Berkshire Hathaway 2002 Annual Report Download - page 32

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BERKSHIRE HATHAWAY INC.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(1) Significant accounting policies and practices
(a) Nature of operations and basis of consolidation
Berkshire Hathaway Inc. (Berkshire or Company) is a holding company owning subsidiaries engaged
in a number of diverse business activities. The most important of these are property and casualty
insurance businesses conducted on both a primary and reinsurance basis. Further information regarding
these businesses and Berkshires other reportable business segments is contained in Note 18. Berkshire
initiated and/or consummated a number of business acquisitions over the past three years which are
discussed in Notes 2 and 3.
The accompanying Consolidated Financial Statements include the accounts of Berkshire consolidated with
the accounts of all of its subsidiaries and affiliates, including special purpose entities that Berkshire
controls as of the financial statement date. Normally control reflects the ownership of majority voting
interests. However, control can be attained when less than a majority voting interest is held. Factors
considered in determining whether control exists include whether Berkshire provides significant
financial support as a result of its authority to purchase or sell assets or make other operating decisions
that significantly affect the entitys results of operations or whether Berkshire bears a majority of the
financial risks. Intercompany accounts and transactions have been eliminated. Certain amounts in 2001
and 2000 have been reclassified to conform with the current year presentation.
(b) Use of estimates in preparation of financial statements
The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, estimates of unpaid losses and loss adjustment
expenses and related recoverables under reinsurance for property and casualty insurance are subject to
considerable estimation error due to the inherent uncertainty in projecting ultimate claim amounts that
will be reported and settled over a period of many years. In addition, estimates and assumptions
associated with the amortization of deferred charges reinsurance assumed, the determination of fair
value of invested assets and related impairments, and the determination of goodwill impairments require
considerable judgement by management. Actual results may differ from the estimates and assumptions
used in preparing the Consolidated Financial Statements.
(c) Cash equivalents
Cash equivalents consist of funds invested in money market accounts and in investments with a maturity of
three months or less when purchased.
(d) Investments
Berkshires management determines the appropriate classifications of investments in securities with fixed
maturities and equity securities at the time of acquisition and re-evaluates the classifications at each
balance sheet date. Berkshires investments in fixed maturity and equity securities are primarily
classified as available-for-sale, except for certain investments which are classified as held-to-maturity.
Held-to-maturity investments are carried at amortized cost, reflecting Berkshires intent and ability to
hold the securities to maturity. Available-for-sale securities are stated at fair value with net unrealized
gains or losses reported as a component of accumulated other comprehensive income.
Realized gains and losses, which arise when available-for-sale investments are sold (as determined on a
specific identification basis) or other-than-temporarily impaired are included in the Consolidated
Statements of Earnings. Berkshire reviews investments classified as held-to-maturity or available-for-
sale as of each balance sheet date with respect to investments of an issuer carried at a net unrealized
loss. If in managements judgement, the decline in value is other-than-temporary, the cost of the
investment is written down to fair value with a corresponding charge to earnings. Factors considered in
determining whether an impairment exists include: the financial condition, business prospects and
creditworthiness of the issuer, the length of time that the asset value has been less than cost, and
Berkshires ability and intent to hold such investments until the fair value recovers.