Berkshire takes big accounting hit

March 28, 2011, 10:16 PM UTC

Warren Buffett’s Berkshire Hathaway took a nearly billion-dollar hit on its stock portfolio after regulators questioned the firm’s accounting.

Berkshire (BRKA) wrote down the value of its holdings in three big companies by $938 million at the end of 2010, reflecting a two-year-long slump in their share prices. The company cut the value of its investments in reinsurer Swiss Re, drugmaker Sanofi (SNY) and regional bank U.S. Bancorp (USB).

Accounting questioned

But correspondence the Omaha-based company filed with the Securities and Exchange Commission makes it clear Berkshire didn’t do so happily.

Berkshire’s ability to hold shares for a long time, together with its assessment of the companies’ prospects, “suggests that it is likely that the market prices of each of these securities will recover to a level equal to or greater than our cost basis in each investment,” finance chief Marc Hamburg wrote to the chief of the SEC’s accounting branch, Gus Rodriguez, in a Feb. 4 letter.

Berkshire disclosed the big stock hit in its annual report, filed last month. But until today it hadn’t named the companies whose investments were deemed to be other than temporarily impaired.

The SEC asked Berkshire in December to justify the large unrealized losses it was carrying on its investments in five stocks. Accounting rules say companies should write down the value of stock investments if they stay in the red for an extended period or if the holder is unlikely to be able to hold the shares over a longer period over which they might recover.

The agency noted that Berkshire’s unrealized stock losses rose to $3.5 billion at the end of the third quarter of 2010 from $3 billion at the end of the previous quarter, in spite of the market having risen over that span. Berkshire’s stock portfolio was worth $61 billion at Dec. 31.

Berkshire responded last month that it would write down the value of its holdings in three of its five biggest unrealized loss positions, all of which have been in the red for at least 21 months.

But it defended its decision not to take writedowns in two cases, a $3.2 billion slug of Wells Fargo (WFC) stock and a $2.9 billion stake in Kraft (KFT).

Hamburg said the size of those losses has shrunk, and that the company expects to be able to hold the shares till they are in the black again. He made that argument in spite of the fact that Berkshire trimmed its stake in Kraft by a third during 2010, a year in which Buffett criticized Kraft’s management for overpaying for Cadbury.

The impairement hit isn’t the first for Berkshire, which in 2009 wrote down part of its investment in Conoco (COP), a 2008 purchase that Buffett later derided as one of his dumbest moves. Berkshire has since sold much of its Conoco stake, though the firm says taking an impairment charge doesn’t make it more apt to sell.

The disclosure comes a few days after Berkshire warned investors to be careful not to overvalue red hot social media companies like Twitter and Facebook. But Monday shows even Buffett isn’t perfect on that score.

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