Berkshire Hathaway 2014 Annual Report Download - page 56

Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(f) Derivatives
We carry derivative contracts in our Consolidated Balance Sheets at fair value, net of reductions permitted under
master netting agreements with counterparties. The changes in fair value of derivative contracts that do not qualify as
hedging instruments for financial reporting purposes are recorded in earnings.
Cash collateral received from or paid to counterparties to secure derivative contract assets or liabilities is included in
other liabilities or other assets. Securities received from counterparties as collateral are not recorded as assets and
securities delivered to counterparties as collateral continue to be reflected as assets in our Consolidated Balance Sheets.
(g) Fair value measurements
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability
between market participants in the principal market or in the most advantageous market when no principal market
exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in
order to estimate fair value. Alternative valuation techniques may be appropriate under the circumstances to determine
the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market
participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting
under duress. Our nonperformance or credit risk is considered in determining the fair value of liabilities. Considerable
judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly,
estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current
or future market exchange.
(h) Inventories
Inventories consist of manufactured goods and goods acquired for resale. Manufactured inventory costs include raw
materials, direct and indirect labor and factory overhead. Inventories are stated at the lower of cost or market. As of
December 31, 2014, approximately 43% of our consolidated inventory cost was determined using the last-in-first-out
(“LIFO”) method, 33% using the first-in-first-out (“FIFO”) method, and the remainder primarily using the average cost
method. With respect to inventories carried at LIFO cost, the aggregate difference in value between LIFO cost and cost
determined under the FIFO method was $857 million and $796 million as of December 31, 2014 and 2013,
respectively.
(i) Property, plant and equipment and leased assets
Additions to property, plant and equipment used in operations and leased assets are recorded at cost and consist of
major additions, improvements and betterments. With respect to constructed assets, all construction related material,
direct labor and contract services as well as certain indirect costs are capitalized. Indirect costs include interest over the
construction period. With respect to constructed assets of certain of our regulated utility and energy subsidiaries that
are subject to authoritative guidance for regulated operations, capitalized costs also include an equity allowance for
funds used during construction, which represents the cost of equity funds used to finance the construction of the
regulated facilities. Also see Note 1(q).
Normal repairs and maintenance and other costs that do not improve the property, extend the useful life or otherwise do
not meet capitalization criteria are charged to expense as incurred. Rail grinding costs related to our railroad properties
are expensed as incurred.
Property, plant and equipment and leased assets are depreciated to estimated salvage value primarily on the straight-
line method over estimated useful lives or mandated recovery periods as prescribed by regulatory authorities.
Depreciation of assets of our regulated utilities and railroad is generally provided using group depreciation methods
where rates are based on periodic depreciation studies approved by the applicable regulator. Under group depreciation,
a single depreciation rate is applied to the gross investment in a particular class of property, despite differences in the
service life or salvage value of individual property units within the same class. When our regulated utilities or railroad
retires or sells a component of the assets accounted for using group depreciation methods, no gain or loss is recognized.
Gains or losses on disposals of all other assets are recorded through earnings.
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