Professor Elam

Tuesday Oct 26 2010

Financial Accounting GAAP requires an adjustment to market when the value of securities held rises or falls above cost. Or at least that is the idea of Trading Securities and Available for Sale Securities. But 

Berkshire Hathaway did not take any mark to market losses on Kraft or US Bancorp, both of which are below BRK's cost. So, will the SEC do anything or is BRK just a special case? 

Here is the BRK response.

As of December 31, 2009, approximately 77% of the $1,864 million of unrealized losses in equity investments that were in a continuous unrealized loss position for more than twelve months was concentrated in two issuers, Kraft Foods ($789 million or 18% of cost) and U.S. Bancorp ($646 million or 27% of cost). These securities were principally acquired during 2006 and 2007.

As a result of the housing and credit crises and near collapse of the financial markets in 2008, the market prices for substantially all of Berkshire’s investments in equity securities declined, including Kraft Foods and U.S. Bancorp. This was consistent with the stock market in general. While stock prices for these two companies at December 31, 2009 did not change significantly as compared to December 31, 2008, each company reported significant earnings despite the prevailing economic conditions.

At December 31, 2009, we reviewed publicly available information on these companies and concluded that the underlying businesses of Kraft Foods and U.S. Bancorp were each financially sound and continued to possess significant future earnings potential, and that it was likely that their stock prices would eventually exceed our original cost. We also concluded that the market price declines in Kraft Foods (18% of cost) and U. S. Bancorp (27% of cost) were not extraordinary given the economic and other conditions prevalent in 2008 and 2009.

At December 31, 2009, we further concluded we had the ability and intent to hold these securities to their anticipated recovery. We believe it is reasonably possible that the market prices of Kraft Foods and U.S. Bancorp will recover to our cost within the next one to two years assuming that there are no material adverse events affecting these companies or the industries in which they operate. As of March 31, 2010, the market prices of Kraft Foods and U.S. Bancorp increased by 11.3% and 15.0%, respectively, since December 31, 2009. Historically, Berkshire has demonstrated the ability to hold equity securities for very long periods and currently holds certain equity securities that were acquired over 20 years ago.

Based on the information presented above, we believe that our conclusions to not record other-than-temporary impairment charges on investments in an unrealized loss position for more than twelve consecutive months was appropriate and in accordance with ASC 320 and Topic 5M. We will continue to evaluate the unrealized losses in our investments in equity securities in future periods based on the information currently available and assess whether impairment losses should be appropriately considered other than temporary for financial reporting purposes.