Amortization Charges - GAAP versus reality

[Guest longinvestor]

In the 2014 letter, WEB writes about GAAP versus "reality" as it has to do with amortization expense. This appears on page 14 and 15 of the letter and references page 67 which has the GAAP compliant table of "Goodwill and other intangible assets". Basically saying that, for valuation purpose, 80% of reported amortization ($1.15B in 2014) should be added back to earnings.

 

Additionally, WEB talks about the $7.4 B accumulated amortization being charged off between 5 and 10 years, whereupon reported earnings will be free to grow without the drag of intangible charge offs. Watch that earnings number! IV / IV growth is going to be all about earnings for a long time to come. 

 

Any thoughts?

 

 

[doughishere]

First off I highly recommend an accounting course at a major university if you can get the time to do it. Its one of those important skill sets that I think you can never spend too much time learning...but thats just me. I've fallen in love with it. Make sure you pick one with good standards...and most importantly make sure you learn. Its up to you to learn from it. Doing awesome by asking questions now.

 

 

Accounting has a lot of finesse to it.  GAAP is a set of Principles that are meant to be guidelines to managers and other users of financial statement in reporting the "status" of the business with the goal of "accurately" reporting the situation of the business...because humans cant agree on all measures of how to report items....companies often report them "proforma" which is a fancy way of saying how they(managers) think it should be reported. People dont agree because they are subject to their own incentives and biases on how to report them....GAAP tries to eliminate these and does a good job for the most part. GAAP and "economic reality" can deviate because...its not a perfect system its a human system.

 

 

 

Key point: Amortization charges get deducted in the earnings by a schedule based on certain assumptions and thus are subject to considerable bias and "flexibility." WEB basically believes that the GAAP way of doing things does not reflect economic reality for certain assets on BRK balance sheet.

 

 

Soo...lets look at BRK report. I believe you are looking into this passage:

I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand the disparate nature of intangible assets. Some truly deplete over time, while others in no way lose value. For software, as a big example, amortization charges are very real expenses. The concept of making charges against other intangibles, such as the amortization of customer relationships, however, arises through purchase-accounting rules and clearly does not reflect reality. GAAP accounting draws no distinction between the two types of charges.Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint they could not be more different.14

In the GAAP-compliant figures we show on page 49, amortization charges of $1.15 billion have been deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once non-existent at Berkshire, have become significant because of the many acquisitions we have made. Non-real amortization charges will almost certainly rise further as we acquire more companies.

 

 

If you have something like software, we call it an intangible asset, Buffett states that the "amortization charges are very real expenses." Software gets old after a while...certian software are no longer useful. It becomes obsolete. Expenses in developing new software are very real costs and need to be taken into account....GAAP provides guidelines on how to do it.

 

Think of it this way your car depreciates, maintaining it and eventually getting rid of of it over the course of its useful lifetime are very real concerns....software is similar. GAAP provides "guidelines" on how to do it.

 

Again....But the true economic value of lots of things are not as easily determinable as an automobile or software. Buffett uses the example of the "amortization of customer relationships." This is what we call an intangible asset.

 

This is an imperfect analogy.....but.........I go to the same lady i get a haircut from for the last 5 years because we know each other....I call her up say hey its Doughishere can you fit me in wednesday at 1pm. She says yes and when i go we know each other so well that i dont even have to tell her how to do my hair....how do you account for that relationship? GAAP would say depreciate the relationship like software. Well, the depreciation depends on a lot of factors one being the assumption of how long the relationship is going to continue.  I may move citys in 1 year, 5-years or 10 years who knows when that customer relationship is over. But how do i report that unknown? She gets my business all the time, because i dont dare let just anyone touch my hair, but how do you account for that?

 

 

Now WEB makes his own, non-GAAP, assumptions on how he thinks the economic realities of the Patents, Customer relationships...yadda yadda are. These are in the earnings statement because Amortization charges get deducted in the earnings

 

He warns that....."Depreciation charges, we want to emphasize, are different: Every dime of depreciation expense we report is a real cost. That’s true, moreover, at most other companies. When CEOs tout EBITDA as a valuation guide, wire them up for a polygraph test."

 

 

Maybe we need to hook him up to a polygraph test at the meeting this weekend......I'm kidding.

 

 

[doughishere]

 

Additionally, WEB talks about the $7.4 B accumulated amortization being charged off between 5 and 10 years, whereupon reported earnings will be free to grow without the drag of intangible charge offs. Watch that earnings number! IV / IV growth is going to be all about earnings for a long time to come. 

 

Any thoughts?

 

So...Amortization is the write off of assets...Assets depreciate over their economic life.

 

If i purchase a car for $10,000 and depreciate the car over 10 years I charge off $1000 each year for 10 years as an expense. Assume no other costs like maintenance go into the car. Well what happens when the car actually runs for 15 year....I "in a way" get 5 years of "free" economical use of that car. Where all revenue generated for that last 5 years has no associated expense. Theres no "charge off" for the last 5 years.

 

 

Webs just warning that revenue generated after the "charge of"(amortization expense) can be much greater because there is no associated expense from year 10 to 15 in my car example.

 

 

if my car needs to get replaced and I buy a new one, well i need to start to expense amortization of the new car and revenues from my use of the car are going to drop in proportion to the amortization expense.

 

 

[doughishere]

Others in here might be able to fill in the gaps...I hope ive answered the question somewhat sufficiently.

 

 

Edit 1: And it is a bit repetitive...ill try to clean it up later.

 

Edit 2: Wow my rough drafts suck...poor spelling...Im working on cleaning it up.

[Guest longinvestor]

Thanks for your suggestion on a college degree in accounting. I'm eager to learn but also want to avoid learning the wrong kind of accounting. The kind that is all around us and yes, taught in colleges and business schools. We're told by Munger that it is primarily the accounting profession that brought on the 2008 crisis by not speaking up.  https://www.youtube.com/watch?v=RtvTOJISXKg. Take a listen. Munger, I suspect is right, they actually have gone over to the dark side by giving up the honest accounting principles from the early 1900's and accepting the 2000's version because everyone is doing it. . Like derivative trading, where both parties report major gains on the same transaction. Is that what the "generally accepted" in GAAP mean? How deep rooted is this malaise? Perhaps won't change in my lifetime. So, no thanks to the accounting college suggestion. No need to get the mind polluted with bullshit accounting.

 

I like the Buffett version of accounting "We add up revenues, add up the costs, subtract one from the other and report earnings" - Income Statement. Actually the Khan academy videos on reading income statements/ balance sheets are great when investing in BRK. With 499 of the 500 S&P size companies, the accounting "nuances" kick in, (read: they count revenues that don't exist, hide costs that are embarrassing etc.). With BRK, I tend to take WEB at his word. So when he says "80% of the intangibles are likely non-real", I've little doubt that he is right. In fact I'm convinced that the "pain now, gain later" is the norm at BRK. They take any bad news to the accounting statements right away. Time will tell, the next 5 years will likely be no different from the previous 50 at BRK for this to prove out. 

 

Now to customer relationships, I get the example of the hair dresser and what it is worth is difficult. Let's see where the lion's share of recent capital investments at BRK have gone; BHE, some $15 Billion have gone into wind and solar projects. BHE has signed up 25 plus year  agreements with customers with these projects. Same with BNSF moving grain from the Kansas farm. Neither the farm nor the railroad are going anywhere for the foreseeable  future. Is that a little different from the hair dresser or the used car value? Perhaps Buffett is alluding to this kind of customer relationship, no? 

 

 

 

First off I highly recommend an accounting course at a major university if you can get the time to do it. Its one of those important skill sets that I think you can never spend too much time learning...but thats just me. I've fallen in love with it. Make sure you pick one with good standards...and most importantly make sure you learn. Its up to you to learn from it. Doing awesome by asking questions now.

 

 

Accounting has a lot of finesse to it.  GAAP is a set of Principles that are meant to be guidelines to managers and other users of financial statement in reporting the "status" of the business with the goal of "accurately" reporting the situation of the business...because humans cant agree on all measures of how to report items....companies often report them "proforma" which is a fancy way of saying how they(managers) think it should be reported. People dont agree because they are subject to their own incentives and biases on how to report them....GAAP tries to eliminate these and does a good job for the most part. GAAP and "economic reality" can deviate because...its not a perfect system its a human system.

 

 

 

Key point: Amortization charges get deducted in the earnings by a schedule based on certain assumptions and thus are subject to considerable bias and "flexibility." WEB basically believes that the GAAP way of doing things does not reflect economic reality for certain assets on BRK balance sheet.

 

 

Soo...lets look at BRK report. I believe you are looking into this passage:

I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand the disparate nature of intangible assets. Some truly deplete over time, while others in no way lose value. For software, as a big example, amortization charges are very real expenses. The concept of making charges against other intangibles, such as the amortization of customer relationships, however, arises through purchase-accounting rules and clearly does not reflect reality. GAAP accounting draws no distinction between the two types of charges.Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint they could not be more different.14

In the GAAP-compliant figures we show on page 49, amortization charges of $1.15 billion have been deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once non-existent at Berkshire, have become significant because of the many acquisitions we have made. Non-real amortization charges will almost certainly rise further as we acquire more companies.

 

 

If you have something like software, we call it an intangible asset, Buffett states that the "amortization charges are very real expenses." Software gets old after a while...certian software are no longer useful. It becomes obsolete. Expenses in developing new software are very real costs and need to be taken into account....GAAP provides guidelines on how to do it.

 

Think of it this way your car depreciates, maintaining it and eventually getting rid of of it over the course of its useful lifetime are very real concerns....software is similar. GAAP provides "guidelines" on how to do it.

 

Again....But the true economic value of lots of things are not as easily determinable as an automobile or software. Buffett uses the example of the "amortization of customer relationships." This is what we call an intangible asset.

 

This is an imperfect analogy.....but.........I go to the same lady i get a haircut from for the last 5 years because we know each other....I call her up say hey its Doughishere can you fit me in wednesday at 1pm. She says yes and when i go we know each other so well that i dont even have to tell her how to do my hair....how do you account for that relationship? GAAP would say depreciate the relationship like software. Well, the depreciation depends on a lot of factors one being the assumption of how long the relationship is going to continue.  I may move citys in 1 year, 5-years or 10 years who knows when that customer relationship is over. But how do i report that unknown? She gets my business all the time, because i dont dare let just anyone touch my hair, but how do you account for that?

 

 

Now WEB makes his own, non-GAAP, assumptions on how he thinks the economic realities of the Patents, Customer relationships...yadda yadda are. These are in the earnings statement because Amortization charges get deducted in the earnings

 

He warns that....."Depreciation charges, we want to emphasize, are different: Every dime of depreciation expense we report is a real cost. That’s true, moreover, at most other companies. When CEOs tout EBITDA as a valuation guide, wire them up for a polygraph test."

 

 

Maybe we need to hook him up to a polygraph test at the meeting this weekend......I'm kidding.

[LC]

Accounting classes are mostly cookie-cutter. The stuff doesn't change very often and most aspect have stringent rules to follow. You can probably teach it yourself if you have the inclination.

 

I'm eager to learn but also want to avoid learning the wrong kind of accounting. The kind that is all around us and yes, taught in colleges and business schools. We're told by Munger that it is primarily the accounting profession that brought on the 2008 crisis by not speaking up.

 

He's talking about ethics, not accounting.

 

Perhaps won't change in my lifetime. So, no thanks to the accounting college suggestion. No need to get the mind polluted with bullshit accounting.

Yea I think you're being overly dramatic here. Bullshit accounting? What? Accounting rules don't change whether you learn it from Tyco University or straight from Munger's mouth. Double-entry bookkeeping is about as good as it gets. GAAP accounting is pretty damn good.

 

The problem is, people will simply lie to steal people's money. That's called ethics and is much more difficult to teach.

[KCLarkin]

Thanks for your suggestion on a college degree in accounting. I'm eager to learn but also want to avoid learning the wrong kind of accounting. The kind that is all around us and yes, taught in colleges and business schools. We're told by Munger that it is primarily the accounting profession that brought on the 2008 crisis by not speaking up.  https://www.youtube.com/watch?v=RtvTOJISXKg. Take a listen. Munger, I suspect is right, they actually have gone over to the dark side by giving up the honest accounting principles from the early 1900's and accepting the 2000's version because everyone is doing it. . Like derivative trading, where both parties report major gains on the same transaction. Is that what the "generally accepted" in GAAP mean? How deep rooted is this malaise? Perhaps won't change in my lifetime. So, no thanks to the accounting college suggestion. No need to get the mind polluted with bullshit accounting.

 

When Warren was asked by the daughter of one of his business associates what courses she should study in college, he replied, "Accounting -- it is the language of business".

 

However, double-entry bookkeeping was a hell of an invention. And it’s not that hard to understand. But you have to know enough about it to understand its limitations - because although accounting is the starting place, it’s only a crude approximation. And it’s not very hard to understand its limitations. For example, everyone can see that you have to more or less just guess at the useful life of a jet airplane or anything like that.

--Charlie Munger

 

[augustabound]

I don't know how relevant this is but the suggestion of a college course reminded me of this.

 

https://www.coursera.org/learn/wharton-accounting

Enrollment closes tomorrow but they run this every couple of months.

 

Part 2

https://www.coursera.org/learn/wharton-financial-accounting

 

I have all the videos of the courses but haven't watched any of them yet. His annoying animation characters are really ................. annoying. Brutal actually. But the course is free.

You can always just do what I did, enroll and download the videos....................then forget about them for 6 months.  ;D

[Guest longinvestor]

Accounting classes are mostly cookie-cutter. The stuff doesn't change very often and most aspect have stringent rules to follow. You can probably teach it yourself if you have the inclination.

 

I'm eager to learn but also want to avoid learning the wrong kind of accounting. The kind that is all around us and yes, taught in colleges and business schools. We're told by Munger that it is primarily the accounting profession that brought on the 2008 crisis by not speaking up.

 

He's talking about ethics, not accounting.

 

Perhaps won't change in my lifetime. So, no thanks to the accounting college suggestion. No need to get the mind polluted with bullshit accounting.

Yea I think you're being overly dramatic here. Bullshit accounting? What? Accounting rules don't change whether you learn it from Tyco University or straight from Munger's mouth. Double-entry bookkeeping is about as good as it gets. GAAP accounting is pretty damn good.

 

The problem is, people will simply lie to steal people's money. That's called ethics and is much more difficult to teach.

 

Actually, if you watch the video, Munger is talking about the accounting profession not following their duty of keeping folly and unethical behavior out. Also, the pervasive nature of this malaise of not allowing honest accounting to take hold (again)in our lifetimes is Munger's observation as well. Both Munger and Bogle are of the opinion that the smartest young minds ending up in the financial industry (versus working on real world problems) is a travesty. There is simply too much folly, make-believe etc in the financial world today that draws too much human talent. For a net societal loss. This was the context of my reference to "bullshit". Perhaps was a bit harsh in referencing GAAP.

 

I get that the double entry accounting is rock solid but that was from the early 1900's. I will spend some time on mastering this. GAAP? Perhaps gain understanding enough of it to see where it does not reflect economic reality accurately. I believe reading BRK's annual reports helps me along the way, Buffett's language there meant for the lay investors (his sister) is good enough.

[Guest longinvestor]

I don't know how relevant this is but the suggestion of a college course reminded me of this.

 

https://www.coursera.org/learn/wharton-accounting

Enrollment closes tomorrow but they run this every couple of months.

 

Part 2

https://www.coursera.org/learn/wharton-financial-accounting

 

I have all the videos of the courses but haven't watched any of them yet. His annoying animation characters are really ................. annoying. Brutal actually. But the course is free.

You can always just do what I did, enroll and download the videos....................then forget about them for 6 months.  ;D

 

Thanks for the links

[LC]

Actually, if you watch the video, Munger is talking about the accounting profession not following their duty of keeping folly and unethical behavior out.

 

What I highlighted above in your quote is an ethical issue, not an issue with the rules governing GAAP or IFRS (the two major accounting standards).

 

Nobody is going to teach you in a classroom that you shouldn't accept a bribe in exchange for moving liabilities off the balance sheet.

[alwaysinvert]

Accounting classes are mostly cookie-cutter. The stuff doesn't change very often and most aspect have stringent rules to follow. You can probably teach it yourself if you have the inclination.

 

I'm eager to learn but also want to avoid learning the wrong kind of accounting. The kind that is all around us and yes, taught in colleges and business schools. We're told by Munger that it is primarily the accounting profession that brought on the 2008 crisis by not speaking up.

 

He's talking about ethics, not accounting.

 

Perhaps won't change in my lifetime. So, no thanks to the accounting college suggestion. No need to get the mind polluted with bullshit accounting.

Yea I think you're being overly dramatic here. Bullshit accounting? What? Accounting rules don't change whether you learn it from Tyco University or straight from Munger's mouth. Double-entry bookkeeping is about as good as it gets. GAAP accounting is pretty damn good.

 

The problem is, people will simply lie to steal people's money. That's called ethics and is much more difficult to teach.

 

Actually, if you watch the video, Munger is talking about the accounting profession not following their duty of keeping folly and unethical behavior out. Also, the pervasive nature of this malaise of not allowing honest accounting to take hold (again)in our lifetimes is Munger's observation as well. Both Munger and Bogle are of the opinion that the smartest young minds ending up in the financial industry (versus working on real world problems) is a travesty. There is simply too much folly, make-believe etc in the financial world today that draws too much human talent. For a net societal loss. This was the context of my reference to "bullshit". Perhaps was a bit harsh in referencing GAAP.

 

I get that the double entry accounting is rock solid but that was from the early 1900's. I will spend some time on mastering this. GAAP? Perhaps gain understanding enough of it to see where it does not reflect economic reality accurately. I believe reading BRK's annual reports helps me along the way, Buffett's language there meant for the lay investors (his sister) is good enough.

 

Under GAAP real estate is carried on the books at historical value. Under IFRS you are allowed to mark-to-market. What is the effect on the accounting of real estate companies? Under GAAP book value is often wildly inaccurate. Under IFRS on the other hand, book value is perhaps more accurate but the last line in the income statement is a mirage. Which is the truth? None of them. Both are approximations. And both can be used for nefarious ends. In the GAAP case you could easily see how the true values on the balance sheet could be kept hidden from investors. As for IFRS, the potential for runaway roll-up stories seems decent.

 

GAAP generally does reflect reality fairly, as does IFRS. But they aren't built for the exceptions, which is why things about the accounting in BRK could be off ("real" goodwill of Geico is x as opposed to the y on the books, etc). You can't have rules of thumb that apply every single time.

 

"Bullshit accounting" is not necessarily about incorrect rules but about dishonest intent. In order to spot intent you have to know the rules as taught and practiced.

[Guest longinvestor]

Here's an update, from the 2015 letter, the bolded text(mine) is new commentary from Buffett. I believe I just got some meaningful accounting education by reading a few paragraphs from Buffett on the same subject over a few year. Love this kind of education. But again, that's just me.  Not to mention receiving confirmation that BRK's valuation is that much more divergent from the quoted market price. Thanks to GAAP not reflecting economic reality in this case.

 

 

 

First off I highly recommend an accounting course at a major university if you can get the time to do it. Its one of those important skill sets that I think you can never spend too much time learning...but thats just me. I've fallen in love with it. Make sure you pick one with good standards...and most importantly make sure you learn. Its up to you to learn from it. Doing awesome by asking questions now.

 

 

Accounting has a lot of finesse to it.  GAAP is a set of Principles that are meant to be guidelines to managers and other users of financial statement in reporting the "status" of the business with the goal of "accurately" reporting the situation of the business...because humans cant agree on all measures of how to report items....companies often report them "proforma" which is a fancy way of saying how they(managers) think it should be reported. People dont agree because they are subject to their own incentives and biases on how to report them....GAAP tries to eliminate these and does a good job for the most part. GAAP and "economic reality" can deviate because...its not a perfect system its a human system.

 

 

 

Key point: Amortization charges get deducted in the earnings by a schedule based on certain assumptions and thus are subject to considerable bias and "flexibility." WEB basically believes that the GAAP way of doing things does not reflect economic reality for certain assets on BRK balance sheet.

 

 

Soo...lets look at BRK report. I believe you are looking into this passage:

I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand the disparate nature of intangible assets. Some truly deplete over time, while others in no way lose value. For software, as a big example, amortization charges are very real expenses. The concept of making charges against other intangibles, such as the amortization of customer relationships, however, arises through purchase-accounting rules and clearly does not reflect reality. GAAP accounting draws no distinction between the two types of charges.Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint they could not be more different.14

In the GAAP-compliant figures we show on page 49, amortization charges of $1.15 billion have been deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once non-existent at Berkshire, have become significant because of the many acquisitions we have made. Non-real amortization charges will almost certainly rise further as we acquire more companies.

 

 

If you have something like software, we call it an intangible asset, Buffett states that the "amortization charges are very real expenses." Software gets old after a while...certian software are no longer useful. It becomes obsolete. Expenses in developing new software are very real costs and need to be taken into account....GAAP provides guidelines on how to do it.

 

Think of it this way your car depreciates, maintaining it and eventually getting rid of of it over the course of its useful lifetime are very real concerns....software is similar. GAAP provides "guidelines" on how to do it.

 

Again....But the true economic value of lots of things are not as easily determinable as an automobile or software. Buffett uses the example of the "amortization of customer relationships." This is what we call an intangible asset.

 

This is an imperfect analogy.....but.........I go to the same lady i get a haircut from for the last 5 years because we know each other....I call her up say hey its Doughishere can you fit me in wednesday at 1pm. She says yes and when i go we know each other so well that i dont even have to tell her how to do my hair....how do you account for that relationship? GAAP would say depreciate the relationship like software. Well, the depreciation depends on a lot of factors one being the assumption of how long the relationship is going to continue.  I may move citys in 1 year, 5-years or 10 years who knows when that customer relationship is over. But how do i report that unknown? She gets my business all the time, because i dont dare let just anyone touch my hair, but how do you account for that?

 

 

Now WEB makes his own, non-GAAP, assumptions on how he thinks the economic realities of the Patents, Customer relationships...yadda yadda are. These are in the earnings statement because Amortization charges get deducted in the earnings

 

He warns that....."Depreciation charges, we want to emphasize, are different: Every dime of depreciation expense we report is a real cost. That’s true, moreover, at most other companies. When CEOs tout EBITDA as a valuation guide, wire them up for a polygraph test."

 

 

Maybe we need to hook him up to a polygraph test at the meeting this weekend......I'm kidding.

 

 

Our income and expense data conforming to GAAP is on page 38. In contrast, the operating expense

figures above are non-GAAP because they exclude some purchase-accounting items (primarily the amortization of

certain intangible assets). We present the data in this manner because Charlie and I believe the adjusted numbers

more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do

GAAP figures.

I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand

the disparate nature of intangible assets. Some truly deplete in value over time, while others in no way lose value.

For software, as a big example, amortization charges are very real expenses. Conversely, the concept of recording

charges against other intangibles, such as customer relationships, arises from purchase-accounting rules and clearly

does not reflect economic reality. GAAP accounting draws no distinction between the two types of charges. Both,

that is, are recorded as expenses when earnings are calculated – even though, from an investor’s viewpoint, they

could not differ more.

15

In the GAAP-compliant figures we show on page 38, amortization charges of $1.1 billion have been

deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once nonexistent

at Berkshire, have become significant because of the many acquisitions we have made. Non-real

amortization charges are likely to climb further as we acquire more companies.

The table on page 55 gives you the current status of our intangible assets as calculated by GAAP. We now

have $6.8 billion left of amortizable intangibles, of which $4.1 billion will be expensed over the next five years.

Eventually, of course, every dollar of these “assets” will be charged off. When that happens, reported earnings

increase even if true earnings are flat. (My gift to my successor.)

I suggest that you ignore a portion of GAAP amortization costs. But it is with some trepidation that I do

that, knowing that it has become common for managers to tell their owners to ignore certain expense items that are

all too real. “Stock-based compensation” is the most egregious example. The very name says it all: “compensation.”

If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of

earnings, where in the world do they belong?

Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring

“earnings” figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they

fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is

playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of

propagating misleading numbers that can deceive investors.

Depreciation charges are a more complicated subject but are almost always true costs. Certainly they are at

Berkshire. I wish we could keep our businesses competitive while spending less than our depreciation charge, but in

51 years I’ve yet to figure out how to do so. Indeed, the depreciation charge we record in our railroad business falls

far short of the capital outlays needed to merely keep the railroad running properly, a mismatch that leads to GAAP

earnings that are higher than true economic earnings. (This overstatement of earnings exists at all railroads.) When

CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses

lengthen while they speak.

Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality, however,

you should remember to add back most of the amortization charges we report. You should also subtract something

to reflect BNSF’s inadequate depreciation charge.

[doughishere]

Its nice to hear it from Buffett but you should really learn it for yourself also. How do we know Buffett isn't lieing to us?  And at some point he will be gone and you will no longer have to decide for yourself. How do you know the next guy isnt a scumbag?

 

 

Even Buffett has a formal education in accounting. He did go to school and study it....ohh well i guess Its all about how well you trust someone. And for the premature haters....im not criticizing Buffet in any way.  Im not saying Buffett is bad or hasnt earned his sterling reputation im just saying that its good to check even the most trusted man. And to do so you need to study things independently.

 

I guess the difference is that some people are ok with being passive...id rather be active. Both are neither immoral nor wrong.