Berkshire Hathaway 2005 Annual Report Download - page 44

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(14) Income taxes (Continued)
Berkshire and its subsidiaries’ income tax returns are continuously under audit by U.S. Federal and various local and
international taxing authorities. Berkshire’ s consolidated U.S. Federal income tax return liabilities have been settled with the Internal
Revenue Service through 1998. Berkshire is also involved in income tax litigation in the U.S. with respect to certain issues in Federal
income tax returns dating back to 1988, in which a favorable ruling from the U.S. District Court was received in the fourth quarter of
2005. On February 16, 2006, the U.S. Government appealed this ruling to the United States Court of Appeals. Although the ultimate
resolution of these matters remains uncertain, Berkshire does not currently believe that the impact of potential audit adjustments will
have a material effect on its Consolidated Financial Statements.
Charges for income taxes are reconciled to hypothetical amounts computed at the U.S. Federal statutory rate in the table shown
below (in millions).
2005 2004 2003
Earnings before income taxes................................................................................................ $12,791 $10,936 $12,020
Hypothetical amounts applicable to above
computed at the Federal statutory rate ............................................................................... $ 4,477 $ 3,828 $ 4,207
Tax effects resulting from:
Tax-exempt interest income............................................................................................... (65) (59) (88)
Dividends received deduction ............................................................................................ (133) (116) (100)
Net earnings of MidAmerican............................................................................................ (183) (83) (150)
State income taxes, less Federal income tax benefit.............................................................. 84 70 53
Foreign rate differences......................................................................................................... 56 (41) (104)
Other differences, net ............................................................................................................ (77) (30) (13)
Total income taxes ................................................................................................................ $ 4,159 $ 3,569 $ 3,805
(15) 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 $6.7 billion as ordinary dividends during 2006.
Combined shareholders’ equity of U.S. based property/casualty insurance subsidiaries determined pursuant to statutory
accounting rules (Statutory Surplus as Regards Policyholders) was approximately $52 billion at December 31, 2005 and $48 billion at
December 31, 2004.
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.
(16) Fair values of financial instruments
The estimated fair values of Berkshire’ s financial instruments as of December 31, 2005 and 2004, are as follows (in millions).
Carrying Value Fair Value
2005 2004 2005 2004
Insurance and other:
Investments in fixed maturity securities....................................................... $27,420 $22,846 $27,420 $22,846
Investments in equity securities ................................................................... 46,721 37,717 46,721 37,717
Notes payable and other borrowings............................................................ 3,583 3,450 3,653 3,558
Finance and financial products:
Investments in fixed maturity securities....................................................... 3,435 8,459 3,615 8,648
Derivative contract assets ............................................................................ 801 4,234 801 4,234
Loans and finance receivables ..................................................................... 11,087 9,175 11,370 9,382
Notes payable and other borrowings............................................................ 10,868 5,387 10,865 5,499
Derivative contract liabilities....................................................................... 5,061 4,794 5,061 4,794
In determining fair value of financial instruments, Berkshire used quoted market prices when available. For instruments where
quoted market prices were not available, independent pricing services or appraisals by Berkshire’ s management were used. Those
services and appraisals reflected the estimated present values utilizing current risk adjusted market rates of similar instruments. The
carrying values of cash and cash equivalents, accounts receivable and payable, other accruals, securities sold under agreements to
repurchase and other liabilities are deemed to be reasonable estimates of their fair values.
Considerable judgment is necessarily required in interpreting market data used to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair
value.