BUREAU OF NOTIFICATIONS |
| DIRECTOR Ulysses Ulyanovsk |
ABOUT
When one company owns part of another company, appropriate
accounting procedures pertaining to that ownership interest must
be selected from one of three major categories. The percentage
of voting stock that is owned, in large part, determines which
category of accounting principles should be utilized.
Generally accepted accounting principles require (subject to
exceptions, naturally, as with our former bank subsidiary) full
consolidation of sales, expenses, taxes, and earnings of business
holdings more than 50% owned. Blue Chip Stamps, 60% owned by
Berkshire Hathaway Inc., falls into this category. Therefore,
all Blue Chip income and expense items are included in full in
Berkshire’s Consolidated Statement of Earnings, with the 40%
ownership interest of others in Blue Chip’s net earnings
reflected in the Statement as a deduction for “minority
interest”.
Full inclusion of underlying earnings from another class of
holdings, companies owned 20% to 50% (usually called
“investees”), also normally occurs. Earnings from such companies
- for example, Wesco Financial, controlled by Berkshire but only
48% owned - are included via a one-line entry in the owner’s
Statement of Earnings. Unlike the over-50% category, all items
of revenue and expense are omitted; just the proportional share
of net income is included. Thus, if Corporation A owns one-third
of Corporation B, one-third of B’s earnings, whether or not
distributed by B, will end up in A’s earnings. There are some
modifications, both in this and the over-50% category, for
intercorporate taxes and purchase price adjustments, the
explanation of which we will save for a later day. (We know you
can hardly wait.)
Finally come holdings representing less than 20% ownership
of another corporation’s voting securities. In these cases,
accounting rules dictate that the owning companies include in
their earnings only dividends received from such holdings.
Undistributed earnings are ignored. Thus, should we own 10% of
Corporation X with earnings of $10 million in 1980, we would
report in our earnings (ignoring relatively minor taxes on
intercorporate dividends) either (a) $1 million if X declared the
full $10 million in dividends; (b) $500,000 if X paid out 50%, or
$5 million, in dividends; or (c) zero if X reinvested all
earnings.