Deciphering Financial Statements (Berkshire Hathaway, Deferred Taxes, and Other
Comprehensive Income)
Consider the excerpts from the 2004 financial statements of Berkshire Hathaway shown below and on the next page to answer the following questions.
1. What was Berkshire Hathaway’s comprehensive income in 2004?
2. Make one summary journal entry to record the sale, redemption, and maturity of all securities (both equity securities and fixed maturity securities) during 2004.
3. Look at the statement of changes in stockholders’ equity. What is the purpose of the “Reclassification adjustment for appreciation included in net earnings”?
4. What journal entry did Berkshire Hathaway make to recognize the change in the market value of its available for sale investment securities during 2004? Ignore the reclassification mentioned in (3).
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From the statement of cash flows: |
2004 |
2003 |
2002 |
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Cash flows from investing activities: |
$(5,924) |
$ (9,924) |
$(16,288) |
|
Purchases of securities with fixed maturities |
(2,032) |
(1,842) |
(1,756) |
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Purchases of equity securities |
4,560 |
17,165 |
9,108 |
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Proceeds from sales of securities with fixed maturities |
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|
|
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Proceeds from redemptions and maturities |
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|
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of securities with fixed maturities |
5,637 |
9,847 |
6,740 |
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Proceeds from sales of equity securities |
2,610 |
3,159 |
1,340 |
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Finance loans and other investments purchased |
(6,314) |
(2,641) |
(2,281) |
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Principal collections on finance loans and other investments |
2,736 |
4,140 |
5,226 |
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Acquisitions of businesses, net of cash acquired |
(414) |
(3,213) |
(2,620) |
|
Additions of property, plant and equipment |
(1,201) |
(1,002) |
(928) |
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Other |
563 |
243 |
148 |
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Net cash flows from investing activities |
$221 |
$15,932 |
($1,311) |
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From the statement of changes in |
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|
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stockholders’ equity: |
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|
|
|
year ended December 31 |
2004 |
2003 |
2002 |
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Class A & B Common Stock |
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|
|
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Balance at beginning and end of year |
$ 8 |
$ 8 |
$ 8 |
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Capital in Excess of Par Value |
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|
|
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Balance at beginning of year |
$26,151 |
$26,028 |
$25,607 |
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Common stock issued in connection with |
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|
|
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business acquisitions |
— |
— |
324 |
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Exercise of stock options issued in connection |
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with business acquisitions and SQUARZ |
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|
|
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warrant premiums |
117 |
123 |
97 |
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Balance at end of year |
$26,268 |
$26,151 |
$26,028 |
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|
|
|
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Retained Earnings |
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|
|
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Balance at beginning of year |
$31,881 |
$23,730 |
$19,444 |
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Net earnings |
7,308 |
8,151 |
4,286 |
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Balance at end of year |
$39,189 |
$31,881 |
$23,730 |
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Accumulated Other Comprehensive Income |
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|
|
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Unrealized appreciation of investments |
$ 2,599 |
$10,842 |
$ 2,860 |
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Applicable income taxes |
(905) |
(3,802) |
(1,029) |
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Reclassification adjustment for appreciation |
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|
|
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included in net earnings |
(1,569) |
(2,922) |
(638) |
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Applicable income taxes |
549 |
1,023 |
223 |
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Foreign currency translation adjustments |
140 |
267 |
272 |
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Applicable income taxes |
134 |
(127) |
(65) |
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From the statement of changes in |
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stockholders’ equity: |
2004 |
2003 |
2002 |
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Minimum pension liability adjustment |
(38) |
1 |
(279) |
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Applicable income taxes |
3 |
(3) |
29 |
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Other |
(34) |
6 |
7 |
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Other comprehensive income |
879 |
5,285 |
1,380 |
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Accumulated other comprehensive income at |
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|
|
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beginning of year |
19,556 |
14,271 |
12,891 |
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Accumulated other comprehensive income at end of year |
$20,435 |
$19,556 |
$14,271 |
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Comprehensive Income |
|
|
|
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Net earnings |
$ 7,308 |
$ 8,151 |
$ 4,286 |
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Other comprehensive income |
879 |
5,285 |
1,380 |
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Total comprehensive income |
$ 8,187 |
$13,436 |
$ 5,666 |
From Note 7 to the financial statements:
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Investment gains (losses) from sales and redemptions of investments are summarized below (in millions): |
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2004 |
2003 |
2002 |
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Fixed maturity securities— |
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|
|
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Gross gains from sales and other disposals |
$ 883 |
$2,559 |
$927 |
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Gross losses from sales and other disposals |
(63) |
(31) |
(8) |
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Equity securities— |
|
|
|
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Gross gains from sales |
769 |
850 |
392 |
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Gross losses from sales |
(1) |
(167) |
(66) |
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Losses from other than temporary impairments |
(19) |
(289) |
(607) |
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Foreign currency forward contracts |
1,839 |
825 |
297 |
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Life settlement contracts |
(207) |
— |
— |
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Other investments |
295 |
382 |
(17) |
|
|
$3,496 |
$4,129 |
$918 |
From Note 14 to the financial statements:
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The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred |
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tax liabilities at December 31, 2004 and 2003, are shown below (in millions): |
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2004 |
2003 |
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Deferred tax liabilities: |
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Unrealized appreciation of investments |
$11,020 |
$10,663 |
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Deferred charges reinsurance assumed |
955 |
1,080 |
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Property, plant and equipment |
1,201 |
1,124 |
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Investments |
509 |
573 |
|
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Other |
665 |
629 |
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|
$14,350 |
$14,069 |
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Deferred tax assets: |
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|
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Unpaid losses and loss adjustment expense |
$ (1,129) |
$ (1,299) |
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Unearned premiums |
(388) |
(372) |
|
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Other |
(1,659) |
(1,448) |
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|
(3,176) |
(3,119) |
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Net deferred tax liability |
$11,174 |
$10,950 |
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