 and will end January 31, 1984.“.
five-line footnote (number 2, Annual Report, p. 19) merely stated the
eve-noted details of the change; no mention of the change was made in the
audit report.
Throughout the 1982 Annual Report, the 3-month period ended 31 January
1983 is treated separately. Comparisons are between the year ended 31
October 1982 and the year ended 31 October 1981, and note the year ended 31
January 1983 and the year ended 31 January 1982.

Accounting Decision 15 (Deconsolidation of Combines Division and Non-accrual

of Share of Losses)
summary of the business events surrounding the deconsolidation of the
Combines Division is set out in Appendix 1. The accounting decisions that
Massey’s top management made with respect to this strategic move were
as follows.
0 The consolidated income statement for the year ended 31 January, 1986
(i.e. fiscal 1985) displayed the results of the Combines Division for the
9 months ended 31 October 1985 (i.e. the time of deconsolidation) as
“discontined operations”. On an after tax basis, this resulted in a loss
from discontinued operations of $20 million, which could now be show
separately from the income from continuing operations of $23.9 million.
* Although Massey had a 45% common equity interest in the new entity
(Massey Combines Corporation (MCC)), it carried its investment in MCC at
a “nominal value” (Annual Report, p. 151, and “no portion of MCC losses
sutisequent to 31 October 1985 has been included in the operati
results;” (pa 15). Top management’s rationale for this accounting tre
ment is set out in the “Financial Review” as follows (Annual Report,
15):
“Effective as of November 2, 1985, the Company reorganized the Combines
Division into MCC and disposed of its majority interest therein. The
Co’mpany continues to have a financial interest in MCC through approxim-
ately U.S. $32.0 million carrying value of MCC secured Notes and its
ownership of 45% of the common shares. The Company’s equity invest-
ment in MCC is carried at nominal value. The Company has no obligations
to invest additional equity capital in MCC and has not given any guarantees
to MCC lenders. Therefore, as discussed in Note 4 to the Consolidated
Financial Statements, no portion of MCC losses subsequent to October 31,
1985 has been included in the operating results.“.
24 J. Amemic

Although MF apparently wished to extricate itself from the combines busi-

ness, the way management chose to go about it (see Appendix 1) created
uncertainties regarding MF’s obligations, especially those with respect to their
former employees and retirees, who were now to be MCC’s responsibility.
Footnotes 2, 4 and 10 from the 1985 Annual Report, which disclose the
technical details of the 1985 restructuring plan, MF’s accounting policy with
respect to MCC, and MF’s obligations as a result of the MCC deconsolidation,
are reproduced in Appendix 2. The upshot of the MCC accounting decision
was:
l MF’s current year income from continuing operations, operating income,
and future income numbers were improved significantly;
l MF’s debt was reduced;
l Combines Division manufacturing and other assets, which perhaps
should have been written down in prior years were removed from the
balance sheet without a loss being recorded.
Since the auditors made no mention of the MCC deconsolidation itself, nor
of MF’s policy of not accruing MCC’s losses, presumably they felt it was
merely the application of existing accounting principles to a new situation.
Although it is, impossible to show that a company enters into a series of
transactions in order, among other objectives, to attain a predetermined
financial reporting objective; the deconsolidation of MCC appears to be an
interesting candidate for further consideration. Reaction of union leaders in
1988 when MCC went out of business was hostile, and accused Massey
management of a “sham” (Appendix 1). Also; MCC was still operationally
bound to Massey, as indicated in footnote 4 (Annual Report, p. 28):
“The Company has signed several technical and administrative agreements
for exchange of services with MCC including the provision of retail
financing through the Company’s North American Finance Subsidiaries.
. . . The Company has certain obligations in the event of the bankruptcy or
liquidation of MCC . . .‘I.
Footnote IO(a)(G) (3) described these obligations further:
“In certain circumstances (essentially in the event of liquidations or
winding-up of MCC) within a defined period of time (about two years from
the commencement of manufacturing operations) the Company has under-
taken to ,pay, the trustees of the hourly rated employees pension plan
transferred to rvVZCin respect to the unfunded liability of such plan up to a
maximum of’ U.S. $26.7 million. . . . The Company has pledged its MCC
Notes (face value of U.S. $60.5 million) as collateral for such indemnity.“.
MCC was established on 2 November, 1985, and went out of business on
4 March, 1988, comfortably in excess of the 2-year limit. A reader of this
paper, who had been a senior partner in Massey’s audit firm for several years
but who had note been directly involved in the Massey audit, commented as
follows on the above discussion of Accounting Decision 15:
“Since this [paper] is ostensibly an examination of accounting issues, it
would be he@ful to know what alternative accounting you think might have
been proper ilgiven the transactions undertaken. Was the accounting a
“sham?” Ma$sey’s case presumably would be as follows: (I) we have
 Massey-Ferguson’s visible accounting system 25
traded the combines business for a 45% interest in shares and some notes
receivable of MCC, so we have to remove the assets sold and liabilities
assumed from our company unconsolidated balance sheet; (2) since we
only have a 45% interest in MCC, we cannot consolidate it; (3) equity
accounting for losses of MCC is not required since the carrying value of the
investment is nominal and we are not on the hook to make up losses; (4)
we do have to be concerned about the carrying value of the notes in MCC,
but with a face value of $60 million and a book value of only $32 million we
appear to be onside; (5) we do have a contingent liability on our
guarantees and this is properly disclosed; (6) since through this transaction
we have got out of the combines business we have no option under GAAP
but to account for its losses before disposal as losses from discontinued
operations. If this case cannot be rebutted, it seems to me you are
unwarranted in implying that the accounting was wrong. It may be that the
transaction can be questioned on ethical grounds, but as long as it stands
up legally the accounting must follow. The one point you could make might
be that insufficient provision was made against the value of the notes or the
contingencies (which together require a provision of $59.7 million 2
years later) but that could be said to be using hindsight.“.
This comment by the audit partner appears to be based upon a conception of
accounting akin to the reporter (Bedford and Baladouni, 1962) or neutrability
(Solomons, 1991) views, and thus on the surface seems “sensible”. However,
such a comment appears to deny two important features of accounting:
0 First, that the desirability of a particular accounting outcome might be the
force motivating the business event itself (Zeff, 1978). This is, of course,
almost impossible to prove in any meaningful sense, but given the central
importance of management’s story in the annual report, such a view
should not be dismissed completely out of hand.
0 Second, visible accounting decisions should not be evaluated solely on an
individual basis. It is when one examines the overall trend or impact of
the entire portfolio of visible accounting decisions that some perhaps
more suggestive evidence regarding management’s accounting aspira-
tions is revealed. Thus, of the 16 visible accounting decisions examined in
this paper, 12 (numbers 1, 2, 3, 4, 6, 8, 9, 11, 12, 13, 15 and-to be
discussed below-l& clearly resulted, in portraying top management
performance in a more positive light in the year of the change, one (No.
S&although resulting in a reduction in a key performance measure in the
year of the decision-led to the maintenence of a 2-year income uptrend
when the following year was’taken into account, and the impact of the
remaining three (numbers 7, l/O and 14) was unclear.

Accounting Decision 16 (Treat Write-off as Extraordinary Item)

As indicated in Appendix 1, in fiscal 1987 Massey provided for the write-off of
its investment in MCC and provision for its obligations with respect to MCC as
a $59.7 million extraordinary item. The footnote disclosure described the
extraordinary ‘provision as followsl(Annual Report, footnote 2, pp. 22-23):
“(a) Provision for Loss on Liquidation
On .March 4, 1988 a receiver was appointed by an order of the Supreme
Court of Ontario for Massey Combines Corporation (MCC). The Company
has conducted a detailed review of the’likely effect of MCC’s receivership on
26 J. Amemic
its investment in MCC Notes, its trade end other receivables end cn its
liabilities arising from undertakings given to third parties. Various courses
of action and opportunities are, or may become, available to the receiver
and other parties and the resolution of certain issues may well be subject to
protracted negotiations. While the consequences of the alternative actions
and the final outcome of negotiations cannot be predicted with certainty,
the extraordinary provision of $59.7 million represents management’s best
estimate, based on information presently available, of its losses on existing
assets and costs arising from obligations to third parties and, in
management’s view, further loss, if any, would not be material.
Various parties have announced their intentions to commence actions or
proceedings against the Company with respect to the termination of
employment and loss of certain employee benefits associated with the
financial failure of MCC. The Company believes any such actions or
proceedings would be without merit and accordingly, no provisions have
been made with respect thereto.“.
The following comments concerning the MCC extraordinary provision are
worthy of exploration:
l With MF having undergone a IO-year period of retrenchment and
productivity improvement programs, shutdowns and re-organizations
were commonplace. Indeed, the 1987 “Management Discussion and
Analysis” (Annual Report, p. 13) indicated that “The current year’s
operating results were favourably affected by . . . gains realized on
property disposals.“. Thus, the classification of the provision is- open to
question.
l The magnitude of the provision might be open to challenge, especially in
light of union and other comments in the press (see Appendix I).

Evaluation of Visible Accounting Decisions--Patterns of Decision-making

It is when patterns of decision-making are examined in the Visible Accounting
Decisions from 1970 to 1987, that the questions raised in the commentary of
the previous section gain additional force as supporting the view that top
management is engaged in a continuing effort to define the vocabulary of
motive of financial reporting. These patterns include the following:
l The 1979 switchback on revenue recognition of North American floor plan
sales: “comparability” as an espoused rationale offered by management
thus outweighed “economic reality” on this issue, even though “econo-
mic reality” was the most frequent (and thus apparently the most
important) rationale over the l&year period.
l Sequence of changes with respect to accounting for foreign currency
financial statements translation adjustments: in 1973 Massey changed to
deferral; in 1976 FASB8 (with full flow-through) was adopted; in 1979
certain exchange rate differences are removed from Cost of Goods Sold.
l Selective voluntary adoption of US accounting standards: FASB 8 was
adopted but FASB 31 was not. This weakens considerably management’s
use of the “comparability” argument.
l Inconsistent treatment of provisions for discontinued businesses: treating
the ‘provision for writing-off MF’s investment in MCC as an extraordinary
item.
 Massey-Ferguson’s visible accounting system 27

m Shift in indicators valued by top management: shift from net income to

operating income to cash flow from operations.
c Apparent “strategic” adoption pattern of new accounting methods an
decisions:
l Adopted US dollar as reporting currency when continuing to use the
Canadian dollar would have increased a loss.
0 Adopted and dropped settlement accounting in accounting periods in
which the change favoured net income.
0 Deferral policy on translation adjustments adopted at a time when net
income trend could be maintained.
* Treating UK tax credit as an extraordinary item which was just sufficient
in magnitude to offset the provision for re-organization expense in 1979,
and linking the two items prominently in the Annual Report.
0 Getting profit when management absolutely needs it: the combination
the complex transaction extricating MF from the combines business in
1985, and the subsequent accounting for this transaction and Massey’s
non-accrual of its interest in MCC’s losses, is an apparent example of this.
* The previously-noted observation that the overwhelming majority of
visible accounting decisions resulted in more positive indications of
management’s performance.
It is not any single visible accounting decision over the period from 1970 to
87 that provides clear-cut support for a strategic or symbolic use of financial
reporting, but rather it is the cumulative weight of evidence that is very
suggestive.

Conclusion
Corporate financial reporting consists of much more than merely the process
of preparing and disseminating financial statements. The Financial Account-
ing Standards Board in the US conceptualizes financial reporting as encom-
passing financial statements (including footnotes), supplementary informa-
tion, management discussion and analysis, and letters to shareholders (FAST,
1984, p. 5). In this paper, some aspects of the financial reporting of the
important multinational Massey-Ferguson Limited have been assessed for
the period of its decline and retrenchment from 1970 to 1987.
The specific means of financial reporting that was examined was the annual
report. Such reports have occasionally been dismissed as irrelevant and
innocuous. Hoivever, if one views corporate annual reports as “texts”, then
garnering interesting and useful information becomes a, matter of learning
how to interpret them;, that is, applying a “theory” of reading, as it were
(Brooks, 1985). Such theories may be grounded in a wide array of literature,
depending upon the objective of the researcher. For example, Newell (19881,
who was interested in studying the evolution of the diversification strategy at
US Steel, drew upon concepts from strategic change in order to gain insights
from ,US Steells’ annual reports from the period 1945 to 1985. In the present
paper, we beIgan with; a perspective grounded in th,e notion that top
management 9111 strive Ro control an important means by ‘which its account-
ility is assessed, i.e. the accounts in the’annual report.
28 J. Amemic

The company chosen as our subject experienced significant and sustained

crises over the l&year period under study, as it attempted to free itself
from the vagaries of the agricultural cycle. There was some support in the
Massey case for the notion that corporate financial reporting is not simply a
process of one-way communication, in which improvements in measuring
and reporting simply lie hidden awaiting to be discovered. Even with
standards, rules and auditors, top management will vigorously attempt to
“get its story out”. The way such a story is told, the words that are chosen,
and the accounting principles and concepts that are used, may provide more
insights into management than the simple surface structure of the financial
reports suggest. Thus, even though financial accounting is itself a remarkably
malleable resource (Burchell et al., 1980), it is the ways in which these
malleable acts are undertaken that may prove to be the most interesting of ail.
Indeed, this case study is not as much about financial reporting as an
abstract subject as it is about the financial reporting behavivur of manage-
ment, as revealed by the interplay of management’s visible accounting
decisions and the unfolding context of the company. On a purely “technical”
financial reporting basis, Massey was perceived by the businesscommunity
to be a leader-the company won the prestigious Financial Post Annual
Report Award for many of the i8 years under study.
The evidence marshalled in the present paper’s case study, while incapable
of being definitive, is consistent with the ,idea that financial reporting, even
within the framework of GAAPl largely accedes to top management’s attempt
to define the language by means of which’its self-accounts are to’be written.
Thus, management determines its own “vocabulary of motive” (Mills, 1967;
Batstone, 1979), and is largely unchallenged in so doing. What makes this
social process so important is that the story portrayed by corporate annual
reports “is a member of a battery of belief-forming institutions.. .” (Tinker,
1985, p. 82).

Acknowledgements
A grant from the Research Committee of the Canadian Academic Accounting
Association, through the Deloitte, Haskins & Sells Fund (now the Deloitte and Touche
Fund), is gratefully acknowledged. The constructive comments and suggestions of the
editor and two reviewers resulted in considerable improvement in the paper.

Notes
There is some controversy as to whether or not cases, especially single cases, can be used to
examine phenomena within a formal hypothetical framework. For example, Simon (1969)
suggests that case studies may be used to generate hypotheses. Both Lee (1985) and Yin
(1984), however, argue that case studies should be viewed as experiments, in which theoretical
constructs may be tested; if the observations in the case setting are consistent with the
theoretical expectations, then this may be viewed in the same manner as the situation in which
statistical results in large samples do not refute a null hypothesis. Yin (1984) puts forth a
strono argument, though, for multi-case studies, in which some variance is anticipated.
Thesefactors were from the so-called “positive” literature in accounting.
An examole of an accountino orinciole choice is the selection between LIFO and FIFO. Once
this selection is made, management must then decide how to implement the choice. If LIFO
were to be chosen, for example, it could be applied literally as each item is purchased and
sold, or it could be applied to monthly or quarterly purchases and sales. Different methods of
implementation result in different accounting numbers.
 Massey-Ferguson’s visible accounting system 29

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Appendix 1. Chronology of Important Environmental, Strategic and

Management Changes 1970-1987

1970 (Net Sales $937.9 Million; Net Loss $19.7 Million)

l Year end 31 October.
l 3.2% decline in sales from 1969; first loss since 1957, due to:

l program to reduce North American dealer inventories, which had great success, but
which led to a reported loss “since our financial statements are based on wholesale sales
and not on retail sales, results for 1970 show a substantial, non-recurring adverse impact
on profitability, particularly in the fourth quarter.” (1970 Annual Report, p. 4);
l wildcat strikes;
l persistent inflation;
l world-wide reduction in demand for combine harvesters, due to the low level of
international grain markets for 1969 and 1970. The Annual Report (AR) noted (p. 4): .“As
the manufacturing of grain-harvesting machinery involves high fixed costs, reduced sales
have a disproportionately heavy adverse effect on earnings.”
l greater focus on retail control in North American operations: the distribution chain for
MF’s farm machinery products is as follows:
WhOteSakS S&e , Dealer Retail sale
MF > Farmer
 Massey-Fergusou’s visible accounting system 31

As of 1969, a build-up in dealer inventories; for North American sales, MF grants interest-free
payment terms of up to 23 months for highly seasonal machines, and 12 months for non-seasonal
machines (but dealer must settle as soon as retail sale occurs). The AR noted (p. 29) that “under
these circumstances, management performance is obviously best measured in terms of sales to
‘the final customer, not the dealer.“. MF wanted to “achieve substantial reduction in dealer
inventories in 1970” (AR, p. 291, and decided its best approach would be to focus dealer and
management attention on the retail market. ‘I.. . In 1970, North American management was able
to reduce dealer receivables of new farm and industrial machinery by $47 million, or 30%, from
1969, while improving retail sales.” (AR, pi 29).
The above discussion in the 1970 Annual Repot-t is in a special section entitled “Retail Control in
North American Operations”; the final paragraph of this section is devoted to some comments on
the possibility of shifting the company’s “public financial reports” to this retail method:
“Having found the retail control system useful from the management standpoint,
consideration is being given to the possibility of providing public financial reports on
this basis. There are difficulties involved in effecting a change in the method of
reporting, among which is the fact that the practice of the farm and industrial
machinery industry is to report on a wholesale basis. We and our advisors will
continue to explore this matter. But for internal purposes, management performance
in our North American operations will continue to be measured by retail
achievement.“.

1971 (Net Sales $1029.3 Million; Net Income $9.3 Million)

e This is the first US billion-dollar sales year.
* No dividends this year: “In view of the substantial loss incurred in 1970, no dividends were
declared in 1971.” (Annual Report, p. 5).

1972 (Net Sales $1190.0 Million; Net Income $40.3)

1973 (Net Sales $1506.2 Million; Net Income $58.2 Million)
1 Sales up over 1972 by 26%.

1974 (Net Sales $1784.6 Million; Net Income $68.4 Million)

* Dividends increased to $0.80 per share.
0 Shareholders’ Letter noted (p. 3 of Annual Report): “The major challenge which the company
faced in 1974 was to bring production up to the level of market demand in the face of
widespread’shortages of materials and components.“.
* A year of ,significant expansion and increase in debt (including a doubling of current bank
borrowings); due to strong sales growth and expectations for continued strong growth,
especially in MF’s world-wide farm machinery markets, capital expenditures in 1974 almost
doubled over the previous year, to $110 200 000, with plans’for even m&e. Also, in Industrial
and Construction Machinery, there were acquisitions such as Hanomag of Germany. In
summary, the 1974 Annual Report was very optimistic.

1975 (Net Sales $2513.3 Million; Net Income $94.7 Million)

. The cover of the Annual Report reflected the attitudes and expectations of top management;
it co’nsisted df an accelerating-growth curve on a totally white background. -
0 The back of the Annual Report’s cover page noted: “In the past five years Massey-
Ferguson’s sales! have risen 150 per cent to $2.5 billion. In this period the company also has
been able t’o ‘d&lop a firm founbation for future growth.. .“.
0 Ftecord level of capital expenditures ($170 million); the same olanned for 1976.
0 Another e&&sibnist, ‘optimistic Annual Report; greatly expanded discussions of achieve-
ments an’d eipectations for the three product categories of Farm Machinery, Industrial and
Construction,Ma’chinery and Engines.

1976 (NdUSaIds iF4771.7 Million; Net Income $117.9 Million)

* The Bhareho’lderB’ Letter notes (p. 3 of Annual Report): ” For the sixth successive year we are
able’to rep?& iedord levels of production, sales and net income.“.
32 J. Amernic

1977 (Net Sales $2805.3 Million; Net Income $32.7 Million)

l The significant profit downturn was caused, according to the Shareholders’ Letter, by
depressed world grain prices, manufacturing supply problems and weather problems in
some markets.

1978 (Net Sales $2925.5 Million; Net Loss $256.7 Million)

l A new top management team.
l Common dividends suspended because of a restriction in a senior not’e issue.
l In the “Management Discussion and Analysis of Operations”, top management noted
(Annual Report, p. 5): “In response to unacceptable results during 1978, drastic actions were
taken to counteract serious operating losses and a deteriorating financial position. These
actions resulted in manpower cuts of 9000 and a major reduction in Company inventories in
the latter half of the year. Studies have been completed and a major program is underway
to rationalize manufacturing operations and to dispose of excess facilities or peripheral
businesses and eliminate unprofitable products.“.

1979 (Net Sales $2973.0 Million; Net Income $36.9 Million)

l In the shareholders’ letter (Annual Report, p. 31, Conrad Black (chairman of the board and
chief executive officer) and Victor Rice (president and chief operating officer) commented that
“1979 proved to be a year in which the Company established the foundation for profitable
growth. . . . After the major loss of $262.4 million in 1978 we ended 1979 with a net income of
$36.9 million.“.
l Continued policy of divestment and rationalization; among the units whose disposal was
decided upon:
l Hanomag Construction Machinery, as part of the withdrawal from this business;
l Kilmarnock, Scotland combine harvester plant;
l a variety of other plant closures and reductions in ownership.
In support of the core structure, a program was undertaken to rationalize manufacturing
operations and to dispose of excess facilities and peripheral businesses.” (Annual Report, p. 5).

l Development of concepts of core businesses and tighter management control; “The main
thrust of the new organization was the concept of a “core structure” to replace the former
decentralized, regional structure. This core structure is now in place. It includes the
production and sale of farm and industrial machinery and diesel engines, related components
and parts from our facilities in Canada, the United States, the United Kingdom and France.

1980 (Net Sales $3132.1 Million; Net Loss $225.2 Million)

l The 1980 Annual Report’s cover is solid dark blue, with the words “The Future of
Massey-Ferguson” in bold white letters.
l The chairman and chief executive officer’s letter to investors is reproduced in full as follows:

To Massey-Ferguson’s Investors
1980 was an extraordinarily difficult year for your Company. It was relieved only by
the tentative prospect now happily realized for arrival at agreements in principle
which should lead to a major refinancing of Massey-Ferguson.
Pages 20 and 21 of this Report provide an excerpt from the Company’s 10-K report
to the U.S. Securities and Exchange Commission which details those uncertainties
and caveats which investors should study in addition to reading the following much
more general review.
Lets deal with the bad news first.
The Company entered 1980 hopeful but in financially frail shape reflecting (a) the
severe problems of 1978 and earlier and (b) a precarious debt-to-equity ratio which
resulted from a decade of dramatic growth financed to the extent not provided for by
retained earnings largely by debt-and much of that short-term debt. The hopeful-
ness stemmed from the new management’s satisfaction that a remarkable process of
“slimming down” had taken place in the previous year and a half and as a result of
severe but objective measures, Massey-Ferguson was in substantially improved
operational shape.
As the year began, an upturn in world agricultural markets seemed well estab-
 Massey-Ferguson’s visible accounting system

lished and management again began directing major attention to completion of its
long-planned, large-scale equity program.
Then the roof fell in. Not only for us. But for the entire industry. The difference was
that Massey-Ferguson didn’t have the reserves to cope quite as calmly as some of
our competitors. In the aftermath one of our competitors, a noble name in North
American farm machinery, appeared threatened with extinction. Even your Company,
the largest tractor manufacturer in the world, was endangered. The problems were:
Several key markets virtually collapsed. First North America, then Europe.
Elsewhere in the world local markets weakened, in some instances quite severely.
interest rates skyrocketed and had a doubly negative effect. Costs for short-term
debt more than doubled in some cases, precisely at the time that such rates were
further depressing markets.
The U.K. pound rose dramatically relative to most of the currencies with which our
customers and your Company pay for our very significant exports from Britain. This
depressed margins severely.
The resultant deterioration in operating results brought about a crisis in confidence
during which the very survival of the Company became a popular speculation in the
press particularly in the English-speaking countries. The impact of what turned out to
be a six-month-long morbid death watch further deteriorated sales during the second
half, especially in North America.
When the downturn hit, the Company took a painful but prudent and quick action
by implementing a comprehensive cash conservation program at the expense of the
current income statement. Factories were closed temporarily. Inventories were
reduced. This reduction in the supply pipeline impacted immediately and adversely
on reported gross revenues because like most of the industry, it is the wholesale
sales to dealers and distributors-not retail sales-that are reflected in the current
income statement.
These difficult conditions which continue resulted in a 1981 first quarter loss of
U.S. $81 million.
Now the good news.
The general principles for the refinancing have been agreed to by all the leading
participants. There are strong grounds for optimism that almost all negotiations on
matters of substance can be concluded by the end of April. The closing will be held
as soon as practicable thereafter. But even without the completion of these steps, the
pressure on the Company, although it remains considerable, has been lessening
progressively since our first major meetings on the refinancing plan, which were
held with representatives of our world-wide lenders in December 1980. This pressure
continued to ease with the achievement in mid-Januan/ 1981 of an agreement in
principle with the leaders of our world-wide lending community, and with the
announcement in early February that agreements in principle had been reached with
the Governments of Canada and Ontario under which they would guarantee a
preferred share issue of Cdn. $200 million.
As a result of the progression of events since December, we have been able to
begin the transition to more normal operational aggressiveness, An example has
been some amelioration in the complex matter of intercompany fund transfers.
Freeing up payments for component interchange between the national entities of the
Company has made operating efficiencies more feasible. Anottier highly positive
development recently has been the provision by our suppliers’ of $80 million in
interim financing through payment deferrals.
The leading indicators which have previously signaled improvements in the
markets for farm and industrial machinery and diesel engines are showing signs of
strengthening. By the end of the year or early in 1982, world-wide demand is
expected by the industry to improve significantly and as a result, combine and
tractor manufacturing plants in North America have been reopened.
Included in the “good news” section should be mention of the positive aspects
flowing from the decisions of the Governments of Canada and Ontario to support the
refinancing package. The first of these is that without detriment to Massev-
Ferguson’s flexibility as a multinational enterprise, the Company is now much more
firmly established in its “home’‘-Canada, As part of the arrangement for this
government support, the Company has agreed upon a number of commitments
concerning the upgrading of research and development in Canada along with
confirmation ttiat any future expansion of manufacturing capacity in North America
will, provided it is economically justified, be in Canada. These commitments fit
34 J. Amemic

harmoniously into both our short- and long-term plans. Canada’s sophisticated
industrial infrastructure combined with a highly favourable currency climate comple-
ment the Company’s needs.
The final element in the review of positive news focuses on market share.
Notwithstanding all of the excruciating problems that occurred in 1980 many of
which impacted on Massey-Ferguson much more savagely than on our competitors,
your Company maintained its market share on a world-wide basis. In fact, one of the
more gratifying aspects of the year’s results was that in the key high-horsepower
tractor market in the U.S. corn belt, Massey-Ferguson was making major gains in
market share right up to the time when the adverse publicity barrage concerning
survival began-after which, understandably, market share declined. It is the
Company’s firm intention to resume its progress in this market sector.

The Outlook
The outlook is positive. 1981 will be a very difficult year. We anticipate a
progressive improvement during the remaining three quarters, both as a conse-
quence of stronger markets later in the year, and increased confidence following the
progress with our refinancing plan. In spite of these factors, it is probable that a loss
will be recorded for the year as a whole. 1982 is another story, however. The industry
is bracing for a surge in demand and Massey-Ferguson has the products, the
manufacturing capacity, and the distribution resources, to exploit it profitably.
Elsewhere in this Report, there is a section on the Company’s first definitive
strategic plan. Preparation of the plan has proved to be a major asset. We have
articulated Massey-Ferguson’s objectives for the next decade and laid out detailed
plans of how we will reach our goals. We have confidence these objectives will be
achieved.

Effect on Common Shares

The refinancing package, while avoiding collapse and the consequential destruc-
tion of all common share value, will bring about a major dilution of existing common
shares. Management was acutely sensitive to this problem throughout the nego-
tiations leading to the agreements in principle. A large part of the refinancing
involves cash, interest forgiveness, and debt conversion which will add to the
Company’s equity through exchanges for newly issued common shares. In the
circumstances, it is your Board’s opinion that the necessary dilutions and potential
dilutions are preferable to the alternative which was clearly the collapse of your
Company.
Our Annual Report and Annual Meeting this year are somewhat later than usual.
This is because we believed it important to include, as full as possible, information
on the components and progress of our refinancing program.
On behalf of the Directors, I want to thank the many thousands of people who have
stood loyally by the Company in some of the most difficult circumstances in our
133-year history. These include our customers, distributors and dealers, suppliers,
shareholders, lenders and our employees world-wide. Perhaps more than anything
else, I believe such dedication augers well for a sound future.
Victor A. Rice
Chairman of the Board and Chief Executive Officer
Toronto, March 23, 1981
In a special section of the Annual Report headed “Discussion with Management-An
Interview with Massey-Ferguson’s Senior Management on the Company’s Future” (pp. 3-6
of Annual Report), the following appeared: “. . . how did Massey get into such a mess?“.
“Mr. Laurenzo {Senior Vice-President Planning and Administration}. That’s a central
question, of course. ‘There were a number of contributing factors. The Company
expanded tremendously in the ‘70’s, financed largely through borrowings and failed to
raise adequate new equity capital. Much of this debt was short term and when interest
rates increased sharply in 1979-80, the interest bill became phenomenal-some U.S.
$300 million in 1980 alone.
In those past years we also became so focused on sales growth that we lost sight of
the need to improve our operational efficiency, especially in manufacturing. The
Company also made some unfortunate acquisitions during this period.
As a result of all these factors, MF had become a higher cost manufacturer than the
industry leaders and consequently we had fewer reserves for contingencies. Faced with
 Massey-Ferguson’s visible accounting system 35

suddenly depressed markets in 1980, the high value of British sterling which lowered
margins on our large U.K. export volume, and high interest rates, we didn’t have the
financial strength to effectively withstand a crisis of those proportions.”

0 An excerpt from MF’s 10-k report, reproduced on pp. 21 and 22 of the Annual report, outline
the severity of the financial problems facing the company: “Negotiations with the Company’s
existing lenders, as well as potential investors and the Governments of Canada and Ontario,
have been continuing for many months with a view to finding substantial new equity capital
and restructuring the Company’s existing debt. . . . In order to permit the Company to survive,
a general restructuring of the Company’s indebtedness, revisions to existing financial
covenants in its debt instruments, and the restoration and maintenance of profitable
operations and adequate cash flow are required.“.
This excerpt underlines the importance that both the Canadian federal and provincial
governments gave to the continued existence of Massey. It also underlines the importance that
Massey gave to negotiating a bailout with public money (Trebilcock et a/., 1985).

* The 1980 Annual Report also contained a four page section entitled “Strategic Plan-
Massey-Ferguson in the 1980’s”. and a section describing the “strengthening” of Head Office
functional operations through the four functions of “Product Planning”, “Engineering”,
‘“Manufacturing” and “Marketing”.

1981 (Net Sales $2646.3 Million; Operating Loss $218.2 Million; Net Loss $194.8
Million)
e The cover of the 1980 Annual Report was a solid light-grey background with just the
following phrase in one-inch high lettering:
“Number 1
in tractors
world-wide”

0 Victor Rice (chairman and chief executive officer) wrote in the shareholders’ letter (p. 1 of
Annual Report):

“1981 saw your Company’s turnaround delayed by a major market deterioration late in the
year that ran contrary to industry expectations.. .
The refinancing, involving our world-wide lenders and the Governments of Canada, Ontario
and the United Kingdom, was successfully completed in July, 1981 . .
. . . the unexpected development in the North American market in September and October
which, instead of becoming stronger, weakened considerably under the pressures of high
interest rates, low commodity prices and reduced farm incomes.“.
a MF and its major banks reached a refinancing agreement on 16 January 1981, which involved
interest forgiveness, issuing common shares to the banks, a commitment by the banks to
maintain current credit levels for 3 years, a preferred share issue guaranteed by a UK
government agency, and conversion of loans to preferred shares. As Trebilcock et al. (1985)
points out, the “agreement with the banks was a prerequisite to arranging federal and
provincial support.“. Trebilcock et al. (1985) describe the political negotiations that preceded
final governrnent support, which consisted of a $200 million preferred share sale guarantee,
among other features, in exchange for certain employment and investment guarantees by
MF. All the financial arrangements were interdependent, and the final agreement in July
represented what Cook (1981, p. 13) termed a “deal {which} was possibly the most
convoluted and voluminous in history”, involving more than 200 lenders from 10 countries,
and national and provincial governments.

Cook (1981) suggests that (p. 11) I’. . Massey had managed to patch together a formula for
saving itself that was extraordinarily complicated while at the same time based on a simple
premise. That premise, which Rice had managed to sell to hard-bitten financial men and
politicians as well as to his own corporate team,-was that Massey-Ferguson was worth saving.
The company had contributed a great deal during its 140 years of history. And it must not be
allowed to iperish.“.
Cook (1981, p. 14) goes on to describe the key to the 1981 MF refinancing as follows:

“In its parlous state, Massey could scarcely afford to negotiate its way ou’t of these
36 J. Amernic

concessions {expected to be exacted by the bankers}. Left to its own devices, the
company might well have found itself tied down and prevented from resurrecting
itself because of the onerous terms set by its lenders. There were precedents for this
impasse in the rescue proposals advanced to bail out other farm machinery
companies such as International Harvester and White Motor Corporation in the U.S.
Both had been so restricted by banks’ demands for collateral, that the attempted
rescue had been undermined. Harvester had managed to limp along, but in the
winter of 1981 White had filed for court protection under the U.S. Bankruptcy Act.
The saving grace for Massey was the presence of two levels of Canadian
government. Both the federal government and the provinicial government of Ontario
had agreed to guarantee the capital risk on a $200 million issue of preferred shares.
The condition was that there had to be a satisfactory amount of assistance from the
lenders, and the banks and other financial institutions must be willing to take an
additional risk, through acquiring warrants to purchase Massey common shares. If
any dividend on the preferred shares were missed, then the government would
agree to buy the shares at their issue price.
The terms for the involvement of the governments gave Massey a trump card to
play against the banks. It meant that there would be no government participation,
and no extra infusion of needed equity, unless the banks held off and watered down
their demands. Massey was a better prospect with this additional aid than without it.
And the governments had a vested interest in keeping the company going thereby
avoiding having to trigger their commitment. Massey must not be put in a position
where it failed to pay a dividend on the new preferred shares, and the governments
would do all in their power to ensure that it would not be.
Helpful in itself, this government co-operation had been hardwon and reluctantly
given . . .I’.

l MF top management was especially concerned that the market’s deterioration had come just
after the above complex financial restructuring had been arranged. In his shareholders’ letter,
Victor Rice writes (Annual Report, p. 2): “We continue to make every effort to maintain
dividend payments on the preferred shares in line with our refinancing agreements to
prevent a default which would trigger the guarantees by the Governments of Canada, Ontario
and the United Kingdom. This would create concerns that could slow our ongoing
consultative initiatives with those governments and the implementation of plans to take full
advantage of the upturn in our major markets when it occurs.
It is this context that the special meeting of common shareholders in January authorized a
reduction in the common share stated capital of $140 million to provide a surplus available
for dividend payments on preferred shares.“.

1982 (The Fiscal Year End was Changed to 31 January; MF Reported on the 12
Months Ended 31 October 1982 and the 3 Months Ended 31 January 1983 in this
Annual Report)

l Results (in millions of US dollars):

3 months ended Years ended

Jan. 31 Oct. 31
1983 1982 1982 1981
Net sales 313.3 480.6 2058.1 2646.3
Operating loss 85.3 54.7 205.0 218.2
Net loss 94.4 73.5 413.2 194.8
Cash flow from operations
(excludes finance
subsidiaries) (5.7) (47.0) 21.4 27.3

l p. 3 of the Annual Report included a separate section entitled “Financial Restructuring”,

which-after describing the 1981 refinancing which was completed in July 1981-continued
 Massey-Ferguson’s visible accounting system 37

as follows:

‘“lt was anticipated that this refinancing would provide a bridge to the expected
improvement in market conditions in the farm machinery industry. However the
market recession continued throughout 1981 and 1982 in an accelerated manner and
the benefits of the refinancing were eroded. During this period, the Company
declared as its number one priority a policy of cash generation and conservation
despite its effect on earnings. As a result, in both 1981 and 1982 the Company
recorded positive cash flows.
In early 1982 the Company prepared a further integrated operating and financial
restructuring program. The operating restructuring was designed to reduce the costs
of operations to a level which would enable the Company to break even in the
current depressed market conditions. The program, which will be completed in 1983,
principally involves the closure of three manufacturing plants in Detroit, U.S.A.; the
down sizing of plants in North America and Europe; the sale of the Company’s
interests in Argentina; and the divestment of a majority interest in the Brazilian
subsidiary.
The financial restructuring program was successfully concluded in March, ‘I983
and will result in cash savings of $520 million.. .‘I.

The special section then went on to describe the new refinancing, the second major restructuring
in 2 years.

1983 (Year End 31 January 1984)

0 Results (in millions of US dollars):
Year ended 3 months ended 31 Jan.
31 Jan./84 31 Oct./82 1983 1982
Net sales 1535.0 2058.1 313.3 480.6
Operating loss 47.8 205.0 85.3 54.7
Net loss 68.0 413.2 94.4 73.5
Cash flow from operations
(excluding finance subsidiaries) 44.8 21.4 (5.7) (47.0)
0 The comparisons throughout the 1983 Annual Report are between the year ended 31 January
1984 and the year ended 31 October 1982. Why not use the year ended 31 January 1983 as
the comparative year?
0 Top management commented on the year in the shareholders’ letter as follows (Annual
Report, p. 2): “In 1983 we essentially completed the first phase of our long-term strategic
plan. Massey-Ferguson has been resized and restructured in response to lower levels of
world-wide demand for farm and industrial machinery and diesel engines. During the past
year, our Company’s recovery accelerated, setting in place a solid foundation for the future.
We are now poised to restore profitability.
With a break-even point nearly half the 1977 level, we are capable of continuing to improve
our financial performance even if the marketplace remains at its depressed 1983 volumes.“.

1984 (Year End 31 January 1985)

l The company intends to change its name to ‘Varity Corporation’, since “The transition to a
new corporate identity reflects the Company’s new strategic priorities and its desire to avoid
confusion among customers, shareholders and others when it is associated with business
interests unrelated to agriculture.
In the process of adopting a new name, the Company is assigning its present name in
perpetuity to its farm machinery and other agriculture related businesses.” (Annual Report,
inside front cover).
* Results, in millions of US dollars:
FY 1984 FY 1983
Net sales 1468.8 1535.0
Net income (loss) 7.2 (68.0)
Cash flow from operations 86.9 44.8
38 J. Amernic
. The shareholders’ letter (Annual Report, p. 2) noted: “Massey-Ferguson returned to
profitability in 1984. It was our first profit since 1979 and it was achieved in a largely
unfriendly sales climate. , . . We have fought our way back to profitability in a hostile market
environment characterized by chronic oversupply and lagging demand.
. . . One year ago, on these pages, we promised you that we would make substantially more
progress in 1984. We did.“.

1985 (Year End 31 January 1986)

l Results, in millions of US dollars:
FY 1985 FY 1984
Net sales-continuing operations 1288.4 1293.6
-discontinued operations ___121.3 __175.0
1409.7
Income (loss) ___ -1468.6
from continuing operations
(before inc. tax) 36.6 55.6
income tax provision (12.7) (17.8)
inc. tax recovery re
discontinued operations 15.4 22.8
loss from discontinued operations
(before tax) (35.4)
___ -(53.4)
Net income 3.9 7.2
_____
l In the shareholders’ letter for this year, MF top management focused on their determination
to diversify (Annual Report, p. 2):

“We are intent on diversification. With our restructured balance sheet, we are
actively preparing to reduce our dependence on the agricultural cycle.”

A key part of MF’s third restructuring in 5 years was the deconsolidation of the combines
business, as described further in the shareholders’ letter (p. 2):

“This development . . was a central element in our restructuring. The decision was
financially imperative. Yet it should not be construed as more than that. Through our
substantial investment in the ongoing combines business, we remain committed to
the manufacture and distribution of grain harvesting machinery and to the support of
these products in the field.. .“.

l In the “Review of Restructuring Plan” (Annual Report, p. 5), president Vincent D. Laurenzo
described the restructuring plan as follows”:

“During 1985 it became increasingly clear that mounting losses by the Combines
Division were threatening the recovery of the Company’s other businesses. Hit by a
record plunge in industry demand, the Division was losing approximately $55 million
annually.
To resolve this urgent problem, the Company decided that the Division should be
recapitalized as a new legal entity, Massey Combines Corporation, and separated
from Massey-Ferguson Limited. These steps were considered essential to the future
success of the Company.
The Governments of Canada and Ontario, as holders of Cdn $200 million Series D
preferred shares, agreed to exchange Cdn $150 million of these shares for preferred
shares in the new business. Lenders to the Company’s operating subsidiaries in
North America agreed to transfer a portion of their loans to enable the new entity to
fund internally the cost of rationalization actions needed to return it to viability.
These actions are expected to further reduce the break-even sales level of Massey
Combines Corporation and strengthen its ability to continue operations pending
recovery of market demand.“.

0 In the “Financial Review” (Annual Report, p. 14) it was noted that since MF had just a 45%
interest in the newly created combines entity, “{a}ccordingly, the Company’s consolidated
net income for the year ended January 31, 1986 reflects the results of the Combines business
 Massey-Ferguson’s visible accounting system 39

for the nine months ended October 31, 1985 as discontinued operations.” Massey Combines
Corporation (MCC) subsequently went out of business in 1988; workers whose pension and
other entitlements had been transferred from MF to MCC stood to bear significant losses. An
illustration of the impact of the MCC deconsolidation is provided by the following excerpt
from the Toronto Star of 14 September, 1988 (p. D3), the headline of which was
“Restructuring of Varity Corp. labelled ‘sham”‘:

“A Canadian union official has accused Varity Corp. of engaging in a ‘sham’

restructuring that supplied it with capital for acquisitions but stripped workers and
retirees of health and welfare benefits.
Jack Tubman, a national representative of the Canadian Auto Workers, said in a
telephone interview this week that the union would seek a court order within two
weeks to force Varity to restore the lost benefits to 5,100 members in Toronto and
Brantford ...
J. R. Nowling, a spokesman for Varity, denied the 1986 restructuring was designed
to free Massey-Ferguson of its labor obligations, saying, ‘The purpose was to help
the business survive in a very difficult environment.’
. . . Varity, a manufacturer of farm machinery, is what remains of the former
Massey-Ferguson Ltd., based in Toronto. In its third major restructuring in five
years, Massey Ferguson was broken into two parts, Varity and Massey Combines
Corporation. After the deal, Varity held a 45 per cent interest in Massey Combines. .I
Most of those who lost benefits never worked for Massey Combines, but in the
restructuring their benefits had been pooled with those of the new company.“.

* A restructuring of debt and equity were the other two elements of the 1986 restructuring plan.

1986 (Year Ended 31 January 1987)

e Results, in millions of US dollars:

FYI986 FY1985
Net sales-continuing operations 1359.3 1288.4
-discontinued operations 121.3
1359.3 1409 7
Net income (loss) (23.3) 3.9
Cash provided by operations 52.0 44.3

* The inside front cover of the 1986 Annual Report noted: “Varity Corporation is a diversified
industrial holding company.. .“, and the shareholders’ letter (Annual Report, p. 4) asserted
I, . . . we are becoming a global enterprise composed of autonomously managed
businesses. . .‘I. By fiscal year 1986, Farm and Industrial Machinery comprised 69.2% of net
sales, significantly down from the 1978 percentage of 83.0%.

1987 (Year Ended 31 January 1988)

* Results, in millions of US dollars:

FY 1987 FY 1986
Net sales 1948.9 1359.3
Income (loss) before
extraordinary items 50.6 (23.3)
Extraordinary items (46.1)
Net income (loss) 4.5 (23.3)
Cash provided by operations 156.5 52.0

e The inside back cover of the 1987 Annual Report noted that “Varity Corporation is a
management holding company based in Canada.. .“. Farm and Industrial Machinery declined
to 58.0% of net sales (from 69.2% in fiscal vear 1986).
0 The shareholders’ letter commented on the operational and strategic improvements in 1987
as follows (Annual Report, p. 2):

“We made substantial progress in 1987. Perhaps the most important development in
40 J. Amemic

terms of value for shareholders was a vigorous upturn in sales and operating
performance; as the year progressed, it became increasingly apparent that our
tenacious efforts to reduce costs, improve productivity and hone our competitive
skills were beginning to yield tangible rewards.. ..
Progress in 1987 was strategic as well as operational. We raised approximately
U.S. $77.5 million with a well-received offering of Class 1 convertible preferred
shares, our first such equity issue in many years. We disposed of surplus assets
. . . for proceeds of approximately $79 million. We strengthened our balance sheet,
most emphatically by reducing long-term debt $120 million and by raising sharehol-
ders’ equity through profitability and our recent equity issue.. ..
Massey Combines’ inability to remain operational imposed stiff financial and human
costs. Varity held 45% of the combines firm’s equity, plus notes valued at $32 million
when fiscal 1987 began, plus certain contractual obligations. To account for these
items, we established a provision on our books amounting to $60 million. This
extraordinary provision largely offsets our operating gains.
This was, of course, a non-recurring event which will not detract from the
underlying earnings capabilities of our ongoing operations.. . .
We have completed a demanding transitional phase in our long history.“.

Varity Corporation: Current Situation:

l Securities firms have begun to follow Varity again, after a hiatus of several years; for
example, Prudential Bathe Securities initiated coverage on 30 March 1988 rating the stock as
“undervalued” because of improving crop prices, strengthening farm land values and
Varity’s strong cash position enabling it to make a major non-agricultural-related acquisition
in the US, partly in order to take advantage of its huge tax-loss carryforwards.

Appendix 2. Selected Excerpts from 1985 Annual Report Footnotes

Footnote 2: Restructuring Plan

In March 1986 the Company’s shareholders passed resolutions approving the Restructuring Plan
which comprised three major interrelated components described below. The Plan agreements
between the Company, its lenders, various Governments and other parties provided that such
agreements would become effective as of certain earlier dates. Accordingly, the consolidated
financial statements give effect to the various aspects of the Restructuring Plan as of their
respective effective dates.

(i) Disposal of the Combines division The Combines division manufactured and distributed a
range of combine harvesting equipment and related components and operated a found.,y
business. The business of this division was transferred to Massey Combines Corporation (MCC)
effective as of November 2, 1985. In summary the related transactions were as follows:

Transfer to MCC of the Combines division business, assets and liabilities (other than
long-term debt) with an aggregate net book value of $296.2 million.
Transfer of related long-term debt of $206.7 million to MCC and the issue of 12 year secured
notes (MCC Notes) to lenders evidencing such debt.
Agreement by the lenders to MCC to a concessionary interest rate on the MCC Notes of 6.5%
plus contingent interest at the rate of 1% for every $10.0 million of MCC earnings in any fiscal
year before such contingent interest. The fair value of the contribution by the lenders of the
interest rate reduction on the MCC Notes was estimated to be $20.4 million.
Issue of MCC Common Shares as partial consideration for the business and net assets
purchased.
The restructuring of MCC Common Shares into MCC Common and MCC Preferred Shares.
Transfer to the Governments of Canada and Ontario of the Company’s investment in’the MCC
Preferred Shares as part of the restructuring of the Company’s share capital as described in
(iii) below.
Transfer to the Government of Canada of 20% of the MCC Common Shares.
Transfer of 35% of MCC Common Shares to a MCC lender in consideration for various
concessions in connection with the Restructuring Plan.
Acquisition of $60.5 million principal amount of MCC Notes held ‘by the lendem in exchange
for the issue of 3 025 000 Class 1 Series A Shares of the Company with a stated value of $60.5
million.
 Massey-Ferguson’s visible accounting system 41

The effect of the foregoing transactions and determination of the residual value of the Company”s
investment in MCC can be summarized as follows:

Transfer of business and net assets of Combines

division to MCC $296.2
Assumption of related debt by MCC (net of
interest rate concessions of $20.4 million) (186.3)
Exchange of MCC Preferred Shares on elimination of
the Company’s former Series D Preferred Shares ( 109.8)
Face value of MCC Notes acquired in connection with
the issue of Class 1 Series A Preferred Shares 60.5
Deferral of gain arising on interest rate concessions
and reversal of accruals no longer required on
disposal of Combines division (28.4)
Residual value of investment in MCC $32.2
Represented by:
MCC common shares $0.1
MCC Notes 32.1
$32.2

The Company’s equity investment represents a 45% minority shareholding and MCC was
therefore deconsolidated with effect from November 2, 1985.

(ii) Debt Restructuring The restructuring of the Company’s debt consisted of debt to equity
conversions, transfer of debt to a finance subsidiary and debt rescheduling, all effective
January 31, 1986. A summary of the principal transactions follows:
* $93.3 million of debt was converted into 4578 000 Class 1 Series A Shares and 801 567
common shares with a stated value of $91.7 million and $1.6 million respectively.
Unamortized costs relating to the converted debt of $5.1 million were charged to contributed
surplus.
* $75.0 million of iong-term debt of a consolidated U.S. subsidiary was transferred to the U.S.
finance subsidiary.
* A substantial ,portion of the remaining debt was rescheduled and the maturities extended, as
described in Note 8.

(iii) Share Capital Restructuring The restructuring of the Company’s share capital comprised the
following transactions, all of which were effective as of January 31, 1986:

* 1458 500 Series A Preferred Shares and 2 197 500 Series 8 Preferred Shares with a stated
capital of $35.7 million and $55.9 million respectively on which there were dividend arrears of
$10.2 million and $15.1 million respectively at January 31, 1986 were changed into 28 532 155
Common Shares of the Company. Applicable foreign currency exchange gains of $27.3
million have been credited to contributed surplus.
* 8 000 000 Series D Preferred Shares were changed into:
2 000 000 Class II Series A Shares with a stated value of $36.6 million and;
6000 000 Class II Series B Shares, which were subsequently purchased for cancellation in
exchange for:
(i) the Company’s investment in MCC Preferred Shares with a stated value of $109.8
million;
(ii) 7.2 million Common Shares of the Company with a stated value of $15.3 million; and
(iii) 12.8 million common share purchase warrants exercisable up to May, 31, 1991 at
Cdn. $5.60 per Common Share.
0 The foreign currency exchange gain of $4.3 million arising on the elimination of the’series D
Preferred Shares was credited to contributed surplus.
0 The stated capital of the Series C and Series E Preferred Shares was reduced by $121.1
million and’$70.8 million respectively by transfer to contributed surplus.
0 ‘The Series :C and Series E Preferred Shares were changed into 10 176 000 Class II ;Series A
Shares with’ a stated value of $4.9 million and a value in the event of liquidation of the
Company of Cdn. $254.4 million.
0 $28.8 million of :Other Paid-in Capital was converted to 15 614 230 Common Shares.
0 The stated :capital of the Common Shares was reduced by $119.5 million by tra’nsfer to
contributediNsurplus.
42 J. Amernic

l The estimated costs of the Restructuring Plan of approximately $9.1 million were charged to
contributed surplus ($5.2 million) and retained earnings ($3.9 million). (See Note 14(a)).

Footnote 4: Investment in Associate Companies

The investment in Associate companies consists of the following:
January 31
1986 1985
Investment in common shares of
various comaanies $35.5 $34.5
Investment in MCC Note (see Note 2(i)) 32.1
- -
$67.6 $34.5
- -
The investment in common shares includes the Company’s 45% interest in MCC which is
carried at a nominal value following the Restructuring Plan (See Note 2(i)). The Company has no
obligations to invest additional equity capital in MCC and has not given any guarantees to MCC
lenders. Accordingly, the Company has not recorded its share ($17.6 million) of losses of MCC for
the period November 2, 1985 to January 31, 1986 and will not recognize its share of any future net
income of MCC, until such accumulated share exceeds its share of accumulated unrecorded
losses.
The MCC Notes are secured by a general pledge on the assets of MCC. The Notes earn a
concessionary rate of interest of 6.5% (see Note 2(i)) and are to be repaid during the period
1988-l 998.
The Company has signed several technical and administrative agreements for exchange of
services with MCC including the provision of retail financing through the Company’s North
American Finance Subsidiaries. The consolidated statements include $3.9 million due from MCC
for such services to January 31, 1986.
The Company has certain obligations in the event of the bankruptcy or liquidation of MCC as
more fully described in Note lO(ii).
The summarized balance sheet and the summarized statement of operations of MCC are
provided below:
(a) Summarized Balance Sheet- January 31, 1986
Current Assets $242.2
Fixed and other assets 71 5
Total Assets @iF&
Current Liabilities
Long-term notes 183’9
Total Liabilities d246
Shareholders’ Equity
Preferred Shares 109.8
Common Shares
Deficit (309::)
Equity adjustment from foreign
currency translation (3.9)
Total Liabilities and Shareholders’ Equity $313.7
(b) Summarized Statement of Operations-for the
three months ended 31 January 1986
Net sales $13.6
Expenses 47.1
Interest on long-term notes
Net Loss 3%
The net loss of MCC for the three months ended January 31, 1986 reflected low sales volume
because of factory shut-down and high expenses relating to sales incentive costs as MCC acted to
reduce levels of inventory and dealer receivables.
MCC will continue to face the risks associated with a depressed and competitive combine
harvester market. While in the longer term its viability is dependent on the stabilization and
eventual upturn in that market, management believes that MCC has sufficient resources to fund
rationalizatioh actions and expected operating losses in the forthcoming year. It is not presently
foreseen that the Company will incur any material loss with respect to its investment in MCC.
 Massey-Ferguson’s visible accounting system 43

Footnote 10: Contingent Liabilities and Commitments

(a) Covenants, Undertakings and Compliance
(i) Most of the agreements under the Restructuring Plan provide for covenants by Massey-
Ferguson Limited on a consolidated basis as well as individually by the Company and its
principal subsidiaries (including Finance Subsidiaries), such that they have each agreed to
maintain assets and net worth at specified relationships to their respective indebtedness
and to maintain certain minimum levels of working capital and net worth.
Massey-Ferguson Limited has also guaranteed a major portion of the borrowings of its
subsidiaries. Substantially all of the net assets of the Company are held in subsidiaries and
are restricted against transfer to Massey-Ferguson Limited, under the covenants contained
in the Restructuring Plan agreements. The agreements also contain provisions so that a
default under any one agreement may result in an acceleration of debt covered by that
agreement and through various cross-default provisions may cause acceleration of
substantially all indebtedness (including that of the Finance Subsidiaries).
The covenants contained in the Restructuring Plan agreements are similar but generally
less onerous than those contained in earlier refinancing agreements under which certain
events of non-compliance occurred from time to time up to the completion of the
Restructuring Plan. Under the Restructuring Plan the Company has obtained a waiver of all
events of non-compliance relating to the earlier refinancing agreements.
The Company is presently and believes it will remain in compliance with the covenants
and undertakings contained in the Restructuring Plan agreements.
(ii) In connection with the Restructuring Plan, the Company has given undertakings to the
Governments of Canada and Ontario as follows:
1. The Company will invest at least Cdn. $40 million in incremental projects in Canada by
May 1, 1990.
2. If MCC does not maintain an eventual level of 1500 permanent jobs annually by 1993
the Company will be required either to create and maintain such jobs or to pay the
Governments Cdn. $30 000 for each job which is not maintained.
3. In certain circumstances (essentially in the event of liquidations or winding-up of MCC)
within a defined period of time (about two years from the commencement of
manufacturing operations) the Company has undertaken to pay the trustees of the
hourly rated employees pension plan transferred to MCC in respect of the unfunded
liability of such plan up to maximum of U.S. $26.7 million (Cdn. $38.0 million). The
Company has pledged its MCC Notes (face value of U.S. $60.5 million) as collateral for
payment of such indemnity.