Berkshire letter, part 1 -- BNI + Mid-American = Less Transparency
My first take on the shareholder letter this a.m. is that it didn't say a whole lot that was new but there are some interesting points worth commenting on. Forgive me for starting out with a gripe but as a former CPA, I must say this. Berkshire has been growing less transparent year by year. Now it is going to combine BNI with its utlity segment for financial reporting next year. Buffett made the argument for combining them (regulated, high capex etc.), but the result is less transparency. BNI is in the transportation business. If being a regulated and capital intensive business is what creates an operating segment for financial reporting, the insurance businesses would also be combined with Mid-American. BNI also will represent more than 10% of Berkshire's combined revenues and earnings.
Here is the definition of an operating segment under FAS 131.
an operating segment is a component of a business, for which separate financial information is available, that management regularly evaluates in deciding how to allocate resources and assess performance.
Specifically, SFAS No. 131 states that an operating segment is a component of a business:
* that engages in activities from which it may earn revenues
and incur expenses (including revenues and expenses relating
to transactions with other components of the same business);
* whose operating results are regularly reviewed by the
enterprise’s "chief operating decision maker" to make
decisions about resources to be allocated to the segment and
assess its performance; and
* for which discrete financial information is available.
Under SFAS No. 131, a company generally must report separately information about an operating segment that meets any of the following thresholds:
* Its reported revenue, including both sales to external
customers and intersegment sales and transfers, is 10
percent or more of the combined revenue of all reported
operating segments, whether generated inside or outside of
* Its reported profit or loss is 10 percent or more of the
greater of: (1) the combined reported profit of all
operating segments that did not report a loss or (2) the
combined reported loss of all operating segments that did
report a loss; or
* Its assets are 10 percent or more of the combined assets of
all operating segments.
Whatever exceptions & loopholes to avoid the technicalities of these rules are irrelevant. Warren Buffett has always claimed to stand for transparent financial reporting and the spirit of the rules. Berkshire has played squirrelly games with segment reporting in the past, in fact it's been a pattern ever since Nebraska Furniture Mart was purchased. Perhaps because no one has complained, they will continue to get a pass. But this is not the spirit of the rules. Again, as a former CPA, all I can say is that this is pretty annoying.