Investment firm Berkshire Hathaway posted a $25 billion loss in the fourth quarter, mainly due to a writedown from its stake in Kraft Heinz, and chairman Warren Buffett cited a change in accounting standards for the dramatic loss.
Last week, Kraft Heinz disclosed a $15.4 billion impairment charge related to a writedown on the value of trademarks on popular brands such as Kraft Macaroni & Cheese, Oscar Mayer frankfurters and Heinz ketchup. At the same time, the company revealed a subpoena from the Securities and Exchange Commission investigating its accounting for its procurement policies and procedures (see
“The components of that figure are $24.8 billion in operating earnings, a $3.0 billion non-cash loss from an impairment of intangible assets (arising almost entirely from our equity interest in Kraft Heinz), $2.8 billion in realized capital gains from the sale of investment securities and a $20.6 billion loss from a reduction in the amount of unrealized capital gains that existed in our investment holdings,” Buffett wrote. “A new GAAP rule requires us to include that last item in earnings. As I emphasized in the 2017 annual report, neither Berkshire’s vice chairman, Charlie Munger, nor I believe that rule to be sensible. Rather, both of us have consistently thought that at Berkshire this mark-to-market change would produce what I described as ‘wild and capricious swings in our bottom line.’ The accuracy of that prediction can be suggested by our quarterly results during 2018. In the first and fourth quarters, we reported GAAP losses of $1.1 billion and $25.4 billion respectively. In the second and third quarters, we reported profits of $12 billion and $18.5 billion. In complete contrast to these gyrations, the many businesses that Berkshire owns delivered consistent and satisfactory operating earnings in all quarters. For the year, those earnings exceeded their 2016 high of $17.6 billion by 41%.”
The Oracle of Omaha predicted the earnings volatility would keep happening in the future, thanks to mark-to-market accounting. “Wide swings in our quarterly GAAP earnings will inevitably continue,” he wrote. “That’s because our huge equity portfolio — valued at nearly $173 billion at the end of 2018 — will often experience one-day price fluctuations of $2 billion or more, all of which the new rule says must be dropped immediately to our bottom line. Indeed, in the fourth quarter, a period of high volatility in stock prices, we experienced several days with a ‘profit’ or ‘loss’ of more than $4 billion. Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety. My saying that in no way diminishes the importance of our investments to Berkshire. Over time, Charlie and I expect them to deliver substantial gains, albeit with highly irregular timing.”
In his
Buffett warned Berkshire Hathaway shareholders last year about the temporary effects and against putting too much stock in instant analysis. “With the new rule about unrealized gains exacerbating the distortion caused by the existing rules applying to realized gains, we will take pains every quarter to explain the adjustments you need in order to make sense of our numbers,” he wrote. “But televised commentary on earnings releases is often instantaneous with their receipt, and newspaper headlines almost always focus on the year-over-year change in GAAP net income. Consequently, media reports sometimes highlight figures that unnecessarily frighten or encourage many readers or viewers. We will attempt to alleviate this problem by continuing our practice of publishing financial reports late on Friday, well after the markets close, or early on Saturday morning. That will allow you maximum time for analysis and give investment professionals the opportunity to deliver informed commentary before markets open on Monday. Nevertheless, I expect considerable confusion among shareholders for whom accounting is a foreign language.”
