What are Long-Term Assets?

//What are Long-Term Assets?
What are Long-Term Assets? 2017-10-05T06:38:46+00:00

Definition: Long-term assets, also called noncurrent assets, are resources that have a useful life of longer than one accounting period and are not intended to be converted into cash quickly, less than a year, to fund the current business operations.

What Does Long-Term Assets Mean?

What is the definition of long-term assets? Typical examples of these assets are fixed assets, property, plant, and equipment, machinery, furniture or long-term investments. Long-term investment may include stocks and bonds of subsidiaries, associates or other companies, real estate holdings, or cash that is to be used for funding a specific project.

Also, long-term investments may never be liquidated, like short-term investments, as some companies tend to own shares of well-established blue chips regardless of the changes in the stock price. For example, Berkshire Hathaway owns approximately 9.3% of Coca-Cola (400 million shares out of 4.31 billion shares outstanding of Coca-Cola). Let’s look at an example.

Example

ABC is an insurance company that holds bonds and common stocks of different companies. The company classifies $5,000,000 in corporate bonds that it may sell over the next 60 months or more as a part of a complex transaction. Hence, it reports the corporate bonds as long-term investments on its balance sheet. If, however, the company sells the bonds the next twelve months, the bonds will be reported as short-term marketable securities.

In case the value of bonds declines to $4,000,000 over the next six months, the $1,000,000 losses will be reported on the firm’s income statement, even if it’s not an actual loss from a trade. However, if the insurance company holds the bonds until maturity, then these are reported as a long-term investment and they need to be using the amortized cost method to account for any premium or discount to par value.

In periods of a volatile interest rate environment, long-term investments on a firm’s balance sheet typically reflect the broader economic environment. However, long-term investments do not account for the company’s intrinsic value.

Summary Definition

Define Long Term Assets: Long term asset means a resource used by a company for more than one accounting period.