Berkshire Hathaway
ISSUES
Warren Buffet invoked the substance-over-form concept to justify accounting for the GEICO and General Foods transactions as dividends distributions rather than sales of stock. Do you agree with Buffet that the substance of each of the proportionate redemptions was a dividend and not a sale of stock?
In deciding how to account for an unusual or unique transaction for financial reporting purposes, should one consider the tax treatment applied to the transaction?
Did Peat Marwick have a right to change its position on the proper accounting treatment for the stock redemptions? What factor or factors may have been responsible for Peat Marwick's decision to change its position regarding these transactions?
FACTS
In 1983, GEICO announced plans to purchase several million shares of its outstanding common stock for $60 per share. Among GEICO's largest stockholders was Berkshire Hathaway, Inc., an investment company. Executives of the two companies decided that Berkshire would tender approximately 350,000 if its GEICO shares in the stock buyback plan, which would allow Berkshire to treat the transaction as a proportionate redemption. In a proportionate redemption, the percentage equity interest of on company in a second company is maintained at the level that existed immediately before the transaction. For federal taxation purposes, the proceeds received by the investor company in a proportionate redemption are taxed as dividends by applying the effective intercorporate dividend tax rate. In 1983, that tax rate was approximately 6.9 percent.
Berkshire also chose to treat the proceeds from the redemption of the GEICO stock as dividend income in its 1983 financial statements. Berkshire's audit firm, Marwick, Mitchell & Company, approved that accounting treatment. In 1984, another company in which Berkshire had a significant equity interest, General Foods, announced a stock buyback plan. Again, Berkshire structured the sale of stock to General Foods so that the
Warren Buffet invoked the substance-over-form concept to justify accounting for the GEICO and General Foods transactions as dividends distributions rather than sales of stock. Do you agree with Buffet that the substance of each of the proportionate redemptions was a dividend and not a sale of stock?
In deciding how to account for an unusual or unique transaction for financial reporting purposes, should one consider the tax treatment applied to the transaction?
Did Peat Marwick have a right to change its position on the proper accounting treatment for the stock redemptions? What factor or factors may have been responsible for Peat Marwick's decision to change its position regarding these transactions?
FACTS
In 1983, GEICO announced plans to purchase several million shares of its outstanding common stock for $60 per share. Among GEICO's largest stockholders was Berkshire Hathaway, Inc., an investment company. Executives of the two companies decided that Berkshire would tender approximately 350,000 if its GEICO shares in the stock buyback plan, which would allow Berkshire to treat the transaction as a proportionate redemption. In a proportionate redemption, the percentage equity interest of on company in a second company is maintained at the level that existed immediately before the transaction. For federal taxation purposes, the proceeds received by the investor company in a proportionate redemption are taxed as dividends by applying the effective intercorporate dividend tax rate. In 1983, that tax rate was approximately 6.9 percent.
Berkshire also chose to treat the proceeds from the redemption of the GEICO stock as dividend income in its 1983 financial statements. Berkshire's audit firm, Marwick, Mitchell & Company, approved that accounting treatment. In 1984, another company in which Berkshire had a significant equity interest, General Foods, announced a stock buyback plan. Again, Berkshire structured the sale of stock to General Foods so that the
References: http://www.accountax.us/Taxation-%20Corporations%20Lecture%20V.pdf http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00314.pdf http://pcaobus.org/standards/auditing/pages/au508.aspx http://www.berkshirehathaway.com/letters/1984.html http://pcaobus.org/standards/auditing/pages/au316.aspx#au_316.52