Berkshire Hathaway 2010 Annual Report Download - page 39

Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(i) Property, plant and equipment (Continued)
Our railroad business is very capital intensive and its large base of homogenous, network-type assets turns over on a
continuous basis. Each year, a capital program is developed for the replacement of assets and for the acquisition or
construction of assets to enhance the efficiency of operations, gain strategic benefit or provide new service offerings
to customers. Assets purchased or constructed throughout the year are capitalized if they meet applicable minimum
units of property criteria. Normal repairs and maintenance are charged to operating expense as incurred, while costs
incurred that extend the useful life of an asset, improve the safety of our operations, or improve operating efficiency
are capitalized. Rail grinding costs are expensed as incurred.
(j) Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business
acquisitions. We evaluate goodwill for impairment at least annually. Evaluating goodwill for impairment involves a
two-step process. The first step is to estimate the fair value of the reporting unit. There are several methods that may
be used to estimate a reporting unit’s fair value, including market quotations, asset and liability fair values and other
valuation techniques, including, but not limited to, discounted projected future net earnings or net cash flows and
multiples of earnings. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value,
a second step is performed. Under the second step, the identifiable assets and liabilities of the reporting unit are
estimated at fair value as of the current testing date. The excess of the estimated fair value of the reporting unit over
the current estimated fair value of net assets establishes the implied value of goodwill. The excess of the recorded
goodwill over the implied goodwill value is charged to earnings as an impairment loss. A significant amount of
judgment is required in estimating the fair value of the reporting unit and performing goodwill impairment tests.
(k) Revenue recognition
Insurance premiums for prospective property/casualty and health insurance and reinsurance are earned over the loss
exposure or coverage period, in proportion to the level of protection provided. In most cases, premiums are recognized
as revenues ratably over the term of the contract with unearned premiums computed on a monthly or daily pro rata
basis. Premiums for retroactive reinsurance property/casualty policies are earned at the inception of the contracts, as
all of the underlying loss events covered by these policies occurred in the past. Premiums for life reinsurance contracts
are earned when due. Premiums earned are stated net of amounts ceded to reinsurers. Premiums are estimated with
respect to certain reinsurance contracts where reports from ceding companies for the period are not contractually due
until after the balance sheet date. For contracts containing experience rating provisions, premiums are based upon
estimated loss experience under the contract.
Sales revenues derive from the sales of manufactured products and goods acquired for resale. Revenues from sales are
recognized upon passage of title to the customer, which generally coincides with customer pickup, product delivery or
acceptance, depending on terms of the sales arrangement.
Service revenues are recognized as the services are performed. Services provided pursuant to a contract are either
recognized over the contract period or upon completion of the elements specified in the contract depending on the
terms of the contract. Revenues related to the sales of fractional ownership interests in aircraft are recognized ratably
over the term of the related management services agreement as the transfer of ownership interest in the aircraft is
inseparable from the management services agreement.
Interest income from investments in fixed maturity securities and loans is earned under the constant yield method and
includes accrual of interest due under terms of the agreement as well as amortization of acquisition premiums,
accruable discounts and capitalized loan origination fees, as applicable. In determining the constant yield for
mortgage-backed securities, anticipated counterparty prepayments are estimated and evaluated periodically. Dividends
from equity securities are recognized when earned, which is on the ex-dividend date or the declaration date, when
there is no ex-dividend date.
Operating revenue of utilities and energy businesses resulting from the distribution and sale of natural gas and
electricity to customers is recognized when the service is rendered or the energy is delivered. Amounts recognized
include unbilled as well as billed amounts. Rates charged are generally subject to federal and state regulation or
established under contractual arrangements. When preliminary rates are permitted to be billed prior to final approval
by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is
accrued.
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