Berkshire Hathaway 1994 Annual Meeting Audience Question # 19

Warren explains why one should focus on the economics of a transaction rather the accounting treatment

Warren Buffett:

Your second question about goodwill amortization and purchase accounting versus pooling: we care not… at Berkshire, it absolutely makes no difference to us what accounting treatment we get on something. We are interested in the economics of a
transaction.

Some banks… some businesses generally, most businesses perhaps… prefer pooling because they don’t like to take a goodwill amortization charge.

We think our shareholders are smart enough, particularly if we make it clear to them… the accounting consequences… we think they’re smart enough to look through to the economic reality of what Berkshire’s businesses are all about.

And I think that some managements sell short their own ownership group by doing various kinds of financial acrobatics in order to have the charges come in a certain way rather than, as you point out, often they might be better off buying for cash rather than using their own stock as currency, but they may prefer to use their own stock because they avoid goodwill charges.

We’ve written a few things on goodwill in the past and past annual reports that might get to that subject.

We don’t care what accounting… we sort of rewrite the accounting for any business that we’re looking at, because in our heads we want to have, in effect, a standardized way of looking at businesses.

And if one company goes through pooling transactions and another goes through purchase transactions, we’re going to recast them in our own minds so that there is comparability.

Charlie?

Charlie Munger:

Yeah, the published accounting results are in accordance with standard convention and they’re a place to start economic analysis.

The figures are frequently quite silly on a functional basis. I’m not criticizing accounting conventions except for some.

Warren Buffett:

Yeah.

Charlie Munger:

But, I think it’s just a place to start thinking about economic reality.

By their nature, they can’t tie perfectly… they can’t even tie very well… to economic reality.

Warren Buffett:

We regard it is a negative when we find a management that’s preoccupied with accounting considerations. But, we find it so frequent that we can’t afford to use it as a total exclusionary factor.

It really surprises me how many managements focus on accounting, and the time they spend on it, the… it’s really unproductive.

If you find a management that doesn’t care about the accounting but does explain to you in clear terms what’s going on, I think you should regard that as a plus in owning a security.

Looking for an offline, PDF copy of all shareholder questions carefully arranged into specific topics such as How to properly evaluate a company for potential investment, Intelligent Investing and Secrets to achieving Success and Happiness? Click on the image below to learn more.

Q&A with Warren Buffett and Charlie Munger: A Compilation of All Shareholder Questions and Answers from The Berkshire Hathaway Annual Shareholder Meetings

Click here to return to the Q&A topic list. Or alternatively, you can proceed to the next or go back to the previous question.

Don`t copy text!