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Buffett criticizes others for using non-standardized accounts – but he does too

Berkshire Hathaway's Warren Buffett adjusts his bottom line with unconventional accounting, just as Wall Street bankers and business leaders frequently criticize to adjust standard earnings to tell a better story.

The difference is that Buffett does not explicitly call the number he would rather focus on on an "adjusted EBITDA".

In his latest letter to the shareholders, Buffett claims that his earnings adjustment is a "long cry" from other presentations. Too often, he writes that their presentations contain "adjusted EBITDA", a measure that redefines "earnings" to exclude a number of what Buffett says are "too real" costs. In particular, Buffett claims that stock-based compensation should not be considered a cost. He also says the costs of restructuring are common in business-Berkshire's shareholders see the impact of these activities.

But Berkshire Hathaway

BRK.A, -0.26%

BRK.B, -0.20%

regularly uses certain non-GAAP financial measures. Each period adjusts for losses and gains on the investment portfolio. A routine GAAP expense is made more significant for Berkshire Hathaway now, as companies also need to record the impact of unrealized gains and losses on their bottom line numbers.

For further information: Why Buffett Will Hold Berkshire Hathaway Reporting Earnings Over the Weekend

In the fourth quarter, Berkshire adjusts its earnings release net result of nearly $ 27.6 billion in net revenue. Dollars on the investment portfolio for just a quarter, as well as a $ 3 billion hit for its share of Kraft Heinz $ 15 billion write-down of goodwill and intangible assets reflecting impaired fire value.

Kraft Heinz adjusted his loss of $ 15 billion. In the earnings release.

Read: Why Kraft Heinz-brand write-down of $ 15.4 billion was unusual

Generally accepted accounting policies or GAAP are the standard accounting rules that all US listed companies need to use to present their financial performance . The SEC says that "earnings" means net income as stated in the GAAP Operational Statement in May 2016, updated guidance on the use of non-standardized accounting statistics. Measures that are calculated differently from those described as EBIT and EBITDA must be distinguished by a title such as "adjusted EBITDA."

SEC requested Berkshire Hathaway in 2017, so it had not disclosed any charges related to the depreciation of certain intangible assets. Buffett rationalized the move in his letter to shareholders last year: "We present the data this way because Charlie and I believe that the adjusted figures reflect the real economic costs and profits of the companies aggregated in the table than those GAAP, "he said, referring to Charlie Munger, Vice-Chairman of the Board.

Berkshire moving away from a metric

For nearly three decades, Buffett opened his letters with a discussion of another measurement he loved to tout: Berkshire's per-share book value. Book value represents a company's assets less its liabilities and is otherwise known as equity or simply equity.

Buffett also attributes a type of non-GAAP metric he calls "eigenvalue", which is defined as the "discounted value of the cash that can be taken out of a business during the remaining life."

In 2017 letter, Buffet said: "We give you Berkshire's book value figures because today they serve as a rough, though significantly discreet, tracking of Berkshire's intrinsic value. In other words, the percentage change in book value in a given year is likely to be reasonably close to the year's change in intrinsic value. "However, Buffett and his partner Charlie Munger never describe their estimates of Berkshire Hathaway's intrinsic value because they say it is an estimate and very subjective.

"However, what our annual reports do," Buffett said for the 2017 annual report, "are the facts we use to calculate this value ourselves."

See also: Company It does Jack Daniel's skirting accounting rules, experts say

Read also: Valeant supplies the media with a revenue measurement that the SEC told it to stop using

Berkshire Hathaway can hold on to reveal intrinsic value estimates because the SEC has said that free cash flow statistics that are not GAAP are liquidity measures. The SEC prohibits companies from publishing amounts per Share for liquidity measures.

"Perhaps the intrinsic value has never been criticized as a non-GAAP metric because it was not an input to a business evaluation model, but a production," Ed Ketz, a professor of accounting at Penn State University, told MarketWatch.

Berkshire Hathaway's CFO Marc Hamburg did not respond to a request for comment on the company's use of non-GAAP calculations or the takeover letter.

For more information, see: SEC says companies should be careful about how they talk about free cash flow

To read: Take-Two Interactive uses a income metric SEC does not allow to calculate bonuses

"It is now time to abandon this practice," wrote Buffett in this year's letter, referring to his discussion of the book value per book. share metric – because he believes it is no longer relevant.

"Berkshire has gradually morphed from a company whose assets are concentrated in marketable shares to one whose principal value is in operating companies," the letter said.

Buffet's prior focus on book value per. Equity and intrinsic value are based on his belief that it was more useful for investors to focus on what he believed buying was worth. But it is after paying a premium that was recorded for goodwill, rather than the value that the accounting rules said he had to award them.

Buffett argues that "while our stock holdings are valued at market prices, accounting rules require that our collection of operating companies be recognized in book value at a value well below their present value, a mismatch that has grown in recent years. . "

But the other half of his business is marked to the market, and he doesn't like that either. This is because considering the size of the portfolio – nearly $ 173 billion by the end of 2018 – and its concentration of financial services and technology companies, it will often experience a day's price fluctuations of $ 2 billion or more. "In the fourth quarter, Berkshire Hathaway experienced several days with a" profit "or" loss "of more than $ 4 billion, he writes.

This volatility is now seen in the bottom line.

Buyback buyback

Buffett writes in the year's letter, that Berkshire will be a substantial buy-back of its own shares forward. These transactions will be made at prices above book value but below its own value estimate.

"Over time, Berkshire's share price will, however, provide the best measuring business results, "not book value per share or mysterious intrinsic value, he concludes.

Paul Zarowin, professor of accounting at the Stern School of Business at New York University, told MarketWatch:" If Berkshire Hathaway has many assets that is marked on the market now, it makes sense that he changes his focus on stock price. A new emphasis on share buybacks is accordingly. "

Berkshire's common stock repurchase program was changed on July 17, 2018, and allows Buffett to repurchase its shares at prices below Berkshire's intrinsic value, a" conservative "value determined by Buffett and Munger, the annual report says. 2018, Berkshire repurchased $ 1.3 billion of class A and B joint stock.

But last June, Buffett and JPMorgan CEO Jamie Dimon wrote a Wall Street Journal OpEd criticizing the "unhealthy focus on short-term profits at the expense of Long-term strategy, growth and sustainability "promoted by companies providing quarterly earnings per share guidance.

Despite his concern that the financial markets have become too focused in the short term, Buffett says Berkshire Hathaway is planning to Highlight its share price, not its book value per Share, in future financial performance.

Professor Zarowin says he tends to give Buffett the benefits of television ivlen and do not see these changes as self-service given its status as an investment icon, and anyone in charge of many major initiatives advocating higher taxes on the wealthy and making the Gates Foundation philanthropic Giving Pledge

"Although anyone with Buffett & # 39; s record can "fight City Hall. "Everyone is focused on stock prices, and Berkshire Hathaway beats the market if he doesn't move with the trend," Zarowin told MarketWatch.

Read now: The Sanders-Schumer Withdrawal Test will block almost all share buybacks

Offers and more offers

Buffett may prefer investors to ignore the volatility of the value of The equity investment portfolio, however, admits that its influence is expected to grow rather than diminish.

Berkshire's renowned skill in making brilliant acquisitions that can divert attention from stock investment building is now history.

Despite "hoping to move much of our excess liquidity to companies that Berkshire Hathaway will permanently own", the immediate prospects for what he writes in this year's letter are "not good".

"The prices are high for companies that have decent long-term prospects," he says.

The sudden announcement of bad news by Kraft Heinz also questioned earlier publications and prospects of previous acquisitions.

For example, in 2007, Berkshire Hathaway bought a 60% stake in Marmon Holdings, the industrial holding company owned by Chicago's Pritzker family for $ 4.5 billion. Buffett now owns 99.75% of the company, except one family member holding, following a series of transactions in which he also criticized the impact of GAAP accounts.

"Our transaction was done just as Jay would have liked it to be done – no consultants or studies," Buffett said in a statement in 2007 referring to Jay Pritzker, founder of the family's Hyatt hotel empire and uncle of JB Pritzker, current governor of Illinois and his sister Penny Pritzker, a former trade secretary under President Barack Obama.

In 2012, Buffett already complained about the growing challenge of using book value and intrinsic value to measure company performance when talking about the accounts of the agreement.

The Marmon Agreement was one of the biggest acquisitions Buffett has made in recent years. Marmon had more than 125 companies in a wide range of industries and revenues of about $ 7 billion at that time. It now consists of 13 different business sectors and more than 100 autonomous manufacturing and service companies, according to Berkshire's latest annual report.

"Marmon gives an example of a clear and significant difference between book value and intrinsic value. Last year I told you that we had purchased additional shares in Marmon, which increases our ownership to 80% (up from 64% we bought in 2008) I also told you that GAAP accounts require that we immediately take 2011 purchases on our books much less than what we paid, I have now had a year to think about this weird accounting rule, but I have not yet found an explanation that makes sense – nor does Charlie or Marc Hamburg, our CFO, come up with one, "Buffett wrote in 2012.

But Marmon has been struggling over the past few years. Berkshire does not reveal its individual profits any more, but says in its latest annual report that Marmon's pre-tax profit fell 5.6% in 2018 from 2017 despite an increase of 5.2% in revenue to 8.2 billion. Marmon's earnings also declined by 3.5% in 2017 in 2016 despite a $ 305m revenue increase. Or 4.1% this year's annual report.

That's not what Berkshire reported in the 2017 annual report, as it aimed to increase Marmon's revenue by $ 349 million or 7% in 2017 against 2016, and combined profit before tax for Marmon and International Metalworking Companies rose in 2017 in proportion to 2016 "due to a combination of increased sales, increased manufacturing efficiency, the impact of acquisitions and ongoing spending management efforts."

Berkshire first invested significantly in HJ Heinz Holding Corporation in 2013. Berkshire Hathaway owns 26.7% of Kraft Heinz accounted for using the "equity" method because it is part of the control group.

"I was wrong in some ways about Kraft Heinz," said Buffett on Monday to CNBC's Becky Quick on Squawk Box. "We overpaid for power," he said.

"The Kraft Heinz goodwill impairment tends to prove that goodwill is not an asset, but only a comment on how much the transferee tends to pay for the acquired company," said Ketz from Penn Stat. "If there were any true synergies, these deteriorations would not occur."

Another great thing

Buffett refuses to throw the towel on acquisitions.

In this year's letter to shareholders, he writes that he and Munger "continue to hope for an elephant-size acquisition. Even in the 88s and 95s, I'm the young – that's what gets my heart and Charlie to beat faster. "

At 88 and 95 it might be a better idea to play more bridges instead. 19659062]
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