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uh good afternoon gentlemen Andy Marino of uh Chapel Hill by way of Boston uh you have argued against the use of alternate measures of profitability such as earnings before interest tax depreciation and amortization as measures of business performance uh at the same time you have frequently cited the incompleteness of generally accepted Accounting in reflecting econom IC reality for some businesses implying that there are some necessary improper adjustments beyond what you recently described in the annual report as the Folly of omitting depreciation could you elaborate on your thoughts on other pitfalls of alternative Financial presentations is ebitda in your view just too often used as a shorthand for cash flow or is the entire concept of recasting accounting data a suspect exercise and uh which revisions might be appropriate if any and what might be viewed as red flags and does it matter to you who is making those adjustments analysts investors for their own purposes or company managements in terms of how that information should be viewed yeah we regularly told you for some years before the accounting change was made here a year or so ago we told you you should not count Goodwill amortization you know it was required under Gap and we obviously complied with gap but we told you every year virtually that I can remember we said this is not really an economic expense and we ignore it in our own calculations of of of earnings in terms of what we will pay for businesses we don't care whether there's a Goodwill item or not because it it it's immaterial to economic reality so we have been quite willing at at Berkshire to tell our own own owners to ignore certain things and if they disagreed with us they they could look at the Gap figures but we felt they were getting misled by by looking at the amortization of intangibles um that doesn't mean we think all intangibles were good but we just we did feel that that was a that was an arbitrary and decision that didn't make any any any sense at all um and we felt obviously as we've talked about we felt the crazy pension assumptions have have H uh caused people to uh record Phantom earnings uh in many cases uh uh so we're we're willing to tell you when we think there is data that is more important in economic analysis than Gap figures we'll we we'll talk to you about it not thinking of depreciation and expense though strikes us as absolutely crazy I I can think of very few businesses I can think of a couple but I can think of very few businesses where depreciation is not a real expense even at our gas pipelines I mean you know it's some point they are a a they will need they'll need repairs but Beyond at some point they become obsolete I mean there there won't be gas there 200 years from now we know that so it it it depreciation is real and it's the worst kind of expense it's reverse float you know you lay out the money before you get revenue and you are out cash with nothing coming in in and depreciation any any management that doesn't regard depreciation and expenses you know is living in a dream world but of course they're encouraged to do that you know by investment bankers who talk to them about abidah and then it you know certain people have built fortunes on misleading investors by convincing them that iida was a big deal and when we see companies that say a we don't pay any taxes and you know because we don't have any earnings for tax purposes and don't count depreciation and all of that you know that's coming in our view many times that's coming very close to a flimflam game uh uh you know I get these people that show me you know they want to send me books with EA and I just tell them you know I'll I'll look at that figure when you tell me you'll make all the capital expenditures you if I'm going to make the capital expenditures there's very few businesses where I think I can spend a whole lot less than depreciation year after year and maintain the economic strength of the business uh so I think I think the iida has been a term that has cost a lot of investors a lot of money you saw it in the Telecom field I mean the idea that they were spending money so damn fast you know I mean they couldn't have it coming in the door F fast enough from investors and then they pretended that depreciation uh was not a real expense that that's nonsense I mean it couldn't be worse and uh and a generation of investor were sort of brought up to to believe in that uh uh we at Berkshire will spend more than our depreciation this year we spent more than our depreciation last year we spent more than our depreciation the year before that you know depreciation is a real expense just as much as you know the expenditure for for lights it it's not a non-cash expense it's a cash expense you just spend it first you know I mean the cash is gone and it's it's a delayed recording of cash exp how anybody can turn that into something they use as a metric that that talks about earnings is beyond me Charlie yeah I think you would understand any presentation using the word eida if every time you saw that word you just substituted the phrase earnings I knew he'd do it sooner or later folks and the man he made it for the morning but never all day and the man asked the question also says what remaining big accounting troubles exist the real laaloa is pension fund accounting and to some extent post-retirement medical liabilities those are horribly understated Now in America and they're very big numbers I've looked at financial statements and and you've seen them too in the in the last few months where companies are recording pension income in the hundreds of millions while at the same time being underfunded in their pension plan in the many billions and you know they just aren't facing up the reality at all and they don't want to because they don't want to take the hit and they're this you know it's the same mentality as stock option expenses and they are paying people with stock options but you know we pay people with cash bonuses and I suppose you know we might isn't really true but but we we might like it if we didn't have to record cash bonuses as an expens I mean it's a way we pay people and you can say well why don't you put it in the footnotes and leave it out of the income account like they do with option expenses which is a form of compensation too but the you know the the answer is that a bunch of people who cared very much about having their stocks float to unreasonable prices at least in our view uh found they could do it a lot easier if they didn't count compensation expenses and you know why not put all expenses in footnotes just to have an item there that says sales and then have the same figure for net profit and then just have all the all the expenses in the footnotes you know that and and people with a straight face you know say well it's in the footnotes so therefore everybody knows about it and we don't have to count it put it in the income account it's it's amazing what people with high IQs will do to rationalize their own you know their own pocketbooks uh and Charlie has another exponent for why there's been this denial of of of the reality of expense option expense in terms of people's ego getting involved with their own records you want to elaborate on that charl don't name names well no I'm I'm so tiresome on this subject and I've been on it for so many decades it's such a rotten way to run a civilization to make the basic accounting wrong it is very much like making the engineering wrong when you're building a bridge and when I see reputable people making these perfectly ridiculous arguments to the effect that it's Unthinkable that options to be expense or it's too difficult to Value well because it's too difficult to value or God knows what reason and there a lot of them are people you'd be glad to have marry your daughter and yet cu Rich for one thing yet the truth of the matter is there's somewhere between crazy and crooked put him down as undecided uh
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