A long-term investment is an account on the asset side of a company’s balance sheet that represents the company’s investments, including stocks, bonds, real estate, and cash. Long-term investments are assets that a company intends to hold for more than a year.
The long-term investment account differs largely from the short-term investment account, in that short-term investments will most likely be sold, whereas the long-term investments may not be sold 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 afford to be patient for a longer period of time. It also suggests that you have enough capital available to afford to tie up a set amount for a long period of time.
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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.
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 a majority of the voting shares. In this case, the purchase price would be shown as a long-term investment.
When a holding company or other firm purchases bonds or shares of common stock as investments, the decision about whether to classify it as short-term or long-term has some fairly important implications for the way 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, increases in value are not recognized until the item is sold. Therefore, 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 the income statement.
Held to Maturity Investments
If an entity intends to keep an investment until it has matured and the company can demonstrate the ability to do so, the investment is noted as being “held to maturity.” The investment is recorded at cost, although any premiums or discounts are amortized over the life of the investment.
For example, a classic held to maturity investment was the purchase of PayPal by eBay in 2002. Once PayPal had significantly grown its infrastructure and user base, it was then spun out as its own company in 2015 with a five-year agreement to continue processing payments for eBay. This investment helped PayPal grow and at the same time allowed eBay the benefit of owning a world-class payment processing solution for nearly two decades.
The long-term investment may be written down to properly reflect an impaired value. However, there may not be any adjustment for temporary market fluctuations. Since investments must have an end date, equity securities may not be classified as held to maturity.
Available for Sale and Trading Investments
Investments held with the intention of resale within a year, for the purpose of garnering 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 with the intention to sell in the future.
These investments are classified as “available for sale” as long as 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.
Related Terms: short-term investments, balance sheet, purchase price, held to maturity, available for sale, trading investments
References
- U.S. Securities and Exchange Commission. “eBay to Acquire PayPal”.
- eBay. “eBay, PayPal Agreement Highlights Stability, Synergies and Strategic Flexibility”.
