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Warren Buffett decries accounting rule change that has made a mess of Berkshire's earnings

Sam Ro
Managing Editor

“I’ve warned you about the distortions,” Warren Buffett said of Berkshire Hathaway’s (BRK-ABRK-BQ1 earnings.

Berkshire’s net earnings came in at a whopping $21.7 billion or $13,209 per A share and $8.81 per B share. This compared to a $1.1 billion loss a year ago. During the period, Berkshire benefited from a $15.1 billion unrealized gain on its stock portfolio.

And unless you are well-trained in accounting, Buffett wants you to ignore that number.

“The bottom line figures are gonna be totally capricious,” he said at the 2019 Berkshire Hathaway Shareholders Meeting. “What I worry about is the interpretation ... I just hope nobody gets misled.”

“It’s really a shame that the rules got changed that way,” he added.

A recent change to generally accepted accounting principles (GAAP) by the Financial Accounting Standards Board (FASB) requires companies to account for short-term swings of their equity investments in their quarterly earnings. These are known as unrealized gains and losses — unrealized because these are paper losses, not actual losses (or realized gains and losses) that come from the sales of these securities.

2019 Berkshire Hathaway Shareholders Meeting

“That requirement will produce some truly wild and capricious swings in our GAAP bottom-line,” Buffett said in his 2017 letter to shareholders. “Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period. Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our operating performance. For analytical purposes, Berkshire’s ‘bottom-line’ will be useless.

“[N]either Berkshire’s Vice Chairman Charlie Munger nor I believe that rule to be sensible,” Buffett wrote on the first page of his 2018 letter to shareholders. “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.’”

So what are investors to do when they peruse the quarterly income statement of a company holding a lot of equity investments?

“Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety.”

Sam Ro is managing editor at Yahoo Finance. Follow him on Twitter: @SamRo

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