Berkshire Hathaway 2004 Annual Report Download - page 37

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Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(m) Deferred charges reinsurance assumed (Continued)
Changes to the expected timing and estimated amount of loss payments produce changes in the unamortized
deferred charge balance. Such changes in estimates are accounted for retrospectively with the net effect
included in amortization expense in the period of the change.
(n) 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 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.
(o) 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 $1,371 million and $1,278 million at December 31, 2004 and
2003, respectively.
(p) Foreign currency
The accounts of foreign-based subsidiaries are measured in most instances 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 accumulated other comprehensive
income. Unrealized gains or losses associated with available-for-sale securities are included 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.
(q) Deferred income taxes
Deferred income taxes are calculated under the liability method. Deferred tax assets and liabilities are
recorded based on differences between the financial statement and tax bases of assets and liabilities at
the enacted tax rates. Changes in deferred income tax assets and liabilities that are associated with
components of other comprehensive income, primarily unrealized investment gains, are charged or
credited directly to other comprehensive income. Otherwise, changes in deferred income tax assets and
liabilities are included as a component of income tax expense.
(r) Accounting pronouncements to be adopted in 2005
In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-
3 (“Accounting for Certain Loans or Debt Securities Acquired in a Transfer”) (“SOP 03-3”), which
specifies the accounting and disclosure requirements for loans or debt securities purchased in a transfer
where it is probable that the investor will be unable to collect all contractually required amounts due as a
result of deteriorated credit quality of the issuer. SOP 03-3 also addresses post-acquisition income
recognition with respect to such loans and debt securities. SOP 03-3 is effective for loans or debt
securities acquired in years beginning after December 15, 2004. For loans acquired in years beginning
before December 15, 2004, the provisions of SOP 03-3 related to changes in expected cash flows are to
be applied prospectively. The adoption of SOP 03-3 is not expected to have a material effect on
Berkshire’ s financial statements.
In March 2004 the Emerging Issues Task Force (“EITF”) ratified additional provisions of Issue No. 03-01,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The
provisions of EITF 03-01 ratified in March 2004: (a) define impairments of debt and equity securities
accounted for under SFAS 115, (b) provide criteria to be used by management in judging whether or not
impairments are other-than-temporary, and (c) provide guidance on determining the amount of an
impairment loss. These additional provisions were originally scheduled to be applied prospectively
beginning July 1, 2004. Subsequently, the effective date for applying items (b) and (c) above was
postponed in order to consider implementation issues. The postponed provisions are expected to
become effective during 2005. The adoption of the additional provisions of EITF 03-01 is not expected
to have a material effect on Berkshire’ s financial statements.