Berkshire Hathaway 2010 Annual Report Download - page 95

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Management’s Discussion (Continued)
Other Critical Accounting Policies (Continued)
including market quotations, underlying asset and liability fair value determinations and other valuation techniques, such as
discounted projected future net earnings or net cash flows and multiples of earnings. We primarily use discounted projected
future earnings or cash flow methods. The key assumptions and inputs used in such methods may involve forecasting
revenues and expenses, operating cash flows and capital expenditures as well as an appropriate discount rate. A significant
amount of judgment is required in estimating the fair value of a reporting unit and performing goodwill impairment tests.
Due to the inherent uncertainty in forecasting cash flows and earnings, actual future results may vary significantly from the
forecasts. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then individual
assets (including identifiable intangible assets) and liabilities of the reporting unit are estimated at fair value. The excess of
the estimated fair value of the reporting unit over the estimated fair value of net assets would establish the implied value of
goodwill. The excess of the recorded amount of goodwill over the implied value is then charged to earnings as an
impairment loss.
Market Risk Disclosures
Our Consolidated Balance Sheets include a substantial amount of assets and liabilities whose fair values are subject to
market risks. Our significant market risks are primarily associated with interest rates, equity prices, foreign currency
exchange rates and commodity prices. The fair values of our investment portfolios and equity index put option contracts
remain subject to considerable volatility. The following sections address the significant market risks associated with our
business activities.
Interest Rate Risk
We regularly invest in bonds, loans or other interest rate sensitive instruments. Our strategy is to acquire securities that
are attractively priced in relation to the perceived credit risk. Management recognizes and accepts that losses may occur with
respect to assets. We strive to maintain high credit ratings so that the cost of debt is minimized. We utilize derivative
products, such as interest rate swaps, to manage interest rate risks on a limited basis.
The fair values of our fixed maturity investments and notes payable and other borrowings will fluctuate in response to
changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and
increases in fair values of those instruments. Additionally, fair values of interest rate sensitive instruments may be affected
by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the
instrument and other general market conditions. The fair values of fixed interest rate investments may be more sensitive to
interest rate changes than variable rate investments.
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