2002: How does Buffett interpret GAAP accounting?
WARREN BUFFETT: We pay a lot of attention to what we regard as the reality of the balance sheets and economic conditions and cash situation, all of that of a business. And sometimes we think accounting reflects reality, and sometimes we don’t.
It’s a good starting point for us always, but I mean, there are companies in the United — there’s at least one company, at least last year, that was using a 12 percent investment return assumption on its pension plan, and there are other companies that use, I think, even below six, certainly six.
And in the end, should we look at the figures the same of one company, particularly if the pension fund’s a big element, that uses 12 and six? No, we look at what it says they’re using.
But, in our minds, we don’t think the company that’s using a 12 percent assumption is likely to do any better with their pension fund than one of the one’s that’s using six. In fact, we might even think the one that’s using six is likely to do better because we might think they’re more realistic about the world.
So, we start with the figures of the companies we look at, but we’ve got our own model in mind as to what they will look like. It’s true of the businesses we own a hundred percent of. Some of them have some debt in them, some of them don’t, partly that situation’s inherited.
In the end, we’ve got the same metrics that apply to them, whether they happen to have some debt on their own particular balance sheet or not, because in the end, we’re not going to be willing to have very much debt at all at Berkshire.
And where it’s placed doesn’t really make any difference because we’re going to pay everything we owe, no matter where it is. And it’s almost an accident whether company A or company B has a little debt attached to it.