Long-Term Investments include debt and equity instruments that a company plans to hold beyond the current operating cycle (typically over one year). Examples include:
Bonds and Notes Receivable: Debt securities held to maturity or available for sale.
Equity Securities: Investments in the common or preferred stock of other companies for strategic or financial purposes.
Joint Ventures and Affiliates: Ownership interests in other businesses held for influence or control.
Why are Long-Term Investments Important?
Long-Term Investments are important because they:
Generate Income: Provide interest, dividends, or capital gains over multiple periods.
Support Strategic Goals: Allow companies to establish alliances, enter new markets, or influence business partners.
Impact Financial Position: Represent significant assets on the balance sheet and affect risk and return profiles.
How are Long-Term Investments Calculated?
On the balance sheet, Long-Term Investments are reported at:
Long-Term Investments = Cost or Fair Value of Investments − Impairment Losses
Where:
Cost or Fair Value: Depending on classification (held-to-maturity, available-for-sale, or trading), investments are measured at amortized cost or fair value.
Impairment Losses: Write-downs when the investment’s carrying amount exceeds its recoverable amount.
Additional Considerations
Classification and Measurement: Accounting standards (e.g., IFRS 9, ASC 320) govern whether investments are held at amortized cost, fair value through profit or loss, or fair value through other comprehensive income.
Equity Method Accounting: For significant influence (20–50% ownership), investments are accounted for using the equity method, recognizing the investor’s share of earnings.
Fair Value Disclosures: Companies must disclose valuation techniques and key assumptions used to determine fair values of long-term investments.