Potential Volatility Comes to Earnings: A Look at Berkshire Hathaway's Equity Investments

Based in Omaha, Nebraska, Berkshire Hathaway Inc. is a holding company that invests in many diverse businesses. The most significant of those are property and casualty insurance businesses, although the company owns businesses in the railroad, utilities, energy, and finance industries as well. The case focuses on accounting for investments at Berkshire Hathaway. The company adopted the new US guidance (ASU 2016-01) on accounting for investments in its 2018 10-K, and key excerpts from that report comprise much of the case. Students are asked to review Berkshire Hathaway's financial statements and the footnotes related to its investments, consider the method of accounting for those investments, and decipher their impact on the financial statements. Excerpt UVA-C-2426 Rev. Dec. 6, 2019 Potential Volatility Comes to Earnings: A Look at Berkshire Hathaway's Equity Investments It was mid-February 2019, and Maria rushed home. She knew that Warren Buffett's annual letter to shareholders had been posted to the Berkshire Hathaway Inc. (Berkshire Hathaway) website that morning, and she was anxious to see what Buffett, known as the "Oracle of Omaha," had to say about Berkshire Hathaway's 2018 performance. She walked hurriedly through the front door of her condo, opened her laptop, located the letter on the website, and printed a copy to read. Berkshire earned $ 4.0billion in 2018 utilizing generally accepted accounting principles (commonly called "GAAP"). The components of that figure are $ 24.8billion in operating earnings, a $ 3.0billion non-cash loss from an impairment of intangible assets (arising almost entirely from our equity interest in Kraft Heinz), $ 2.8billion in realized capital gains from the sale of investment securities and a $ 20.6billion loss from a reduction in the amount of unrealized capital gains that existed in our investment holdings. . . .