WARREN BUFFETT: The new accounting rule will produce 'wild and capricious swings in our bottom line'

  • Berkshire Hathaway CEO Warren Buffett released his annual letter on Saturday.
  • Buffett said a new Generally Accepted Accounting Principles (GAAP) rule has induced “wild and capricious swings” for the company’s profits, and that the swings will continue.
  • The letter comes one day after one of Berkshire’s holdings, food manufacturer Kraft Heinz, plunged 27% after reporting quarterly earnings.

Warren Buffett released his annual letter on Saturday, one day after shares of one of its largest holdings, Kraft Heinz, plunged 27% and led to a multi-billion dollar loss for Berkshire Hathaway.

The conglomerate earned $US4 billion in 2018, which Buffett broke up into four different slices at the top of his letter:

  • $US24.8 billion in operating earnings.
  • $US3 billion non-cash loss from an impairment of intangible assets – almost entirely a result of the company’s equity interest in Kraft Heinz.
  • $US2.8 billion in realised capital gains from selling off investments.
  • $US20.6 billion loss from a reduction in the amount of unrealized capital gains that existed in Berkshire’s investments.

“A new GAAP rule requires us to include that last item in earnings,” Buffett wrote, referring to generally accepted accounting principles (GAAP). “As I emphasised in the 2017 annual report, neither Berkshire’s Vice Chairman, Charlie Munger, nor I believe that rule to be sensible.”

He added: “Rather, both of us have consistently thought that at Berkshire this mark-to-market change would produce what I described as ‘wild and capricious swings in our bottom line.'”

Buffett said the “wild swings” in Berkshire’s quarterly profits would “inevitably continue” because the company’s nearly-$US137 billion equity portfolio would experience substantial one-day price swings of $US2 billion or more.

The new accounting rule, which Buffett lamented and warned investors about in his letter last year, meant those price fluctuations “must be dropped immediately to our bottom line.”

In the fourth-quarter of last year, a volatile period for the US stock market, Berkshire saw several sessions of gains or losses of more than $US4 billion, Buffett wrote.

He told shareholders last year that the new GAAP rule would “severely distort” the company’s future quarterly results.

“The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report to you,” he wrote in last year’s letter.

On Friday, shares of Kraft Heinz plunged 27%, to an all-time low, after the company disclosed the afternoon prior that it had received a subpoena from the Securities and Exchange Commission related to its accounting practices. The company also disclosed disappointing top and bottom line results and a $US15 billion charge related to the value of its Kraft and Oscar Mayer trademarks.

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