Advanced Financial Accounting

Surname 1

Student’s Name

Professor’s Name

Course Details

November, 2017

Advanced Financial Accounting

Financial accounting keeps track of financial transactions in a given business entity. Transactions

are recorded and summarized using standardized guidelines to come up with a detailed financial

report or financial statements (Rich, n.p). These reports and statements are used externally to

indicate the financial position a company is at, in a particular financial period. The primary domain

that financial reports and statements are availed to is its shareholders. The standardized guidelines

that govern accounting procedures are spelled out by the International Accounting Standards (IAS)

and more specific is the United States’ Generally Accepted Accounting Standards (GAAP). All

accounting principles follow the provided standards. We will embark on Berkshire Hathaway Inc.,

an American multinational to debunk principles used in their advanced financial accounting.

Advanced Financial Accounting With Relation To Berkshire Hathaway Inc.

Some of the financial statements that are prepared in advanced financial accounting would

include; statement of stockholders equity, income statement, statement of financial position, and

statement of cash flows. According to Generally Accepted Accounting Standards, when recording

investments, cost method is used where the shareholder doesn’t exceed 20% of ownership in the

acquired company while the equity method prevails where shares of the investee exceed 20%.

However, the investor company would negate influence to the investee despite having a majority

Surname 2

ownership. This exemption is provided by the Financial Accounting Standards Board. In the cost

method, the entry is treated as a balance sheet value, where updates are indicated only on purchase

of additional shares. Any dividends on the share value are recorded as income. On the equity

method, the value of shares bought is recorded as non-current assets which fluctuate in percentage

when the net income changes. Dividends are booked in the contra-asset account of the shareholder

company.

As at 2013, the conglomerate holding company, Berkshire Hathaway, reported on their

accounting policies and practices. As a holding company, Berkshire has subsidiary business

investors inclusive of insurance and reinsurance, freight rail transportation, utilities and energy,

finance, manufacturing, service and retailing. Berkshire adopts a method of the consolidated

financial statement in what they call a Variable Interest Entity consensus (Berkshire 2013 report,

32). The agreement enables treatment of financial records of the subsidiaries to be treated as part

and parcel to Berkshire investments. Still, the company is entitled to reap benefits as well as absorb

the losses incurred by the components governed by the Variable Interest Entity. This practice did

away with the private indication of other investments in Berkshire’s statements of financial

position in the previous years. At this juncture, the aspect of combining and consolidating financial

statements comes into play in the financial accounting fields. Companies which have subsidiaries

can either incorporate combined or consolidated financial statements so as to reflect the position

of income, cash flows, and finance from the aggregate components of a company. While combined

financial statements treat entries of both the parent company and the subsidiaries individually, the

consolidated financial accounts sums together the financial statements of the parent company, and

its subsidiaries.

Surname 3

When companies adopt combined and consolidation methods of financial reporting,

intercompany transactions are eliminated to avoid double entry issues. Concisely, Transactions

that are recorded on a subsidiaries account would be transmitted to the parent account hence

distorting the results that are used to interpret the financial insights of a company. Income

statements in both the combined and consolidated accounts will entail an aggregate of the

subsidiaries and the parent company. Moreover, stockholders equity in consolidated accounts

maintains the parent figure hence no changes to the shareholders’ equity. In contrast, combined

accounts record the shareholders’ equity entry on the parent account as it expresses interest in

control of its subsidiaries. Berkshire transited to consolidated financial statements by December

31, 2013, which saw its investments incorporated as components of fixed-maturity and securities

investments (Berkshire 2013 report, 32). Furthermore, a company that owns more than 50% of its

investees stock should consolidate its accounts as provided by GAAP. Subsidiary companies

should have a non-controlling interest account to track their transactions that do not affect or

institutes the parent company’s transactions. Advanced financial accounting also deals with

pooling-of-interests, a practice of combining company’s balance sheets in cases of acquisition or

mergers. Alternatively, the purchasing company can assimilate the acquisition or merger at fair

market value.

Just as GAAP provides, Berkshire incorporates estimates and assumption to values that are

uncertain at the date of compiling financial statements (Bragg, n.p). This is subject to uncertainty

experience with the insurance claim expenses that the company projects. Estimates affect reported

assets and liabilities and consequentially transits to revenues and expenses. Estimates of unpaid

losses and adjustments are subject to estimation error. Berkshire recognizes that their actual

records differ from the estimate results of consolidated financial statements.

Surname 4

At acquisition, Berkshire classifies investments into fixed maturity and securities. A

reevaluation is eligible of each balancing date. Berkshire carries investments held to maturity at

an amortized cost and intents to hold the same to the maturity date. Additionally, trading

investments are held with intentions to sell them at a future time and they encompass the fair price

value. Berkshire classifies other investments as available-for-sale and are carried at fair value. Due

to a majority’s interest of Berkshire to its subsidiaries, the company applies equity method to

investments in common stock. However, when other investments possess an identical interest to

common stock, equity method is still used (Berkshire 2013 report, 33). Berkshire records

investments at cost before increasing or decreasing the investments carrying amount. This

reduction or increment is based upon an impartial share of the take-home earnings or losses, and

other comprehensive income of the investee. Dividends and different equity distributions are

recorded as reductions. Still, when the investee’s carrying amount reduces to zero, Berkshire

records additional net losses if the other investee’s investments are at risk. Investment gains arise

when an investment is sold as predetermined whereas a loss occurs when an investment is

impaired.

Issues concerning adjustments made to the value of an investee share vary across principles

that govern cost method and equity method. In equity method, the carrying value is adjusted with

correspondence to the investee’s income or losses. Therefore, no value changes are made to the

carrying value to reflect changes in the fair market value. The cost method does not entail

increment on the book value in an increase of the fair market value. Nonetheless, a markdown of

the book value is implemented in instances where the market fair value of an investee subsides.

Additionally, GAAP defines fair value as the price that would be received to sell an asset or paid

to transfer a liability between market participants in the principal market or in the most

Surname 5

advantageous markets when no principal market exist (Berkshire 2013 report, 34). Berkshire

adjusts its quoted market prices when disorderly markets exists. In an orderly market, valuations

to estimate market fair value are implemented to sell or transfer assets and liabilities respectively.

Sequentially, market trends embrace independence and knowledge and understandings on

perceiving a fair market value should be considered by a company’s due diligence. Still, a fair

market value is subject to change in respect to current and future market trends repeatedly.

Another comprehensive income account is tailor-made to record transactions that an owner

company has no control. For instance, in the case of Berkshire, under the equity method, changes

encountered on available-for-sale securities, should be recorded both in the other comprehensive

income account of the investee as well as Berkshire’s other comprehensive income. However,

under the cost method, no entries are made regarding trustee’s other comprehensive income.

Belmonte states that Berkshire slates insurance receivables as net estimates allowances for

uncollectible balances. These allowances are provided when efforts to collect amounts from

customers are in vain or the capacity for the customers to fulfill their partial payments proves to

be futile within the incapacitation policies of Berkshire. Loan and finance receivables are stated at

amortized cost based on Berkshires ability to hold them to maturity level. Which then indicates

them as net of allowances for uncollectible accounts.

Goodwill is also represented in Berkshire’s excess of the purchase price. The Company

evaluates goodwill for impairment annually. This is enabled by evaluation of the reporting unit’s

fair value through either market quotations or liability fair values. Great judgment crucial in

determining the goodwill of a reporting unit as the factors that are incorporated estimates even the

unit’s impairment cost.

Surname 6

Berkshire’s revenue recognition lies in different facades. Insurance premiums are

considered as revenues over the contractual term. Premiums belonging to the casualty and health

insurance are earned over the coverage periods. Life assurance premiums are due on maturity. All

contracts basing experience rating projections or premiums use the estimated loss experience under

the contracts. Also, revenue is acquired through sales passed to a customer. Concurrently, sales as

a result of service and utilities are recorded upon deliverance of the service or utility. Interest

incomes are defined under the interest method where fixed income securities and loans prevail.

Taxation is another crucial component that is entailed in advanced financial accounting.

Tax impositions in the cost method are imposed on dividends while those imposed in income

method are done so in the annual income fluctuations. Income is more volatile hence the severity

of tax liability is more using the income method. Berkshire has yet consolidated its tax liabilities

with the subsidiaries. The company files tax liability to different states and jurisdiction as

applicable.

Conclusion

As observed, advanced accounting entails all financial operations done post basic accounting and

intermediate accounting operations. Procedures inclusive of consolidations, pooling-of-interests,

cost method and income method accounting, branching and governmental accounting practices are

all held under the helm of advanced financial accounting. Additionally, several adjustments and

treatments are accorded advanced financial accounting as experienced with Berkshire Hathaway

business operations. Berkshire Hathaway as the core of our illustration depicts successful financial

accounting procedures which are contributory to attaining distinguishable ranking in the world

business order. Advanced financial accounting is a contributing factor to this success. While some

adjustments are directly implemented in the accounts, others like loss adjustments of the fair value

Surname 7

and estimated insurance projections require keen attention so as to slate final results that do not

diverge completely from the actual results. Considerations on the method to use between cost and

income methods are discerned as per the existing relationship of acquisition or merger. Percentages

of ownership is essential for this decision as well.

Surname 8

Works Cited

Belmonte, Joseph. Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection. , 2015.

Berkshire Hathway Inc. "Annual Report." 2013.

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahU

KEwjqtYummZ_XAhVJbxQKHb4RDKoQFggmMAA&url=http%3A%2F%2Fwww.berkshireh

athaway.com%2F2013ar%2F2013ar.pdf&usg=AOvVaw0Josd3FfUiimndBeQcjtU7

Bragg, Steven M. Wiley Gaap 2011: Interpretation and Application of Generally Accepted Accounting

Principles. Hoboken, N.J: Wiley, 2010.

Everingham, G K, J E. Kleynhans, and L C. Posthumus. Principles of Gaap. Cape Town, South Africa:

Juta, 2007.

Hussey, Roger. Fundamentals of International Financial Accounting and Reporting. Singapore: World

Scientific, 2010.

Rich, Jay S. Cornerstones of Financial Accounting: Current Trends Update. Australia: South-Western,

Cengage Learning, 2010.

Place new order. It's free, fast and safe

Paper type

Deadline

Page count

550 words

Total price: $ 15.00

Our customers say

Jeff Curtis

USA, Student

"I'm fully satisfied with the essay I've just received. When I read it, I felt like it was exactly what I wanted to say, but couldn’t find the necessary words. Thank you!"

Ian McGregor

UK, Student

"I don’t know what I would do without your assistance! With your help, I met my deadline just in time and the work was very professional. I will be back in several days with another assignment!"

Shannon Williams

Canada, Student

"It was the perfect experience! I enjoyed working with my writer, he delivered my work on time and followed all the guidelines about the referencing and contents."