Long-Term Investments on a Company’s Balance Sheet
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A long-term investment is an account on the asset side of a company’s balance sheet for the company’s stocks, bonds, real estate, cash, and so forth. Long-term investments are those a company intends to hold for more than a year.
The long-term investment account differs mainly from short-term investments likely to be sold in the near-to-medium term. Long-term investments are held for years and, in some cases, may never be sold.
Being a long-term investor means that you are willing to accept a certain amount of risk in pursuit of potentially higher rewards and that you can be patient for an extended period. It also suggests that you have enough capital to put away in financial assets for a long period until you need it.
Key Takeaways
- A long-term investment is an account a company plans to keep for at least a year such as stocks, bonds, real estate, and cash.
- The account appears on the asset side of a company’s balance sheet.
- Long-term investors are generally willing to take on more risk for higher rewards.
- These are different from short-term investments, which are meant to be sold within a year.
Investopedia / Sydney Saporito
Long-Term Investments Explained
A common form of long-term investing occurs when company A invests largely in company B and gains significant influence over company B without having the most voting shares. In this case, the purchase price would be shown as a long-term investment.
When a holding company or other firm buys bonds or shares of common stock as investments, the decision to classify it as short-term or long-term has some significant implications for how those assets are valued on the balance sheet. Short-term investments are marked to market, and any declines in value are recognized as a loss.
However, the appreciation in value isn’t recognized until the item is sold. So, the balance sheet classification of investment—whether it is long-term or short-term—has a direct impact on the net income that is reported on a firm’s income statement.
Held-to-Maturity Investments
Suppose an entity intends to keep a financial product until it has matured and the company can demonstrate the ability to do so. In that case, the investment is noted as “held to maturity.” The investment is recorded at cost, although any premiums or discounts are amortized over its life.
The purchase of PayPal by eBay in 2002 is now a classic example of an investment that’s held to maturity. Once PayPal had significantly grown its infrastructure and user base, it was spun out as its own company in 2015 with a five-year agreement to continue processing payments for eBay. This investment helped PayPal grow while allowing eBay the benefit of owning a world-class payment processing firm for almost a decade.
Long-term investments may be written down to properly reflect an impaired value. However, there may not be any adjustment for temporary market fluctuations. Since investments must end, equity securities may not be classified as held to maturity.
Available for Sale and Trading Investments
Investments held for resale within a year to get a short-term profit are classified as current investments. A trading investment may not be a long-term investment. However, a company may hold an investment to sell in the future.
These investments are classified as “available for sale” if the anticipated sale date is not within the next 12 months. Available-for-sale long-term investments are recorded at cost when purchased and subsequently adjusted to reflect their fair values at the end of the reporting period. Unrealized holding gains or losses are kept as “other comprehensive income” until the long-term investment has been sold.
Long-Term Investment Example
One example of a long-term investment on a company’s balance sheet is real estate. Companies may invest in land or buildings with the intention of holding these assets for several years to appreciate in value. This investment can provide rental income and potential capital gains, contributing positively to the company’s financial health.
Another example is equity investments, such as shares in other companies. These are typically held for more than a year to benefit from potential dividends and capital appreciation. Equity investments can diversify a company’s asset portfolio and potentially offer significant returns, enhancing the overall value and stability of the firm’s financial standing.
Can Long-Term Investments Affect a Company’s Liquidity?
Yes, while they boost financial health, they can reduce immediate liquidity since they are not easily convertible to cash.
How Do Long-Term Investments Impact the Financial Strategy of a Company?
They play a crucial role in diversifying asset portfolios and ensuring steady income streams, contributing to long-term financial planning.
Can Long-Term Investments Improve the Creditworthiness of a Company?
Yes, a robust portfolio of long-term investments can improve a company’s financial strength, potentially improving its credit rating.
How Do Long-Term Investments Contribute to a Company’s Profitability?
They provide ongoing income streams and potential capital gains, which can significantly improve its profitability.
The Bottom Line
Long-term investments on a company’s balance sheet, such as stocks, bonds, real estate, and cash, are crucial for financial stability and growth. By holding these assets for over a year, companies can generate a steady income through dividends, rental income, or capital appreciation.
This strategic investment approach can improve a firm’s financial health and support business expansion.
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