New Rules

New rules affected Berkshire Hathaway’s Quarterly Results,

img_1008In the first quarter Berkshire reported a loss of $1.138 Billion in Net earnings.

If you take a look at what really matters in the income statement, Berkshire’s operating segments delivered a total gain of $5.288 Billion in the first 3 month of 2018, compared to a total gain of $3.566 billion, in the same period in 2017.

On the one hand the change in the U.S. Tax Code provided a huge tailwind for Berkshire’s net worth, as it mainly reduced its net deferred income tax liability. On the other, a new accounting rule dipped its Net earnings figure into a negative territory after almost a decade.

The tailwind:

The gain in net worth for Berkshire during 2017 was ~$65 billion. With more than half of that figure ($36 billion) coming from Berkshire’s operations. “This benefit included approximately $29.6 billion related to a one-time non-cash reduction of our net deferred income tax liabilities that arose from reduction in the statutory U.S. corporate income tax from 35% to 21%.” (Berkshire Hathaway inc 2017 annual report)

In previous years if Berkshire had a $100 of unrealized gains in equity, in order to realize those gains, it had to pay a secured reserved sum of $35 in taxes. Under the new tax changes Berkshire needs to secure and pay only $21 in taxes, a drop of $14 in liabilities.
Liabilities go down; Net worth goes up.

The “Headwind”:

A new accounting rule requires it to report the net change in unrealized gains or losses in stocks for each quarter in all net income figures. In the first quarter Berkshire reported a loss of $6.426 Billion, which shadowed its 5.288 billion in operating gains. “Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period. Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our operating performance. For analytical purposes, Berkshire’s “bottom-line” will be useless.” (Berkshire Hathaway inc 2017 annual report)

berkshire list of stock

Berkshire Hathaway’s $170 billion portfolio. (As for 12/31/17)

Bullish on Apple

Berkshire bought an additional 75 million of Apple shares making it the third largest owner of Apple stock.

Kraft Heinz & Wells Fargo

With both of them being the biggest laggards, both Messrs. Warren Buffett and Charlie Munger allayed investors’ worries about the future of those companies.

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