I can not see the Berkshire baseline
I can not see the Berkshire baseline
At the end of each quarter, investors depend on accurate and direct corporate reports. However, this year
One of the largest and most followed companies in the market, suddenly has one of the least understandable reports, after decades of almost perfect clarity. Berkshire is not to blame, it's the fault of the federal regulators and the national board of accountants. With a single change in the rules of earnings reporting, investors like me have more difficulties than ever to evaluate complicated companies.
The change of the rule affects all companies that have large amounts of shares. Berkshire, a multinational holding, is the sole owner of Geico, the BNSF rail system and dozens of other subsidiaries, but also owns shares and bonds, more than $ 200 billion as of the third quarter of this year. The value of its capital holdings is always in its balance sheet, on the first page of Berkshire's quarterly reports, the first stop for shareholders who want to know how many stocks, bonds and cash the company owns. CEO Warren Buffett discusses the largest holdings in his annual charters.
But this year, the Financial Accounting Standards Board joined the Securities and Exchange Commission to decree that the gains or losses of shares must be reported as earnings each quarter. So the pre-tax earnings reported by Berkshire jumped from $ 5.3 billion in the third quarter of 2017 to $ 23 billion in the same quarter of 2018. Did your profits quadruple? No, the new FASB accounting rules forced Berkshire to register $ 14.6 billion in earnings on its shares.
On paper, these fluctuations in the value of the shares dwarf Berkshire's actual business profits. In reality, they simply record short-term changes in stock prices that can be held for decades before they are sold. Berkshire and all other companies already report gains and losses in stocks at the time of sale. Intermediate fluctuations should not be allowed to confuse reported profits. Quarter after quarter, Berkshire will be forced to post gains or losses of tens of billions in its shares.
The significant part of the Berkshire reports are the real benefits of their businesses. They had a good third quarter on that basis, reaching almost $ 3 billion over the previous year. But to get to that number, I had to look at the Berkshire trading report and calculate it myself. Next year, I would have to make two calculations of this kind, deducting the profits from the stock market from the profits for the third quarter of this year as well as last year.
Why did the FASB and the SEC insist on the change? Perhaps the accounting perfectionists believed that recording the gains and losses of the shares gave a better definition of the value of a company. Voltaire, who said that the best was the enemy of the good, did not live long enough to see his maxim validated by the SEC and the accountants.
At the annual Berkshire meeting in May, a perfectionist asked Mr. Buffett if the new report format did not give a clearer idea of the company's value. Buffett said it could also be said that the value of the other shares of the company, such as Geico, for example, changes from one quarter to another. Equally his land, and its bonds. But none of these are profits, nor are there any changes in the Berkshire stock portfolio.
Instead of providing clarity, the new rules have effectively made the reported Berkshire numbers meaningless. Buffett said the same in this year's annual report: "For analytical purposes, Berkshire's" bottom line "will be useless."
The change of rules is a rare step back in the history of accounting rules, which have generally become more useful to investors over time. When my grandfather, Eugene Meyer, bought a seat on the New York Stock Exchange in 1905, there was no federal regulator to guarantee that the financial information his staff examined was accurate. But in the mid-1950s, when Buffett began to invest, the SEC could guarantee accurate reports from all public companies.
With the mandate of quarterly report for the value of the shares, the SEC and the board of accountants did not fulfill their duty to provide clarity to investors. The new rule inhibits investors 'understanding of the companies' actual performance, and should be eliminated.
Mr. Graham is CEO of
Graham Holdings
Co.
.
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