Buffett's `Nightmare' Begins as Earnings Include Stock Swings

(Bloomberg) -- An accounting change is about to have a big effect on Warren Buffett’s conglomerate because swings in the value of its stock portfolio will soon be included in earnings.

The new rules from the Financial Accounting Standards Board took effect in December and will start cropping up in earnings reports at U.S. companies this year. There’s plenty in the pronouncement, but one significant change requires businesses to report their equity investments at fair value. Any gains or losses for the period will be recognized in net income.

Buffett's `Nightmare' Begins as Earnings Include Stock Swings

A key part of Buffett’s strategy at Berkshire Hathaway Inc. is buying and holding stocks for the long haul. The company’s equity portfolio, which includes giant stakes in blue chips such as Coca-Cola Co. and American Express Co., was valued at more than $150 billion at the end of September. Now, any change in the value of those holdings in a quarter will appear in Berkshire’s bottom line, even if none of the securities has been sold.

Buffett called this situation a “nightmare” at the company’s annual meeting in May because it could significantly distort profit. For years, he’s told investors in his conglomerate to focus on operating earnings, a figure that strips out gains and losses on investments and derivatives that he considers meaningless. The accounting change is almost certain to prompt him to emphasize that figure more.

Even so, some shareholders may welcome the new guidelines. They’ll force Buffett to highlight an aspect of Berkshire’s performance that has required a bit of digging, even if they also result in more volatile earnings.

Buffett's `Nightmare' Begins as Earnings Include Stock Swings

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