Berkshire Hathaway 2007 Annual Report Download - page 31

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Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(d) Investments (Continued)
Berkshire utilizes the equity method of accounting with respect to investments where it exercises significant influence,
but not control, over the operating and financial policies of the investee. A voting interest of more than 20% and
less than 50% is normally a prerequisite for utilizing the equity method. However, Berkshire may apply the equity
method with less than 20% voting interests based upon the facts and circumstances. Berkshire applies the equity
method to investments in common stock and other investments when such other investments possess substantially
identical subordinated interests to common stock.
In applying the equity method, investments are recorded at cost and subsequently increased or decreased by Berkshire’ s
proportionate share of the net earnings or losses and other comprehensive income of the investee. Dividends or
other equity distributions are recorded as reductions in the carrying value of the investment. In the event that net
losses of the investee have reduced the equity method investment to zero, additional net losses may be recorded if
other investments in the investee are at-risk, even if Berkshire has not committed to provide financial support to the
investee. Berkshire bases such additional equity method loss amounts, if any, on the change in its claim on the
investee’ s book value.
(e) Loans and finance receivables
Loans and finance receivables consist of commercial and consumer loans originated or purchased. Loans and finance
receivables are stated at amortized cost less allowances for uncollectible accounts based on Berkshire’ s ability and
intent to hold such loans and receivables to maturity. Amortized cost represents acquisition cost, plus or minus
origination and commitment costs paid or fees received, which together with acquisition premiums or discounts are
deferred and amortized as yield adjustments over the life of the loan.
Allowances for estimated losses from uncollectible loans are recorded when it is probable that the counterparty will be
unable to pay all amounts due according to the terms of the loan. Allowances are provided on aggregations of
consumer loans with similar characteristics and terms based upon historical loss and recovery experience,
delinquency rates and current economic conditions. Provisions for loan losses are included in the Consolidated
Statements of Earnings.
(f) Derivatives
Derivative contracts are carried at estimated fair value and are classified as assets or liabilities in the accompanying
Consolidated Balance Sheets. Such balances reflect reductions permitted under master netting agreements with
counterparties. The fair values of these instruments generally represent the present value of estimated future cash
flows anticipated under the contracts, which are affected by applicable interest rates, currency rates, security values,
commodity values, counterparty creditworthiness and duration of the contracts. Changes in these factors, or a
combination thereof, may affect the fair value of these instruments. The changes in fair value of derivative
contracts that do not qualify as hedging instruments for financial reporting purposes are included in the
Consolidated Statements of Earnings as derivative gains/losses.
Cash collateral received from or paid to counterparties to secure derivative contract assets or liabilities is included in
liabilities or assets of finance and financial products businesses in the Consolidated Balance Sheets. Securities
received from counterparties as collateral are not recorded as assets and securities delivered to counterparties as
collateral continue to be reflected as assets in the Consolidated Balance Sheets.
(g) Inventories
Inventories consist of manufactured goods and purchased goods acquired for resale. Manufactured inventory costs
include raw materials, direct and indirect labor and factory overhead. Inventories are stated at the lower of cost or
market. As of December 31, 2007, approximately 45% of the total inventory cost was determined using the last-in-
first-out (“LIFO”) method, 34% using the first-in-first-out (“FIFO”) method, with the remainder using the specific
identification method and average cost methods. With respect to inventories carried at LIFO cost, the aggregate
difference in value between LIFO cost and cost determined under FIFO methods was $331 million and $263
million as of December 31, 2007 and 2006, respectively.
(h) Property, plant and equipment
Property, plant and equipment additions are recorded at cost. The cost of major additions and betterments are
capitalized, while replacements, maintenance and repairs that do not improve or extend the useful lives of the
related assets are expensed as incurred. Interest over the construction period is capitalized as a component of cost
of constructed assets. In addition, the cost of constructed assets of certain domestic regulated utility and energy
subsidiaries that are subject to SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation” (“SFAS
71”) includes the capitalization of the estimated cost of capital in addition to interest incurred during the
construction period. Also see Note 1(n).
Depreciation is provided principally on the straight-line method over estimated useful lives. Depreciation of assets of
certain regulated utility and energy subsidiaries is provided over recovery periods based on composite asset class
lives as mandated by regulation.