Berkshire Hathaway 2008 Annual Report Download - page 53

Notes to Consolidated Financial Statements (Continued)
(17) Fair value measurements (Continued)
Level 3 – Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to
use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or
liabilities or related observable inputs that can be corroborated at the measurement date. Measurements of non-exchange
traded derivative contracts and certain other investments carried at fair value are based primarily on valuation models,
discounted cash flow models or other valuation techniques that are believed to be used by market participants.
Unobservable inputs require management to make certain projections and assumptions about the information that would be
used by market participants in pricing assets or liabilities. Berkshire values its equity index put option contracts based on
the Black-Scholes option valuation model which Berkshire believes is used widely by market participants. Credit default
contracts are primarily valued based on indications of bid or offer data as of the balance sheet date. These contracts are not
exchange traded and certain of the terms of Berkshire’s contracts are not standard in derivatives markets. In particular,
Berkshire is not required to post collateral under most of its contracts. For these reasons, Berkshire has classified these
contracts as Level 3.
Financial assets and liabilities measured at fair value in the financial statements as of December 31, 2008 are summarized
in the following table by the type of inputs applicable to the fair value measurements (in millions).
Total
Fair Value
Quoted
Prices
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Insurance and other:
Investments in fixed maturity securities .................. $27,115 $ 4,961 $21,650 $ 504
Investments in equity securities ......................... 49,073 48,666 79 328
Other investments ................................... 8,223 — — 8,223
Finance and financial products:
Investments in fixed maturity securities .................. 4,517 — 4,382 135
Net derivative contract liabilities ........................ 14,404 — 288 14,116
Utilities and energy:
Net derivative contract liabilities ........................ 405 — 2 403
A reconciliation of assets and liabilities measured at fair value on a recurring basis with the use of significant unobservable
inputs (Level 3) from January 1, 2008 to December 31, 2008 follows (in millions).
Investments
in fixed
maturity
securities
Investments
in equity
securities
Other
investments
Net
derivative
contract
liabilities
Balance at January 1, 2008 ......................................... $393 $356 $ — $ (6,784)
Gains (losses) included in:
Earnings * .................................................. 3 — — (6,765)
Other comprehensive income ................................... (16) (29) 223 1
Regulatory assets and liabilities .................................. — — — (110)
Purchases, sales, issuances and settlements ............................. 259 — 8,000 (874)
Transfers into (out of) Level 3 ....................................... — 1 — 13
Balance at December 31, 2008 ...................................... $639 $328 $8,223 $(14,519)
* Gains and losses related to changes in valuations are included in the Consolidated Statements of Earnings as a component of
investment gains/losses, derivative gains/losses or other revenues as appropriate. Substantially all of the losses included in
earnings were unrealized losses related to liabilities outstanding as of December 31, 2008.
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