Berkshire Hathaway is feeling the volatility that comes with observing new accounting rules, and its prompting Warren Buffet to rethink how he reports financial results to investors.

In his annual letter to shareholders, Buffett, chairman at Berkshire Hathaway, says he’s breaking with three decades of tradition by not opening the annual letter with the percentage change in the company’s per-share book value. “It’s now time to abandon that practice,” he reports, as the metric has “lost the relevance it once had.”

Berkshire earned $4 billion in 2018 under Generally Accepted Accounting Principles. That includes $24.8 billion in operating earnings, a $3 billion non-cash loss resulting from intangible asset impairments, $2.8 billion in realized capital gains from the sale of investments, and a whopping $20.6 billion loss from a reduction in the amount of unrealized capital gains sitting in the company’s investment holdings.

“A new GAAP rule requires us to include that last item in earnings,” Buffett wrote. He’s referring to Accounting Standards Update No. 2016-01, codified in Accounting Standards Codification under Subtopic 825-10, which required calendar-year public companies beginning in 2018 to use more fair value in recognizing and measuring financial instruments, especially those they hold as part of an investment portfolio.

Buffett renews criticism he raised in his last annual letter, saying he still does not believe the rule to be sensible. Both he and Berkshire’s vice chairman, Charlie Munger, “have consistently thought that at Berkshire this mark-to-market change would produce what I described as ‘wild and capricious swings in our bottom line.’ ”

Berkshire investors can expect that “wide swings in our quarterly GAAP earnings will inevitably continue,” Buffett wrote. The company’s $173 billion equity portfolio can experience one-day price fluctuations of up to $2 billion or more, he says, “all of which the new rule says must be dropped immediately to our bottom line.”

Going forward, Buffett says he’s advising investors to pay attention more to operating earnings and little attention to gains or losses of any kind. He still expects the company to deliver gains over time, “albeit with highly irregular timing.”

With respect to the per-share book value for the company that will no longer play so prominently in the company’s results, Buffett says he believes it is less relevant for a few reasons. First, he says, the company’s value is tied more to operating businesses than marketable securities. Second, while equity holdings are marked to market pricing, “accounting rules require our collection of operating companies to be included in book value at an amount far below their current value, a mismark that has grown in recent years.”

Finally, he says, over time Berkshire will be a significant repurchaser of its own shares, with transactions taking place at prices above book value but below the company’s estimate of intrinsic value. “The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down,” Buffet wrote. “That combination causes the book-value scorecard to become increasingly out of touch with economic reality.”

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