Berkshire Hathaway 2007 Annual Report Download - page 30

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BERKSHIRE HATHAWAY INC.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Significant accounting policies and practices
(a) Nature of operations and basis of consolidation
Berkshire Hathaway Inc. (“Berkshire” or “Company”) is a holding company owning subsidiaries engaged in a number
of diverse business activities, including property and casualty insurance and reinsurance, utilities and energy,
finance, manufacturing, service and retailing. Further information regarding these businesses and Berkshire’ s
reportable business segments is contained in Note 18. Berkshire consummated a number of business acquisitions
over the past three years which are discussed in Note 2.
The accompanying Consolidated Financial Statements include the accounts of Berkshire consolidated with the accounts
of all of its subsidiaries and affiliates in which Berkshire holds a controlling financial interest as of the financial
statement date. Normally a controlling financial interest reflects ownership of a majority of the voting interests.
Other factors considered in determining whether a controlling financial interest is held include whether Berkshire
possesses the authority to purchase or sell assets or make other operating decisions that significantly affect the
entity’ s results of operations and whether Berkshire bears a majority of the financial risks of the entity.
Intercompany accounts and transactions have been eliminated. Certain amounts in prior year presentations have
been reclassified to conform with the current year presentation.
On February 9, 2006, Berkshire converted its investment in non-voting preferred stock of MidAmerican Energy
Holdings Company (“MidAmerican”) into common stock and upon conversion, possessed approximately 83.4%
(80.5% diluted) of the voting rights and economic interests in MidAmerican. Accordingly, the 2006 and 2007
Consolidated Financial Statements reflect the consolidation of the accounts of MidAmerican. In 2005, Berkshire
accounted for its investment in MidAmerican pursuant to the equity method, reflecting Berkshire’ s ability to
exercise significant influence on the operations of MidAmerican. Through its investment Berkshire possessed 9.7%
of the voting rights and 83.4% (80.5% diluted) of the economic interests in MidAmerican.
(b) Use of estimates in preparation of financial statements
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted
in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. In particular, estimates of unpaid losses and loss adjustment expenses and
related recoverables under reinsurance for property and casualty insurance are subject to considerable estimation
error due to the inherent uncertainty in projecting ultimate claim amounts that will be settled over many years. In
addition, estimates and assumptions associated with the amortization of deferred charges reinsurance assumed,
determinations of fair value of certain financial assets and liabilities and the determinations of goodwill
impairments require considerable judgment by management. Actual results may differ from the estimates used in
preparing the Consolidated Financial Statements.
(c) Cash and cash equivalents
Cash equivalents consist of funds invested in U.S. Treasury Bills, money market accounts and in other investments with
a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is
restricted by loan agreements or other contractual provisions. Restricted amounts are included in other assets.
(d) Investments
Berkshire’ s management determines the appropriate classifications of investments in fixed maturity and equity
securities at the acquisition date and re-evaluates the classifications at each balance sheet date. Held-to-maturity
investments are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. Trading
investments are carried at fair value and include securities acquired with the intent to sell in the near term. All other
securities are classified as available-for-sale and are carried at fair value with net unrealized gains or losses reported
as a component of accumulated other comprehensive income. Berkshire’ s investments in fixed maturity and equity
securities are predominantly classified as available-for-sale.
Investment gains and losses arise when investments are sold (as determined on a specific identification basis) or are
other-than-temporarily impaired. If in management’ s judgment a decline in the value of an investment below cost
is other than temporary, the cost of the investment is written down to fair value with a corresponding charge to
earnings. Factors considered in judging whether an impairment is other than temporary include: the financial
condition, business prospects and creditworthiness of the issuer, the length of time that fair value has been less than
cost, the relative amount of the decline and Berkshire’ s ability and intent to hold the investment until the fair value
recovers.