Berkshire Hathaway 2000 Annual Report Download - page 31

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Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting polices and practices (Continued)
(j) Losses and loss adjustment expenses
Liabilities for unpaid losses and loss adjustment expenses represent estimated claim and claim settlement
costs of property/casualty insurance and reinsurance contracts. The liabilities for losses and loss
adjustment expenses are recorded at the estimated ultimate payment amounts, except amounts arising
from certain reinsurance assumed businesses are discounted. Estimated ultimate payment amounts are
based upon (1) individual case estimates, (2) estimates of incurred-but-not-reported losses, based upon
past experience and (3) reports of losses from ceding insurers.
The estimated liabilities of certain workers’ compensation claims assumed under reinsurance contracts and
liabilities assumed under structured settlement reinsurance contracts are carried in the Consolidated
Balance Sheets at discounted amounts. Discounted amounts pertaining to reinsurance of certain
workers’ compensation risks are based upon an annual discount rate of 4.5%. The discounted amounts
for structured settlement reinsurance contracts are based upon the prevailing market discount rates when
the contracts were written and range from 5% to 13%. The periodic accretion of discounts is included in
the Consolidated Statements of Earnings as a component of losses and loss adjustment expenses. Net
discounted liabilities were $1,531 million at December 31, 2000 and $1,529 million at December 31,
1999.
(k) Deferred charges-reinsurance assumed
The excess of estimated liabilities for claims and claim costs over the consideration received with respect to
retroactive property and casualty reinsurance contracts that provide for indemnification of insurance risk
is established as a deferred charge at inception of such contracts. The deferred charges are subsequently
amortized using the interest method over the expected settlement periods of the claim liabilities. The
periodic amortization charges are reflected in the accompanying Consolidated Statements of Earnings as
losses and loss adjustment expenses. The unamortized balance of deferred charges is included in other
assets and was $2,593 million at December 31, 2000 and $1,518 million at December 31, 1999.
(l) Reinsurance
Provisions for losses and loss adjustment expenses are reported in the accompanying Consolidated
Statements of Earnings after deducting amounts recovered and estimates of amounts that will be
ultimately recoverable under reinsurance contracts. Reinsurance contracts do not relieve the ceding
company of its obligations to indemnify policyholders with respect to the underlying insurance and
reinsurance contracts. Estimated losses and loss adjustment expenses recoverable under reinsurance
contracts are included in receivables and totaled $2,997 million and $2,331 million at December 31, 2000
and 1999, respectively.
(m) Foreign currency
The accounts of several foreign-based subsidiaries are measured using the local currency as the functional
currency. Revenues and expenses of these businesses are translated into U.S. dollars at the average
exchange rate for the period. Assets and liabilities are translated at the exchange rate as of the end of the
reporting period. Gains or losses from translating the financial statements of foreign-based operations are
included in shareholders’ equity as a component of other comprehensive income. Gains and losses
arising from other transactions denominated in a foreign currency are included in the Consolidated
Statements of Earnings.
(n) Accounting pronouncements to be adopted subsequent to December 31, 2000
In 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In June
1999, the FASB issued SFAS No. 137, which delayed the effective date for implementing SFAS No.
133 until the beginning of 2001. In June 2000, the FASB issued SFAS No. 138, which amended certain
provisions of SFAS No. 133 with the objective of easing the implementation difficulties expected to
arise. Berkshire adopted SFAS No. 133 as amended by SFAS No. 138 as of the beginning of 2001 and
does not anticipate that the adoption of these new standards will have a material effect on its financial
position or results of operations.
(2) Significant business acquisitions
During 2000, Berkshire initiated and/or consummated eight significant business acquisitions. Six of the
acquisitions were completed in 2000 and the other two were completed in early 2001. Information concerning seven of
these acquisitions follows. Information concerning the other acquisition is contained in Note 3 (Investment in
MidAmerican Energy Holdings Company).