Reference no: EM132636169

As of this writing (February 2014), Warren Buffett is the fourth-richest man in the world, worth a staggering $58.5 billion. He is also the chairman, CEO, and primary shareholder of Berkshire Hathaway Inc. Over the past 48 years, Berkshire has grown at an average rate of 19.7 percent annually. Warren Buffett has achieved this success through his unparalleled business sense regarding investments and acquisitions of other companies. Berkshire Hathaway was originally a textile manufacturing company. In 1962, Warren Buffett and his partners began buying large blocks of Berkshire stock. Within five years, Buffett began expanding into the insurance industry, and in 1985 the last of Berkshire's textile operations was shut down. In the late 1970s, Berkshire began acquiring stock in GEICO insurance and in January 1996 bought GEICO outright. While Berkshire has extensive insurance holdings, it has not focused its investment activities solely on insurance. Since Buffett took the helm in the 1960s, Berkshire has made many acquisitions. Look at the list of selected Berkshire holdings as of the end of 2013 (on the next page). Do you recognize any of these companies? Each item in Berkshire's portfolio has to be accounted for individually. For example, Comdisco Holdings and Graham Holdings Company are accounted for as equity method investments, while Walmart and American Express are classified as available-for-sale investments. Berkshire consolidates the fully owned companies such as Wesco Financial and See's Candies. In addition, companies like GEICO have many subsidiaries of their own. As you can imagine, accounting for investments at Berkshire can be very complex. This chapter focuses on issues related to the accounting for investments. Page 48 BERKSHIRE HATHAWAY SELECTED HOLDINGS (AS OF 12/31/2013) Examples of fully owned subsidiaries: Benjamin Moore & Co.; Dairy Queen; GEICO; Fruit of the Loom; H.J. Heinz Company; See's Candies; and The Pampered Chef Ltd. 15 largest partially owned companies: DIRECTV 4.2% owned at $1,536 market value; American Express Company 14.2% at $13,756; Exxon Mobil Corp. 0.9% at $4,162; International Business Machines Corporation 6.3% at $12,778; Moody's Corporation 11.5% at $1,936; Munich Re Group 11.2% at $4,415; Phillips 66 3.4% at $1,594; Sanofi 1.7% at $2,354; Tesco PLC 3.7% at $1,666; The Coca-Cola Company 9.1% at $16,524; The Goldman Sachs Group Inc. 2.8% at $2,315; Procter & Gamble Co. 1.9% at $4,272; U.S. Bancorp 5.3% at $3,883; Wal-Mart Stores Inc. 1.8% at $4,470; and Wells Fargo & Company 9.2% at $21,950.

Berkshire Hathaway Revisited (complex ownership situations)

Question 1: Provides an overview of the rise of one of the most successful investment companies in modern history, Berkshire Hathaway, under the direction of Warren Buffett. We do not repeat that history here, but we note that although Berkshire Hathaway owns common stock in many well-known companies, it also has various other investments that might surprise you. For example, did you know that during 2013, Berkshire Hathaway acquired $8 billion of Heinz preferred stock? Did you know that over the past several years, Berkshire also purchased preferred stock in Wrigley, Goldman Sachs, and General Electric (GE) totaling $14.5 billion?

• We have focused on simple ownership situations in which the controlling entity has owned common stock (CS) in other controlled entities. In practice, however, relatively complex ownership structures are frequent. For example, until recently, Berkshire held both common and preferred shares of GE. Other times, one or more subsidiaries may acquire stock of the parent or of other related companies.
• Sometimes the parent's ownership claim on a subsidiary may change through its purchase or sale of subsidiary shares or through stock transactions of the subsidiary.
• The discussion in this chapter provides a basic understanding of some of the consolidation problems arising from complex ownership situations commonly encountered in practice. Specifically, this chapter discusses Subsidiary preferred stock (PS) outstanding.

1. Changes in the parent's ownership interest in the subsidiary.

2. Multiple ownership levels.

3. Reciprocal or mutual ownership.

4. Subsidiary stock dividends.

Questions

Question 2: What three accounting rules guide the external reporting of intercompany investments? (briefly)

Question 3: What are your thoughts on consolidation challenges Berkshire-Hathaway faces in accounting for these complex ownership structures?