Using the 2017 annual report for Berkshire Hathaway fill out

Using the 2017 annual report for Berkshire Hathaway fill out the chart below.

www.berkshirehathaway.com/2017ar/2017ar.pdf

Terms you have to know

Questions - relate to Berkshire Hathaway

Amount

(in millions $)

Page number

Comment

Pre-tax accounting income

--------------

Income before taxes

Book Income

1. Amount (all in millions, and indicate page number)

Income tax expense

--------------

Calculated in a roundabout way:

Taxes paid

plus increase in Deferred Tax Liability

plus decrease in Deferred Tax Asset

2. Amount - if applicable

Income tax benefit

------------------------

Usually when pre-tax accounting income is negative.

3. Amount - if applicable

Net Income

----------------------

Pre-tax accounting income minus Income Tax Expense (plus Income Tax Benefit)

4. Amount

Effective tax rate

----------------------

Income tax expense / Pre-tax accounting income

only meaningful if income tax expense and pre-tax accounting income (not loss)

5. Explain why this is not applicable.

6. Calculate effective tax rate for 2016. Show numerator and denominator.

Statutory Tax Rate

---------------------

New U.S. corporate tax rate of 21%, effective 2018.

7. Divide the second line on page 91 by the first line. What percentage do you get?

Taxes Paid (or Owed) for the period

8. Look at note 12

Income Tax Payable

-----------------------

Short-term liability reflecting taxes to be paid very soon

9. Look at the beginning of note 16

Deferred Tax Asset

---------------------

This account usually increases when Taxes Paid are higher than Income tax expense

10. You will not find DTA on the balance sheet itself. Look at note 16.

Deferred Tax Liability

-------------------

This account usually increases when Taxes Paid are lower than income tax expense

11. What is the gross DTL in the notes?

12. What is the net DTL on the balance sheet?

Terms you have to know	Questions - relate to Berkshire Hathaway	Amount (in millions $)	Page number	Comment
Pre-tax accounting income -------------- Income before taxes Book Income	1. Amount (all in millions, and indicate page number)
Income tax expense -------------- Calculated in a roundabout way: Taxes paid plus increase in Deferred Tax Liability plus decrease in Deferred Tax Asset	2. Amount - if applicable
Income tax benefit ------------------------ Usually when pre-tax accounting income is negative.	3. Amount - if applicable
Net Income ---------------------- Pre-tax accounting income minus Income Tax Expense (plus Income Tax Benefit)	4. Amount
Effective tax rate ---------------------- Income tax expense / Pre-tax accounting income only meaningful if income tax expense and pre-tax accounting income (not loss)	5. Explain why this is not applicable.
	6. Calculate effective tax rate for 2016. Show numerator and denominator.
Statutory Tax Rate --------------------- New U.S. corporate tax rate of 21%, effective 2018.	7. Divide the second line on page 91 by the first line. What percentage do you get?
Taxes Paid (or Owed) for the period	8. Look at note 12
Income Tax Payable ----------------------- Short-term liability reflecting taxes to be paid very soon	9. Look at the beginning of note 16
Deferred Tax Asset --------------------- This account usually increases when Taxes Paid are higher than Income tax expense	10. You will not find DTA on the balance sheet itself. Look at note 16.
Deferred Tax Liability ------------------- This account usually increases when Taxes Paid are lower than income tax expense	11. What is the gross DTL in the notes?
	12. What is the net DTL on the balance sheet?

Solution

1. Have an effect on of tax reform

Warren Buffett opens up the 2017 Berkshire Hathaway Letter to Shareholders via talking concerning the contemporary tax reform. Unfortunately he doesn\'t go into a lot element right here, however he is very obvious with the fact that Berkshire Hathaway used to be a tremendous winner when Congress enacted the Tax Cuts and Jobs Act in December 2017. In 2017, Berkshire\'s reap in net worth was $65 billion. $29 billion of that $sixty five billion obtain in web worth, or 45%, used to be the direct influence of the brand new tax code.

2. The four constructing blocks that add price to Berkshire Hathaway

Buffett explains that there are four building blocks that add value to Berkshire Hathaway:

1. Widespread stand-alone acquisitions

Warren Buffett and Charlie Munger look for organizations with durable competitive strengths; able and excessive-grade administration; good returns on the web tangible property required to function the industry; opportunities for inner progress at appealing returns; and, sooner or later, a wise purchase fee. (See : The four Warren Buffett inventory Investing ideas)

Nothing that Buffett reviewed in 2017 match that final criteria. It sounds as if CEOs are in a frenzy to make offers and gather different firms, pushing up costs. Why? partially, it\"\'s considering the CEO job self-selects for can-do forms. If Wall avenue analysts or board managers urge that company of CEO to keep in mind possible acquisitions, it\'s a bit like telling your ripening teen to be definite to have a traditional intercourse lifestyles.

Berkshire had $115 billion in money on the finish of 2016, up from $86 billion at year end 2016. Buffett and Munger would decide upon to make use of a lot of that money to make some significant acquisitions, due to the fact presently it\'s best incomes subsequent-to-nothing for them. Our smiles will broaden when we\'ve got redeployed Berkshire\'s excess dollars into extra productive assets.

That mentioned, Berkshire Hathaway did make one big acquisition last yr: a 39% curiosity in Pilot Flying J. With $20 billion in annual income, Pilot Flying J is the dominant leader in truck stops and leisure stops in the U.S. Berkshire is contractually obligated to broaden its interest in the corporation to eighty% in 2023.

2. Bolt-on acquisitions that match with businesses Berskshire already owns

Berkshire made many smaller bolt-on acquisitions final yr, as well as a few noteworthy bigger ones:

Clayton properties the manufacturer and financier of cellular houses and mobile home purchases bought two builders of traditional properties, doubling Berkshire presence in the traditional dwelling builder market (a area the organization entered simplest three years in the past). Additionally worth noting, Clayton had a 49% market share of the mobile house market in 2016 3x bigger than the next competitor and virtually 4x the 13% Clayton had in 2003 when Berkshire bought the corporation.
Shaw Industries the carpet and hardwood floors industry got U.S. Floors, a swiftly growing distributor of luxurious vinyl tile.
HomeServices Berkshire Hathaways developing real property brokerage operation acquired the 3rd and 12th largest brokers in the country. HomeServices had in the beginning been an extraordinarily small part of MidAmerican vigor (now Berkshire Hathaway vigor) when Berkshire purchased that manufacturer in 2000. Buffett had barely paid any awareness to it. Nevertheless, by 2016 HomeServices became the 2d-larges dealer in the nation; following the 2 acquisitions, it\'s now close to being the most important. Nonetheless HomeServies handiest has a 3% complete market share (which indicates just how fragmented that real property brokerage market is). As Buffett says, that leaves ninety seven% to go.
Precision Castparts bough Wilhelm Schulz GmbH, a German maker of corrosion resistant fittings, piping techniques, and accessories. Buffett admits that he doesn\'t appreciate manufacturing operations as well as he does real estate brokers, home builders, or truck stops. So he\'s relying closely on Mark Donegan, Precisions CEO. Nonetheless, making a bet on men and women can repeatedly be more specific than having a bet on physical belongings.
Three. Inside income growth and margin development at Berkshires many and different firms

Berkshire Hathaway businesses can also be damaged down into coverage operations and non-coverage operations.

Insurance Operations

in this 2017 Berkshire Hathaway Letter to Shareholders, Warren Buffett as soon as once more talks about the importance of coverage float to Berkshire Hathaway and how it works:

coverage drift has been of satisfactory significance to Berkshire. When we invest these funds, all dividends, interest and positive factors from their deployment belong to Berkshire. (If we experience funding losses, those, of course, are on our tab as well.)

float materializes at %insurers in several approaches:

Premiums are often paid to the manufacturer upfront whereas losses arise over the life of the policy, usually a six-month or one-12 months interval;
though some losses, akin to automobile repairs, are swiftly paid, others such because the harm precipitated by using exposure to asbestos may just take many years to floor and even longer to evaluate and settle;
Loss payments are in many instances spread over many years in cases, say, of a individual employed with the aid of considered one of our staff compensation policyholders being completely injured and thereafter requiring highly-priced lifetime care.
Float will more often than not develop slowly for a minimum of a couple of years. After we ultimately expertise a decline, it will be modest at most 3% or so in any single year. In contrast to financial institution deposits or lifestyles insurance insurance policies containing surrender choices, p.C.Glide can\'t be withdrawn. Because of this %corporations can\'t experience large runs in times of general monetary stress, a attribute of high importance to Berkshire that we factor into our investment choices.
3. within the brief run, the market is a voting laptop; in the end, nonetheless, it turns into a weighing desktop.

Warren Buffett repeats Ben Grahams noted quote: within the quick run, the market is a voting laptop; in the end, nonetheless, it turns into a weighing computing device. (learn: The clever Investor)

In other phrases, in the short-run stock costs are like a fame contest stocks go up or down now not headquartered on their genuine intrinsic worth however on other outside explanations; in the lengthy-run, however, inventory prices are typically established on genuine valued at. Because of this volatility in prices within the brief term and obscure long-time period development in value. Buffett continues:

Berkshire, itself, provides some vivid examples of how rate randomness in the brief-term can vague long-term development in worth. For the last fifty three years, the organization has developed value with the aid of reinvesting its profits and letting compound curiosity work its magic. Year with the aid of 12 months, we have now moved forward. Yet Berkshire shares have suffered four truly predominant dips. Listed here are the gory important points:

but regardless of these 4 most important periods of decline, Berkshire Hathaways stock cost has still compounded at a cost of over 20% each year during the last 50+ years! Back to Buffett:

This desk presents the strongest argument i can muster in opposition to ever using borrowed money to possess stocks. There\'s quite simply no telling how a ways stocks can fall in a brief period. Despite the fact that your borrowings are small and your positions aren\'t immediately threatened via the plunging market, your intellect may good come to be rattled by using scary headlines and breathless commentary. And an unsettled intellect will not make excellent decisions.

Buffet warns that in the subsequent 53 years, Berkshires shares (and the rest of the inventory market) will very usually expertise declines corresponding to those within the table above. And no one shall be equipped to tell you when these declines will happen. the sunshine can at any time go from green to purple without pausing at yellow. however when these predominant declines do arise, they offer individual possibilities to those people who are now not handicapped by debt.

four. The guess is formally over!bet who gained?

The bet was once a $1 million guess that Warren Buffett made with a hedge fund known as Protégé partners. Buffett wager that a basically cost-free investment in an unmanaged S&P 500 index fund would, over the direction of 10 years, provide better outcome than those achieved by using most investment professionals, nonetheless good-viewed and incentivized these hedge cash may be.

Good, listed below are the results:

despite a quick in 2008, in which each fund-of-money beat the S&P Index Fund, performance used to be beautiful abysmal thereafter. In each single some of the 9 years that adopted, the fund-of-cash as a whole trailed the index fund. Now not one character fund even got here just about matching the eight.5% traditional annual reap for the S&P Index Fund over the 10 years. One fund was once even liquidated in 2017 when you consider that its performance used to be so dangerous! As Buffett says: efficiency comes, performance goes. Expenses never falter.

5. Bonds are for the birds. The S&P 500 could also be the world\'s most secure lengthy-term investment.

The bet illuminated another foremost investment lessons. But first we need to fully grasp the mechanics of how the wager was definitely made:

To fund the $1 million 10-year guess (which used to be to be donated to charity), Buffett and Protégé each and every bought $500,000 face quantity of zero-coupon U.S. Treasury bonds. They each and every paid $318,250 for these bonds, which would pay the $500,000 face worth to them in 10 years (with no interest). The cost of return if held to maturity would be 4.56%.

However, with the aid of late 2012 the bonds now with still 5 years to move earlier than they matured were selling for 95.7% of their face value (i.E. $478,500 each). An investor who purchased this bond would obtain an annual cost of return of lower than 1%