Berkshire Hathaway 2006 Annual Report Download - page 45

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Notes to Consolidated Financial Statements (Continued)
(14) Income taxes (Continued)
Berkshire and its subsidiaries’ income tax returns are continuously under audit by Federal and various local and international
taxing authorities. Berkshire’ s consolidated Federal income tax return liabilities have been settled with the Internal Revenue Service
through 1998. Berkshire has received approximately $50 million in income tax refunds and interest with respect to certain issues in
its Federal income tax returns dating back to 1988 that were litigated and for which a favorable ruling from the U.S. District Court
was received in the fourth quarter of 2005. Berkshire does not currently believe that the impact of potential future 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).
2006 2005 2004
Earnings before income taxes................................................................................................ $16,778 $12,791 $10,936
Hypothetical amounts applicable to above
computed at the Federal statutory rate ............................................................................... $ 5,872 $ 4,477 $ 3,828
Tax effects resulting from:
Tax-exempt interest income............................................................................................... (44) (65) (59)
Dividends received deduction ............................................................................................ (224) (133) (116)
Net earnings of MidAmerican............................................................................................ — (183) (83)
State income taxes, less Federal income tax benefit.............................................................. 99 84 70
Foreign rate differences......................................................................................................... (45) 56 (41)
Other differences, net ............................................................................................................ (153) (77) (30)
Total income taxes ................................................................................................................ $ 5,505 $ 4,159 $ 3,569
(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 declare up to approximately $6.4 billion as ordinary dividends before the end of 2007.
Combined shareholders’ equity of U.S. based property/casualty insurance subsidiaries determined pursuant to statutory
accounting rules (Statutory Surplus as Regards Policyholders) was approximately $59 billion at December 31, 2006 and $52 billion at
December 31, 2005.
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 fixed maturity securities 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, 2006 and 2005 are as follows (in millions).
Carrying Value Fair Value
2006 2005 2006 2005
Insurance and other:
Investments in fixed maturity securities....................................................... $25,300 $27,420 $25,300 $27,420
Investments in equity securities ................................................................... 61,533 46,721 61,533 46,721
Notes payable and other borrowings............................................................ 3,698 3,583 3,815 3,653
Finance and financial products:
Investments in fixed maturity securities....................................................... 3,012 3,435 3,164 3,615
Derivative contract assets
(a) ....................................................................... 624 801 624 801
Loans and finance receivables ..................................................................... 11,498 11,087 11,862 11,370
Notes payable and other borrowings............................................................ 11,961 10,868 11,787 10,865
Derivative contract liabilities....................................................................... 3,883 5,061 3,883 5,061
Utilities and energy:
Investments
(a)............................................................................................. 1,046 — 1,041 —
Derivative contract assets
(a) ....................................................................... 484 — 484 —
Notes payable and other borrowings............................................................ 16,946 — 17,789 —
Derivative contract liabilities
(b).................................................................. 889 — 889 —
(a) Included in Other assets
(b) Included in Accounts payable, accruals and other liabilities
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