The rule doesn’t follow common sense. If my Apple stock goes up, that’s not income, its wealth. Obviously the change should be reflected on the balance sheet but it’s quite obviously not net income.
Also it’s very stupid that if Berkshire buys, say, a $30 billion railroad, the value of that investment is reported completely differently than ownership of Apple.
Maybe it doesn’t seem like common sense but it’s not common sense for Berkshire to own a bunch of stock. It really serves no societal purpose. If they don’t like the accounting rules they could just stick to buying and operating businesses rather than accumulating stock in large caps or pay the money back to their shareholders in dividends who can then decide to buy other equities or more Berkshire.
In principle I would rather the government decide to do something to treat unrealized capital gains as income for individuals too. It’s not common sense that guys like Musk and Bezos can become the worlds richest people essentially paying no tax and then access their wealth through loans without ever realizing their capital gains
According to CW, this will lead to a big pop on the stock and then it will sell off once they read the release.
I mostly agree, but it’s tricky to have these two goals at the same time:
The nature of double-entry accounting means that if you want to adjust the Balance Sheet asset values, you’ve got to do something else in order to keep the Balance Sheet in balance (assets = liabilities + equity).
The prior solution accomplished this by stuffing unrealized gains and losses into a Shareholders’ Equity account called Accumulated Other Comprehensive Income (AOCI), which is where firms also stuff unrealized foreign currency translation gains/losses and pension gains/losses. And this introduces a new performance measure called Comprehensive Income, which is the combination of the Income Statement Net Income plus current period AOCI gains/losses (Other Comprehensive Income).
I actually liked this approach, but a lot of people didn’t. They found the AOCI/OCI numbers confusing and it seemed weird to allow gains/losses to affect the equity section of the Balance Sheet without going through Net Income. But the current treatment of equity unrealized gains/losses is ridiculous and I can’t believe that it’s actually helpful for anyone for Berkshire to report its unrealized holding gains/losses as part of Net Income.
I just got done teaching this stuff, and (much to the chagrin of my students) there are actually 6 or 7 different ways of accounting for investments depending on how you count:
Investment in Debt Securities
Held-to-Maturity securities are reported at their amortized cost, not their market value. So unrealized gains and losses aren’t reported anywhere. Unless there’s an other than temporary impairment, in which case it’s sometimes reported in Net Income and other times reported as a component of OCI.
Available-for-Sale securities are reported at their market values, but their unrealized gains and losses are reported as part of OCI, not Net Income. (Again, unless impairment). No effect on the Income Statement until actually sold. This is how most equity securities used to be accounted for.
Trading securities are reported at their market values, and their unrealized gains and losses are included as part of Net Income on the Income Statement.
Investments in Equity Securities:
Fair Value through Net Income, when the investor does not have any significant influence over the investee. This is how most minority stakes are accounted for. Reported at market value on the Balance Sheet with unrealized gains and losses included in Net Income. This is the primary driver of Berkshire reporting ~$90 billion in Net Income for 2021 - only $27.5 billion of that was operating income.
Equity Method investments are situations where the investor owns a substantial (usually >=20%) amount of the investee. These start out on the Balance Sheet at cost, increase by the investor’s proportionate share of the investee’s net income, and decrease by any dividends received and amortization of excess purchase price paid over book value. But they’re not updated to market value. So, for example, Berkshire owns 26.6% of Kraft Heinz and their carrying value on the Balance Sheet is $13.1 billion, while the market value of those shares on that date was only $11.7 billion. [I suspect that the SEC is going to raise questions about why they’re not marking that down to market via an impairment charge.]
UNLESS the firm elects to mark the investment to market value. Amazon is an example here - they treat their investment in Rivian as an equity method investment, but they do elect to mark that asset to market value, which is what led to them reporting $27 per share in earnings or whatever last quarter.
It can be very complicated, especially for a company like Berkshire that has all of these different investment types.
Also, I completely agree with this:
but I think it applies equally well to individuals like Jeff Bezos and Elon Musk and Warren Buffett, so I cringe every time I see someone talking about how much income they earn, when that number is primarily driven by the unrealized change in value of equity they hold.
Man I could talk about this stuff for hours.
https://twitter.com/NateSilver538/status/1497699305607598080
Lol Nate, taxis have always been easier from the airport in most places, and cheaper in some like LA. Unfortunately LAX now has the worst of both worlds. Your options are to call for a cab then wait in a parking garage for 15 minutes, or walk to one far end of the airport, wait for ever for an Uber that costs twice as much.
The last time I was waiting for a cab at LAX some super sketchy dude parked and kept wanting to talk to me. I got a very bad vibe but I was basically trapped waiting for the cab with no one else around. And the cab driver insisted I pay cash and was acting even sketchier. Never again.
calling grand rapids a “metro” is being generous.
Do you consider Honolulu, Little Rock, New Orleans, and Salt Lake City “metros”? Grand Rapids is right in the middle of these cities by population.
It was exactly like this in Boston the last time I went there for work (which was several years ago). Ride shares were limited to picking up people in this out of the way corner of the airport.
Still better than taxis.
I’ve worked/studied in GR for a month and have had a ton of family there my whole life, sometimes sortbypopulation doesn’t really work out.
An Uber to my house from LAX is $60 at peak times, which is all the time. A cab is $35.
Yeah ubers are now more expensive than taxis in Australia. Also they constantly drop your order when they find a better one, was waiting in a nightlife district 30 mins the other night for an uber.
Pretty sure it’s your job to be able to talk about that stuff for years lol.
It’s still like this. Logan is one of the worst airports to get in and out of I’ve ever been to
I was pretty sure this would happen eventually. There’s a reason why cabs are as expensive as they are.
Consumers are just chasing the VC-subsidized deals around like bonus-whoring. Seems like someday they music will stop.
Am I the only boring person here who would just rather take subway/bus than taxi/uber?
I always take subway/bus unless they aren’t running. I hate ride share. I live in the middle of the city and can count on one hand the amount I’ve used it in my own city. In fact used it more in a few days in LA than the last 4 years in Boston lol.
I’m halfway there. Subway, yes. Bus, no.
I’m also on team boring
You are not.
God no. Team public transit to the end. And our public transit is the laughingstock of North America!