Berkshire Hathaway Letters to Shareholders: 1965-2024

by Warren Buffett

Acquisition Accounting Once again, I would like to make some comments about accounting, in this case about its application to acquisitions. This is currently a very contentious topic and, before the dust settles, Congress may even intervene (a truly terrible idea). When a company is acquired, generally accepted accounting principles (“GAAP”) currently condone two very different ways of recording the transaction: “purchase” and “pooling.” In a pooling, stock must be the currency; in a purchase, payment can be made in either cash or stock. Whatever the currency, managements usually detest purchase accounting because it almost always requires that a “goodwill” account be established and subsequently written off — a process that saddles earnings with a large annual charge that normally persists for decades. In contrast, pooling avoids a goodwill account, which is why managements love it. Now, the Financial Accounting Standards Board (“FASB”) has proposed an end to pooling, and many CEOs are girding for battle. It will be an important fight, so we’ll venture some opinions. To begin with, we agree with the many managers who argue that goodwill amortization charges are usually spurious. You’ll find my thinking about this in the appendix to our 1983 annual report, which is available on our website, and in the Owner’s Manual on pages 55 - 62. For accounting rules to mandate amortization that will, in the usual case, conflict with reality is deeply troublesome: Most accounting charg...