NEW YORK (
) -- One thing that
has always made clear is that he believes in investing for the long run. As a matter of accounting practice, though, regulators don't always agree.
This philosophy of long-term value in stocks led to some recent questions from the Securities and Exchange Commission after Berkshire Hathaway decided not to book some big investment losses.
It's not the first time there has been an SEC inquiry into the Berkshire Hathaway approach to booking losses, either.
During the financial crisis the SEC also had some questions for Buffett about his company's approach to writing down losses.
When stocks fall they can be designated as unrealized losses under the assumption that the holdings will recover over time. This means the losses aren't subtracted from net income. Yet the SEC still isn't completely sure that Berkshire Hathaway is using the accounting theory at all the right times and in all the right places.
On Monday, Berkshire Hathaway released copies of letters detailing a discussion earlier this year between the Buffett investment company and the SEC over losses incurred in shares of
( KFT) and
The SEC originally contact Berkshire Hathaway in April, inquiring why Buffett's investment company had not written down close to $1.9 billion in unrealized losses in shares held for more than one year. The SEC argues that losses of this length are not temporary.
Berkshire Hathaway CFO Marc Hamburg responded to the SEC that since most of the losses were in Kraft and U.S. Bancorp, and these holdings had been purchased as far back as 2006 and 2007, Berkshire believes the Kraft and U.S. Bancorp holdings will eventually surpass the cost of purchase. The Berkshire Hathaway argument is that both Kraft an U.S. Bancorp have the earnings potential to overcome the short-term loss, and that Berkshire Hathaway has the "ability and intent" to hold shares for the long haul.
It's typical of Buffett to take the long view of his investments, but the long view as a value investor hasn't been enough to stop the SEC from questioning Berkshire Hathaway's accounting practice, especially when losses have been large and gone unrealized.
In 2009, the SEC inquired into the Berkshire Hathaway 2008 annual report, and that followed on the heels of an SEC inquiry into Berkshire's accounting approach for equity derivatives. Berkshire Hathaway told the SEC that it wrote down stocks and counting the decline against net income when the companies' business outlook was uncertain. However, when "in management's judgment the future earnings potential and underlying business economics of these companies were favorable," Berkshire Hathaway did not write down losses.
This was more or less the argument used again by Buffett to defend the Kraft and U.S. Bancorp positions.
In 2008 and 2009, the SEC also inquired with Berkshire Hathaway about disclosures related to option volatility analyses, and argued that Berkshire's accounting was insufficient given the changes in the market between 2007 and 2008. "Please disclose how you determine weighted average volatility. In addition, tell us why the 2008 weighted average volatility was relatively unchanged from 2007 in light of the market conditions experienced in 2008," the SEC asked. A low volatility input would lead to a relatively understated valuation of the options.
-- Written by Eric Rosenbaum from New York.
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