Berkshire Hathaway 2010 Annual Report Download - page 40

Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(k) Revenue recognition (Continued)
Railroad transportation revenues are recognized based upon the proportion of service provided as of the balance sheet
date. Customer incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/
from specific locations, are recorded as a reduction to revenue on a pro-rata basis based on actual or projected future
customer shipments. When using projected shipments, we rely on historic trends as well as economic and other
indicators to estimate the liability for customer incentives.
(l) Losses and loss adjustment expenses
Liabilities for unpaid losses and loss adjustment expenses represent estimated claim and claim settlement costs of
property/casualty insurance and reinsurance contracts issued by our insurance subsidiaries with respect to losses that
have occurred as of the balance sheet date. The liabilities for losses and loss adjustment expenses are recorded at the
estimated ultimate payment amounts, except that amounts arising from certain workers’ compensation reinsurance
business are discounted as discussed below. Estimated ultimate payment amounts are based upon (1) individual case
estimates, (2) reports of losses from policyholders and (3) estimates of incurred but not reported losses.
Provisions for losses and loss adjustment expenses are charged to earnings after deducting amounts recovered and
estimates of amounts ceded under reinsurance contracts. Reinsurance contracts do not relieve the ceding company of
its obligations to indemnify policyholders with respect to the underlying insurance and reinsurance contracts.
The estimated liabilities of workers’ compensation claims assumed under certain reinsurance contracts are carried at
discounted amounts. Discounted amounts are based upon an annual discount rate of 4.5% for claims arising prior to
January 1, 2003 and 1% for claims arising thereafter, consistent with discount rates used under insurance statutory
accounting principles. The change in such reserve discounts, including the periodic discount accretion is included in
earnings as a component of losses and loss adjustment expenses.
(m) Deferred charges reinsurance assumed
Estimated liabilities for claims and claim costs in excess of the consideration received with respect to retroactive
property and casualty reinsurance contracts that provide for indemnification of insurance risk are established as
deferred charges at inception of such contracts. Deferred charges are subsequently amortized using the interest method
over the expected claim settlement periods. Changes to the estimated timing or amount of loss payments produce
changes in periodic amortization. Changes in such estimates are applied retrospectively and are included in insurance
losses and loss adjustment expenses in the period of the change. The unamortized balances of deferred charges
reinsurance assumed were $3,810 million and $3,957 million at December 31, 2010 and 2009, respectively.
(n) Insurance premium acquisition costs
Costs that vary with and are related to the issuance of insurance policies are deferred, subject to ultimate
recoverability, and are charged to underwriting expenses as the related premiums are earned. Acquisition costs consist
of commissions, premium taxes, advertising and certain other costs. The recoverability of premium acquisition costs
generally reflects anticipation of investment income. The unamortized balances of deferred premium acquisition costs
are included in other assets and were $1,768 million and $1,770 million at December 31, 2010 and 2009, respectively.
(p) Regulated utilities and energy businesses
Certain domestic energy subsidiaries prepare their financial statements in accordance with ASC 980 Regulated
Operations, reflecting the economic effects from the ability to recover certain costs from customers and the
requirement to return revenues to customers in the future through the regulated rate-setting process. Accordingly,
certain costs are deferred as regulatory assets and obligations are accrued as regulatory liabilities which will be
amortized over various future periods. At December 31, 2010, the Consolidated Balance Sheet includes
$2,497 million in regulatory assets and $1,664 million in regulatory liabilities. At December 31, 2009, the
Consolidated Balance Sheet includes $2,093 million in regulatory assets and $1,603 million in regulatory
liabilities. Regulatory assets and liabilities are components of other assets and other liabilities of utilities and
energy businesses.
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