Berkshire's Matter of Trust
To invest in Berkshire Hathaway Inc. means to give Warren Buffett the benefit of the doubt. That's both the beauty and potential drawback of the $392 billion company.
Take this section of Buffett's annual letter to shareholders in February discussing certain adjustments made to operating expenses within Berkshire's manufacturing division, which comprises the recently acquired Precision Castparts business:
"We present the data in this manner because Charlie (Munger) and I believe the adjusted numbers more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP figures. I won’t explain all of the adjustments -- some are tiny and arcane -- but serious investors should understand the disparate nature of intangible assets. Some truly deplete in value over time, while others in no way lose value."
The U.S. Securities and Exchange Commission wasn't satisfied with this "just-trust-me" precept and sent a letter to Berkshire on Sept. 8 asking for clarification on two things: how the unit's net earnings were impacted by such adjustments, and why $17 billion of its customer relationships and trade names can be determined to have indefinite lives.
So as not to bore you with the accounting details, here's the short version of the Oct. 6 response from Berkshire CFO Marc Hamburg, which was released Monday along with the SEC's initial query: First, the acquisition accounting expenses were considered corporate expenses. And second, as a components maker for the "oligopoly" that is the aerospace industry, Precision Castparts' customers aren't going anywhere for the foreseeable future, meaning they shouldn't lose value and will continue contributing to the business's cash flow indefinitely.
Fair enough. No juicy impropriety here, and in fact the SEC said in an Oct. 21 response that it had completed its review of the matter. However, it does shine a light on an issue that will most certainly become a point of contention when Buffett, 86, is no longer running the conglomerate.
more at: Bloomberg |
