SEC questioned Warren Buffett's Berkshire on loss accounting

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission questioned Warren Buffett's Berkshire Hathaway in the second quarter on why it was not writing down large losses on shares in Kraft KFT.N and US Bancorp USB.N, but the company insisted its accounting was right.

Berkshire BRKa.NBRKb.N on Monday publicly filed copies of a letter it sent to the SEC in May, answering questions from the regulator about its accounting treatment for those and other stock investments.

In an April letter, the SEC asked Berkshire why it was not recording write-downs on shares with $1.86 billion in unrealized losses, all of which had been in that position for at least a year.

Given the duration of those losses, the SEC said they appeared to be more than temporary and as such should have been written down.

In a detailed response, Berkshire Chief Financial Officer Marc Hamburg said most of the losses with more than 12 months’ duration as of December 31 were concentrated in Kraft and U.S. Bancorp, shares it had acquired in 2006 and 2007.

Hamburg said that as of December 31, Berkshire determined both companies had enough earnings potential that their share prices would eventually exceed the original cost of the stock. It also has the “ability and intent” to hold the shares until they recovered, he said.

“We believe it is reasonably possible that the market prices of Kraft Foods and U.S. Bancorp will recover to our cost within the next one to two years assuming that there are no material adverse events affecting these companies or the industries in which they operate,” Hamburg said.

Both stocks recorded double-digit percentage increases in the first quarter, he noted. They have since held on to some of those gains, with Kraft up 17.4 year-to-date and U.S. Bancorp up 5.2 percent.

None of the other filings Berkshire disclosed on Monday indicate how the issue was resolved. Buffett’s assistant did not immediately respond to requests for comment.

Berkshire’s Class A shares were up 0.6 percent at $125,690 in morning trading, while the Class B shares rose 0.5 percent to $83.78.

Reporting by Ben Berkowitz; Editing by Lisa Von Ahn