4 ms·

After having seen so much nonsense accounting in the books of so many startups (especially recently, it feels like a growing trend) it's refreshing to see GAAP.

After having seen so much nonsense accounting in the books of so many startups (especially recently, it feels like a growing trend) it's refreshing to see GAAP. The difference in standards between the startup universe and the 'real world' is actually scary. There have been far too many instances of people getting taken for a ride based on EBITDA when the company's financials were far from healthy. Am I alone in thinking this?

3327 7y ago
I run a startup and we use GAAP.
SpicyLemonZest 7y ago
Probably. Berkshire itself doesn't seem to think this; the letter starts off by arguing that GAAP earnings are a misleading metric and encouraging shareholders to ignore them.
Talyen42 7y ago
Buffett thinks GAAP is almost useless now, and doesn't think accountants have a clue. He follows own "owners earnings" model, which is not a standard of any kind.
- Proziam 7y ago
  GAAP is definitely an imperfect standard, so I don't begrudge them going their own way (and their way seems to be reasonable, from a cursory view). My comment mostly comes from the frankly ludicrous financials that have been making headlines in the last few years.
  - divbzero 7y ago
    Agreed. Also noteworthy that Buffett points out the shortcomings of GAAP’s mark-to-market rule whether it makes Berkshire earnings look undeservedly good (2019) or bad (2018).
- basch 7y ago
  "Berkshire’s 2018 and 2019 years glaringly illustrate the argument we have with the new rule. In 2018, a down year for the stock market, our net unrealized gains decreased by $20.6 billion, and we therefore reported GAAP earnings of only $4 billion. In 2019, rising stock prices increased net unrealized gains by the aforementioned $53.7 billion, pushing GAAP earnings to the $81.4 billion reported at the beginning of this letter. Those market gyrations led to a crazy 1,900% increase in GAAP earnings! Meanwhile, in what we might call the real world, as opposed to accounting-land, Berkshire’s equity holdings averaged about $200 billion during the two years, and the intrinsic value of the stocks we own grew steadily and substantially throughout the period."
sethev 7y ago
The thing that stands out in Buffett's letters (including this one), is his commitment to clearly communicating the true health of the company in the most accurate way possible. That's missing in a lot of corporate communication, which try to spin results or invent creative metrics that make the company look better. He always shares GAAP as well but will usually point out where he thinks it not useful.
- ksec 7y ago
  >That's missing in a lot of corporate communication, Instead of a lot, How about the other way around, name a Fortune Global 500 company that actually communicate the true health of the company in the most accurate way possible. Because honestly apart from Berkshire, I dont see one. And I cant blame them, after all their job is to tell you everything is ok.
Reedx 7y ago
Not alone. Indeed Charlie Munger straightforwardly refers to EBITDA as a bullshit earnings metric. “I don’t like when investment bankers talk about EBITDA, which I call bulls--- earnings” “Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You’re almost announcing you’re a flake.”
heymijo 7y ago
I agree. Although for anyone unfamiliar, GAAP isn't and never was perfect. Like any target it is gamed. Hence the origins of the meme "cash flow is a better indicator than net income." In comparison, startup accounting has engaged in such fuckery that it makes GAAP look wholesome.
mbell 7y ago
Startups are selling hockey stick growth, GAAP is pretty meaningless there.
dntbnmpls 7y ago
> The difference in standards between the startup universe and the 'real world' is actually scary. The 'real world' is scary too. Also, you can't really compare the financial statements of startups with established blue chip companies. Investors do not expect nor are they looking for the same things from them. Just like people who buy into VC funds have different goals and expectations from those who invest in an index fund. VC funds, index funds, startups, blue chips all have different "standards". > Am I alone in thinking this? No, I'm sure a lot of people agree with you. It's just that Buffet and Munger aren't one of them. Whatever the accounting standards, I believe it was buffet who said you won't know who has been swimming naked until the tide pulls out ( we won't know how healthy the balance sheets are until we have a recession ). Enron, Washington Mutual, etc all had "healthy balance sheets" until they didn't. And all of them even had the seal of approval from the 3 or 4 major auditing firms too.

3327 7y ago

I run a startup and we use GAAP.

SpicyLemonZest 7y ago

Probably. Berkshire itself doesn't seem to think this; the letter starts off by arguing that GAAP earnings are a misleading metric and encouraging shareholders to ignore them.

Talyen42 7y ago

Buffett thinks GAAP is almost useless now, and doesn't think accountants have a clue. He follows own "owners earnings" model, which is not a standard of any kind.

Proziam 7y ago
GAAP is definitely an imperfect standard, so I don't begrudge them going their own way (and their way seems to be reasonable, from a cursory view). My comment mostly comes from the frankly ludicrous financials that have been making headlines in the last few years.
- divbzero 7y ago
  Agreed. Also noteworthy that Buffett points out the shortcomings of GAAP’s mark-to-market rule whether it makes Berkshire earnings look undeservedly good (2019) or bad (2018).
basch 7y ago
"Berkshire’s 2018 and 2019 years glaringly illustrate the argument we have with the new rule. In 2018, a down year for the stock market, our net unrealized gains decreased by $20.6 billion, and we therefore reported GAAP earnings of only $4 billion. In 2019, rising stock prices increased net unrealized gains by the aforementioned $53.7 billion, pushing GAAP earnings to the $81.4 billion reported at the beginning of this letter. Those market gyrations led to a crazy 1,900% increase in GAAP earnings! Meanwhile, in what we might call the real world, as opposed to accounting-land, Berkshire’s equity holdings averaged about $200 billion during the two years, and the intrinsic value of the stocks we own grew steadily and substantially throughout the period."

sethev 7y ago

The thing that stands out in Buffett's letters (including this one), is his commitment to clearly communicating the true health of the company in the most accurate way possible. That's missing in a lot of corporate communication, which try to spin results or invent creative metrics that make the company look better. He always shares GAAP as well but will usually point out where he thinks it not useful.

ksec 7y ago
>That's missing in a lot of corporate communication, Instead of a lot, How about the other way around, name a Fortune Global 500 company that actually communicate the true health of the company in the most accurate way possible. Because honestly apart from Berkshire, I dont see one. And I cant blame them, after all their job is to tell you everything is ok.

Reedx 7y ago

Not alone. Indeed Charlie Munger straightforwardly refers to EBITDA as a bullshit earnings metric. “I don’t like when investment bankers talk about EBITDA, which I call bulls--- earnings” “Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You’re almost announcing you’re a flake.”

heymijo 7y ago

I agree. Although for anyone unfamiliar, GAAP isn't and never was perfect. Like any target it is gamed. Hence the origins of the meme "cash flow is a better indicator than net income." In comparison, startup accounting has engaged in such fuckery that it makes GAAP look wholesome.

mbell 7y ago

Startups are selling hockey stick growth, GAAP is pretty meaningless there.

dntbnmpls 7y ago

> The difference in standards between the startup universe and the 'real world' is actually scary. The 'real world' is scary too. Also, you can't really compare the financial statements of startups with established blue chip companies. Investors do not expect nor are they looking for the same things from them. Just like people who buy into VC funds have different goals and expectations from those who invest in an index fund. VC funds, index funds, startups, blue chips all have different "standards". > Am I alone in thinking this? No, I'm sure a lot of people agree with you. It's just that Buffet and Munger aren't one of them. Whatever the accounting standards, I believe it was buffet who said you won't know who has been swimming naked until the tide pulls out ( we won't know how healthy the balance sheets are until we have a recession ). Enron, Washington Mutual, etc all had "healthy balance sheets" until they didn't. And all of them even had the seal of approval from the 3 or 4 major auditing firms too.