Berkshire Hathaway 2013 Annual Report Download - page 38

Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(k) Revenue recognition (Continued)
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.
Operating revenues 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. Revenues 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 recorded.
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 pro-rata reduction to revenue 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.
Interest income from investments in fixed maturity securities and loans is earned under the interest method, which
reflects accrual of interest due under terms of the agreements as well as amortization of acquisition premiums,
accruable discounts and capitalized loan origination fees, as applicable. Dividends from equity securities are
recognized when earned, which is usually on the ex-dividend date.
(l) Losses and loss adjustment expenses
Liabilities for losses and loss adjustment expenses are established under property/casualty insurance and reinsurance
contracts issued by our insurance subsidiaries for 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. Estimated ultimate payment amounts
are based upon (1) reports of losses from policyholders, (2) individual case estimates 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 recoverable amounts under ceded 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 discounted
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
The excess, if any, of the estimated ultimate liabilities for claims and claim settlement costs over the premiums earned
with respect to retroactive property/casualty reinsurance contracts 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 are included in other assets and were
$4,359 million and $4,019 million at December 31, 2013 and 2012, respectively.
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