Berkshire Hathaway 2002 Annual Report Download - page 34

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(1) Significant accounting policies and practices (Continued)
(g) Property, plant and equipment
Property, plant and equipment is recorded at cost. Depreciation is provided principally on the straight-line
method over estimated useful lives as follows: aircraft, simulators, training equipment and spare parts, 4
to 20 years; buildings and improvements, 10 to 40 years; machinery, equipment, furniture and fixtures, 3
to 20 years. Leasehold improvements are amortized over the life of the lease or the life of the
improvement, whichever is shorter. Interest is capitalized as an integral component of cost during the
construction period of simulators and facilities and is amortized over the life of the related assets.
(h) Goodwill of acquired businesses
Goodwill of acquired businesses represents the difference between purchase cost and the fair value of net
assets of acquisitions accounted for under the purchase method. Prior to 2002, goodwill from each
acquisition was generally amortized as a charge to earnings over periods not exceeding 40 years, and
was reviewed for impairment if conditions were identified that indicated possible impairment.
Effective January 1, 2002, Berkshire adopted Statement of Financial Accounting Standards (SFAS) No.
142 Goodwill and Other Intangible Assets. SFAS No. 142 eliminated the periodic amortization of
goodwill in favor of an accounting model that is based solely upon impairment tests. Goodwill is
reviewed for impairment using a variety of methods at least annually, and impairments, if any, are
charged to operating earnings.
(i) Revenue recognition
Insurance premiums for prospective property/casualty insurance and reinsurance and health reinsurance
policies are earned in proportion to the level of insurance protection provided. In most cases, premiums
are recognized as revenues ratably over their terms with unearned premiums computed on a monthly or
daily pro rata basis. Premium adjustments on contracts and audit premiums are based on estimates
made over the contract period. Consideration received for retroactive reinsurance policies is recognized
as premiums earned at the inception of the contracts. Premiums for life reinsurance contracts are earned
when due. Premiums earned are stated net of amounts ceded to reinsurers.
Revenues from product sales are recognized upon passage of title to the customer, which coincides with
customer pickup, product shipment, delivery or acceptance, depending on terms of the sales
arrangement. Service revenues are recognized as the services are performed. Services provided
pursuant to a contract are either recognized over the contract period, or upon completion of the elements
specified in the contract, depending on the terms of the contract.
(j) Insurance premium acquisition costs
Certain costs of acquiring insurance premiums are deferred, subject to ultimate recoverability, and charged
to income as the premiums are earned. Acquisition costs consist of commissions, premium taxes,
advertising and other underwriting costs. The recoverability of premium acquisition costs, generally,
reflects anticipation of investment income. The unamortized balances of deferred premium acquisition
costs are included in other assets and were $1,303 million and $1,029 million at December 31, 2002 and
2001, respectively.
(k) 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 with respect to losses that have occurred
as of the balance sheet date. The liabilities for losses and loss adjustment expenses are recorded at the
estimated ultimate payment amounts, except that amounts arising from certain reinsurance businesses
are discounted as discussed below. Estimated ultimate payment amounts are based upon (1) individual
case estimates, (2) reports of losses from ceding insurers and (3) estimates of incurred but not reported
(IBNR) losses.
The estimated liabilities of 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 workers compensation risks
are based upon an annual discount rate of 4.5%, which is the same discount rate used under statutory
accounting principles. 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%.
Payments under such contracts are characterized as fixed and determinable. The periodic discount
accretion is included in the Consolidated Statements of Earnings as a component of losses and loss
adjustment expenses.