Warren Buffett’s annual letter to Berkshire Hathaway shareholders came out last Saturday. It attracted the usual avalanche of media attention, but I recommend that you check out Kevin LaCroix’s particularly good write-up about it over on the “D&O Diary.” The letter contained its customary mix of insight and folksy charm, but it also once again featured a lot of griping about the Oracle of Omaha’s favorite hobby-horse, generally accepted accounting principles – specifically ASC Topic 321.
The fact that ASC 321 requires Berkshire Hathaway to mark many of its minority investments to market really frosts Buffett. He’s spilled a lot of ink on the topic – and its impact on the company’s bottom line – in each of his last 3 annual letters. Here’s an excerpt from the latest:
The adoption of the rule by the accounting profession, in fact, was a monumental shift in its own thinking. Before 2018, GAAP insisted – with an exception for companies whose business was to trade securities – that unrealized gains within a portfolio of stocks were never to be included in earnings and unrealized losses were to be included only if they were deemed “other than temporary.” Now, Berkshire must enshrine in each quarter’s bottom line – a key item of news for many investors, analysts and commentators – every up and down movement of the stocks it owns, however capricious those fluctuations may be.
Berkshire’s 2018 and 2019 years glaringly illustrate the argument we have with the new rule. In 2018, a down year for the stock market, our net unrealized gains decreased by $20.6 billion, and we therefore reported GAAP earnings of only $4 billion. In 2019, rising stock prices increased net unrealized gains by the aforementioned $53.7 billion, pushing GAAP earnings to the $81.4 billion reported at the beginning of this letter. Those market gyrations led to a crazy 1,900% increase in GAAP earnings!
Buffett’s position is that Berkshire’s a buy and hold investor, and he doesn’t think fluctuations in the value of its enormous stakes in Apple, Coca-Cola and other companies should run through its income statement. He says that just doesn’t reflect business reality for a company like his.
-John Jenkins, TheCorporateCounsel.net February 27, 2020