Be Aware Of This ‘Nightmare’ Accounting Rule Change

A new accounting rule change described as a ‘nightmare’ by Warren Buffet is beginning to affect business’ bottom lines.

The rule, introduced by the Financial Accounting Standards Board (FASB), requires companies to report equity investments at fair value and recognize gains and losses as part of their net income.

These rules took effect for public companies from December. Private companies must comply to them in 2019 for annual statements and by 2020 for quarterly statements, although they can choose to begin earlier if they prefer.

In a report detailing the changes, the FASB said: “The main objective in developing this update is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information.”

Warren Buffet warns of ‘nightmare’ swings in profit

Shortly after this rule change was announced, Berkshire Hathaway CEO and world-famous investment expert Warren Buffett called it a ‘nightmare’.

Berkshire Hathaway has invested hundreds of billions of dollars in equities, and Buffet warned attendants at the company’s annual dinner that the rule change would significantly distort profit figures.

Indeed, in the first figures released using these new accounting standards, the company reported its first net loss in nine years. During the first quarter of this year, there were $6.2 billion worth of unrealized losses in the company’s equity portfolio. With these losses included, Berkshire Hathaway had to report a $1.14 billion first-quarter loss.

New rules could prove useful for shareholders

Buffet had predicted the new rules would produce “wild and capricious swings” in bottom-line results that could unnecessarily scare or encourage investors, depending on the direction of the swing.

He has always encouraged shareholders to concentrate on operating profits, and this advice will surely be repeated following the report of these losses.

Ultimately though, the figures could prove useful to shareholders and investors around the United States when considered in a wider context, even if they result in more volatile bottom lines being reported.

More new accounting rules being introduced

This new rule, requiring the recognition of financial asset performance, is one of many introduced by the FASB last year. There are incoming rules that will affect the reporting of non-profit accounts, credit losses and spending on leases. Click the link to learn more about these rules.

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