Gary Gambino - Impact of OXY Accounting Change

Berkshire Hathaway Operating Earnings Will Take A Step Up

Summary

  • Berkshire Hathaway has begun reporting its ownership of Occidental Petroleum under the equity method.

  • Berkshire’s 20.9% share of OXY’s earnings will now be reported in operating earnings. Changes in OXY share price will no longer impact investment gains and losses.

  • This accounting change has no impact on Berkshire’s intrinsic value but investors should be aware of it when comparing results from different periods.

“If Berkshire had owned the 20.9% stake in Oxy for the past year and accounted for it by the equity method, reported operating earnings would have been about $1.7 billion higher after tax, or approximately 7% of Berkshire’s YTD operating earnings.”

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Does this accounting change impact the S&P500 earnings? It seems like OXY reports “x” earnings that are then included in the SP500 earnings and then BRK reports “0.209x” as part of BRK earnings so the SP500 will show “1.209x” earnings from OXY and BRK??

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I’m agreeing with you. Pointed it out to a few of my PE friends and they didn’t get back to me. But it’s the same issue with AAPL and the other S&P companies. Looks like double accounting for income to me. Lets see if others agree.

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There is also “double counting” with dividend income from companies which are accounted for as investments. The dividend paid to BRK by Apple, Coke and other companies have already been included in their earnings, and then get added to BRK earnings. With equity accounting the impact is higher as proportionate earnings rather than the lower dividend amount is included in earnings.