1998: What does Buffett think of the way Disney accounted for the Cap Cities acquisition?

AUDIENCE MEMBER: Yes, my name is Cary Blecker (PH), also from West Palm Beach, Florida.

With all due respect to Mr. Eisner if he’s in the audience, there’s been some criticism levied recently at the Disney Company, mainly from an accounting professor at one of the state universities in New York, in reference to Disney’s purchase of Capital Cities and the way they accounted for that purchase.

Basically, what this professor is saying is that Disney somehow created a slush fund and is charging the expenses to the merger to this slush fund rather than earnings.

If you’re familiar with this criticism, I’m wondering what you think of it? And if you’re not, are you familiar with the way Disney accounted for the purchase of Capital Cities?

WARREN BUFFETT: Yeah, I am familiar.

AUDIENCE MEMBER: Thank you.

WARREN BUFFETT: And actually, Abe Briloff, who wrote that, is a fellow who, in general, I admire.

Abe wrote me a letter not more than about three or four weeks ago and asked me to talk at a university where he teaches. And I wrote him back and I told him I wouldn’t be able to do it because it’s not in proximity to where I’ll be.

And I told him — and he asked me about the Disney thing. And I told him I disagreed with him on —

I admire what Abe does in the attempt to have accounting reflect economic reality, but he and I don’t see it exactly the same on some points, although we would agree on other points.

I think — I don’t think Disney is a very complicated enterprise to evaluate. I mean there are — when Cap Cities bought ABC, there were purchase accounting adjustments, and they tend to wash through, to some extent.

I mean if you have programs that you’re stuck on, you may write those down from what the previous carrying cost was. Maybe the previous management should have written them down, too, at that point. But I don’t think that — I think with Disney, what you see now is what you get.

Charlie?

CHARLIE MUNGER: Yeah. I’ve got no great quarrel with the accounting at Disney. I think —

WARREN BUFFETT: Abe Briloff is a wonderful guy.

CHARLIE MUNGER: Yeah. He’s got a good sense of humor and he generally fights the right demons, but I don’t think you can criticize Disney’s accounting.

WARREN BUFFETT: We certainly disagree with Abe, who, like I say, I agree with Charlie, he is a good guy.

But he — we disagree with him on amortization of intangibles entirely. So we would say that if Disney is charging, whatever it may be, probably 400 million a year for amortization of intangibles, which is not tax deductible, we would include that as a component of earnings.

So there might be some plusses and minuses that you’d make in adjustments, but I would say, by the time you add back amortization of intangibles that we would probably think the economic earnings of Disney might well be more than the reported earnings in the next few years.