Berkshire Hathaway 2010 Annual Report Download - page 37

Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(d) Investments (Continued)
In applying the equity method, we record our investment at cost and subsequently increase or decrease the carrying
amount of the investment by our proportionate share of the net earnings or losses and other comprehensive income of
the investee. We record dividends or other equity distributions as reductions in the carrying value of the investment. In
the event that net losses of the investee reduce the carrying amount to zero, additional net losses may be recorded if
other investments in the investee are at-risk even if we have not committed to provide financial support to the
investee. Such additional equity method losses, if any, are based upon the change in our claim on the investee’s book
value.
Investment gains and losses arise when investments are sold (as determined on a specific identification basis) or are
other-than-temporarily impaired. If a decline in the value of an investment below cost is deemed 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 relative amount of the decline, our ability and intent to hold the investment until the
fair value recovers and the length of time that fair value has been less than cost. With respect to an investment in a
debt security, we recognize an other-than-temporary impairment if we (a) intend to sell or expect to be required to sell
before amortized cost is recovered or (b) do not expect to ultimately recover the amortized cost basis even if we do
not intend to sell the security. We recognize losses under (a) in earnings and under (b) we recognize the credit loss
component in earnings and the difference between fair value and the amortized cost basis net of the credit loss in other
comprehensive income.
(e) Receivables, loans and finance receivables
Trade, premium and other receivables of the insurance and other businesses are stated at the outstanding principal
amounts, net of estimated allowances for uncollectible balances. Allowances for uncollectible balances are provided
when as of the balance sheet date it is probable counterparties will be unable to pay all amounts due based on the
contractual terms and the loss amounts can be reasonably estimated. Receivables are generally written off against
allowances after all reasonable collection efforts are exhausted.
Loans and finance receivables consist of consumer loans (primarily manufactured housing and other real estate loans)
and commercial loans originated or purchased. Loans and finance receivables are stated at amortized cost based on
our ability and intent to hold such loans and receivables to maturity and are stated net of allowances for uncollectible
accounts. 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. Loans and finance receivables include loan securitizations issued when we have the power to
direct and the right to receive residual returns. Substantially all of our consumer loans are secured by real or personal
property.
Allowances for credit losses from manufactured housing and other real estate loans include estimates of losses on
loans currently in foreclosure and losses on loans not currently in foreclosure. Estimates of losses on loans in
foreclosure are based on historical experience and collateral recovery rates. Estimates of losses on loans not currently
in foreclosure consider historical default, collateral recovery rates and existing economic conditions. Allowances for
credit losses also incorporate the historical average time elapsed from the last payment until foreclosure.
Loans in which payments are delinquent (with no grace period) are considered past due. Loans which are over 90 days
past due, in foreclosure, or where borrowers are in bankruptcy, are placed on nonaccrual status and interest previously
accrued but not collected is reversed. Subsequent amounts received on the loans are first applied to the principal and
interest owed for the most delinquent amount. Interest income accruals are resumed once a loan is less than 90 days
delinquent.
Loans in the foreclosure process are considered non-performing. Once a loan is in foreclosure, interest income is not
recognized unless the foreclosure is cured or the loan is modified. Once a modification is complete, interest income is
recognized based on the terms of the new loan. Loans that have gone through foreclosure are charged off when the
collateral is sold. Loans not in foreclosure are evaluated for charge off based on individual circumstances that indicate
future collectability of the loan, including the condition of the collateral securing the loan.
35