Berkshire Hathaway 2004 Annual Report Download - page 48

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(14) Income taxes (Continued)
Charges for income taxes are reconciled to hypothetical amounts computed at the U.S. Federal statutory rate in the
table shown below (in millions).
2004 2003 2002
Earnings before income taxes.................................................................................. $10,936 $12,020 $6,359
Hypothetical amounts applicable to above
computed at the Federal statutory rate .................................................................. $ 3,828 $ 4,207 $2,226
Tax effects resulting from:
Tax-exempt interest income.................................................................................. (59) (88) (109)
Dividends received deduction............................................................................... (116) (100) (97)
Net earnings of MidAmerican .............................................................................. (83) (150) (126)
State income taxes, less Federal income tax benefit................................................ 70 53 57
Foreign rate differences ........................................................................................... (41) (104) 59
Other differences, net .............................................................................................. (30) (13) 49
Total income taxes................................................................................................... $ 3,569 $ 3,805 $2,059
(15) Investment in Value Capital
Value Capital L.P., (“Value Capital”), a limited partnership, commenced operations in 1998. A wholly owned
Berkshire subsidiary is a limited partner in Value Capital. The partnership’ s objective is to achieve income and capital
growth from investments and arbitrage in fixed income investments. Profits and losses (after fees to the general partner)
are allocated to the partners based upon each partner’ s investment. As a limited partner Berkshire’ s exposure to loss is
limited to the carrying value of its investment. Berkshire does not guarantee any of Value Capital’ s liabilities and has
no control over decisions made by the management of Value Capital or those of its general partner.
Prior to January 1, 2004, Berkshire accounted for its investment in Value Capital pursuant to the equity method.
Effective January 1, 2004 and through June 30, 2004 Berkshire consolidated Value Capital as a result of the adoption of
FIN 46 because during that period Value Capital was deemed to be a variable interest entity (“VIE”) and Berkshire was
the primary beneficiary.
Since June 30, 2004, Value Capital accepted investments from new limited partners unrelated to Berkshire and
Value Capital redeemed $125 million of Berkshire’ s investment in December 2004 as permitted under the partnership
agreement. As a result, Berkshire’ s economic interest in Value Capital declined from approximately 90% at June 30,
2004 to approximately 62% as of December 31, 2004.
Consequently, Berkshire reevaluated its investment in Value Capital under FIN 46 and concluded that Value
Capital was no longer a VIE. Since Berkshire possesses no voting or similar rights or other rights that could otherwise
represent a controlling financial interest, Berkshire ceased consolidation of Value Capital as of July 1, 2004 and
resumed accounting for the investment under the equity method. The investment in Value Capital ($503 million as of
December 31, 2004 and $634 million as of December 31, 2003) is included in other assets of finance and financial
products businesses in the Consolidated Balance Sheets.
(16) Dividend restrictions – Insurance subsidiaries
Payments of dividends by insurance subsidiaries are restricted by insurance statutes and regulations. Without prior
regulatory approval, insurance subsidiaries may pay up to approximately $5.7 billion as ordinary dividends during 2005.
Combined shareholders’ equity of U.S. based property/casualty insurance subsidiaries determined pursuant to
statutory accounting rules (Statutory Surplus as Regards Policyholders) was approximately $48 billion at December
31, 2004 and $41 billion at December 31, 2003.
Statutory surplus differs from the corresponding amount determined on the basis of GAAP. The major differences
between statutory basis accounting and GAAP are that deferred charges reinsurance assumed, deferred policy
acquisition costs, unrealized gains and losses on investments in securities with fixed maturities and related deferred
income taxes are recognized under GAAP but not for statutory reporting purposes. In addition, statutory accounting for
goodwill of acquired businesses requires amortization of goodwill over 10 years, whereas under GAAP, goodwill is
subject to periodic tests for impairment.