Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

In Berkshire Hathaways 2012 annual report, Warren Buffett, in discussing the companys post-control step acquisitions of Marmon Holdings, Inc., observed the following: Marmon provides an

In Berkshire Hathaways 2012 annual report, Warren Buffett, in discussing the companys post-control step acquisitions of Marmon Holdings, Inc., observed the following:

Marmon provides an example of a clear and substantial gap existing between book value and intrinsic value. Let me explain the odd origin of this differential.

Last year I told you that we had purchased additional shares in Marmon, raising our ownership to 80% (up from the 64% we acquired in 2008). I also told you that GAAP accounting required us to immediately record the 2011 purchase on our books at far less than what we paid. Ive now had a year to think about this weird accounting rule, but Ive yet to find an explanation that makes any sensenor can Charlie or Marc Hamburg, our CFO, come up with one. My confusion increases when I am told that if we hadnt already owned 64%, the 16% we purchased in 2011 would have been entered on our books at our cost.

In 2012 (and in early 2013, retroactive to year end 2012) we acquired an additional 10% of Marmon and the same bizarre accounting treatment was required. The $700 million write-off we immediately incurred had no effect on earnings but did reduce book value and, therefore, 2012s gain in net worth.

The cost of our recent 10% purchase implies a $12.6 billion value for the 90% of Marmon we now own. Our balance-sheet carrying value for the 90%, however, is $8 billion. Charlie and I believe our current purchase represents excellent value. If we are correct, our Marmon holding is worth at least $4.6 billion more than its carrying value.

How would you explain the accounting valuations for the post -control step acquisitions to the Berkshire Hathaway executives?

Do you agree or disagree with the GAAP treatment of reporting additional investments in subsidiaries when control has previously been established?


Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

IT Auditing And Application Controls For Small And Mid Sized Enterprises Revenue Expenditure Inventory Payroll And More

Authors: Jason Wood, William Brown, Harry Howe

1st Edition

1118072618, 9781118072615

More Books

Students also viewed these Accounting questions

Question

Define induction and what are its objectives ?

Answered: 1 week ago

Question

Discuss the techniques of job analysis.

Answered: 1 week ago

Question

How do we do subnetting in IPv6?Explain with a suitable example.

Answered: 1 week ago

Question

Explain the guideline for job description.

Answered: 1 week ago

Question

What is job description ? State the uses of job description.

Answered: 1 week ago

Question

b. Where did they come from?

Answered: 1 week ago