BERKSHIRE HATHAWAY\'S MANY INVESTMENTS As of this writing (February 2014), Warre
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Question
BERKSHIRE HATHAWAY'S MANY INVESTMENTS
As of this writing (February 2014), Warren Buffett is the fourth-richest man in the world, worth a staggering
$58.5 billion. He is also the chairman, CEO, and primary shareholder of Berkshire Hathaway Inc. Over the
past 48 years, Berkshire has grown at an average rate of 19.7 percent annually. Warren Buffett has achieved
this success through his unparalleled business sense regarding investments and acquisitions of other
companies.
Berkshire Hathaway was originally a textile manufacturing company. In 1962, Warren Buffett and his
partners began buying large blocks of Berkshire stock. Within five years, Buffett began expanding into the
insurance industry, and in 1985 the last of Berkshire's textile operations was shut down. In the late 1970s,
Berkshire began acquiring stock in GEICO insurance and in January 1996 bought GEICO outright. While
Berkshire has extensive insurance holdings, it has not focused its investment activities solely on insurance.
Since Buffett took the helm in the 1960s, Berkshire has made many acquisitions. Look at the list of selected
Berkshire holdings as of the end of 2013 (on the next page). Do you recognize any of these companies?
Each item in Berkshire's portfolio has to be accounted for individually. For example, Comdisco Holdings and
Graham Holdings Company are accounted for as equity method investments, while Walmart and American
Express are classified as available-for-sale investments. Berkshire consolidates the fully owned companies
such as Wesco Financial and See's Candies. In addition, companies like GEICO have many subsidiaries of
their own. As you can imagine, accounting for investments at Berkshire can be very complex. This chapter
focuses on issues related to the accounting for investments.
Case Questions
A. What three accounting rules guide the external reporting of intercompany investments? (briefly)
B. What are your thoughts on consolidation challenges Berkshire-Hathaway faces in accounting for these complex ownership structures?
Explanation / Answer
Answer A.
The inaugural edition of our accounting and financial reporting guide, Consolidation and equity method of accounting, addresses the accounting for consolidation matters under U.S. GAAP reflecting the latest standards. The guide discusses the consolidation framework and equity method of accounting,
The consolidation framework
Variable interest entities (VIEs)
Voting interest entities (VOEs)
Equity method investments
Joint ventures (JVs)
Intercompany transactions
Answer B.
Berkshire Hathaway was originally a textile manufacturing company. In 1962, Warren Buffett and his
partners began buying large blocks of Berkshire stock. Within five years, Buffett began expanding into the insurance industry, and in 1985 the last of Berkshire's textile operations was shut down. In the late 1970s, Berkshire began acquiring stock in GEICO insurance and in January 1996 bought GEICO outright. While Berkshire has extensive insurance holdings, it has not focused its investment activities solely on insurance.
Since Buffett took the helm in the 1960s, Berkshire has made many acquisitions. Look at the list of selected Berkshire holdings as of the end of 2013 (on the next page).
Each item in Berkshire's portfolio has to be accounted for individually. For example, Comdisco Holdings and Graham Holdings Company are accounted for as equity method investments, while Walmart and American Express are classified as available-for-sale investments. Berkshire consolidates the fully owned companies such as Wesco Financial and See's Candies. In addition, companies like GEICO have many subsidiaries of their own.
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