Long-Term Investments

Long-term investments are assets that a company buys with the intention of holding them for more than one year, usually to earn interest, dividends or capital growth, or to gain influence over another business. They include bonds the company plans to hold to maturity, shares in other companies, stakes in joint ventures, land or buildings held for investment rather than use, and money set aside in funds for future purposes such as debt repayment. They are reported in the noncurrent section of the balance sheet, usually just after current assets.

The key test is intention and ability to hold. The same type of security, such as a share or a bond, can be a short-term investment for one company and a long-term investment for another. Short-term holdings that a company expects to sell within a year are shown among current assets instead.

US GAAP measures long-term investments according to the kind of instrument and the degree of control:

• Debt securities held to maturity: bonds that the company has both the intent and the ability to hold until they mature. Held-to-maturity securities are carried at amortized cost, with any premium or discount spread over the remaining life.
• Available-for-sale debt securities: bonds that may be sold before maturity. They are carried at fair value, with unrealized gains and losses reported in other comprehensive income until the bonds are sold.
• Equity securities with no significant influence: since ASU 2016-01, these are generally measured at fair value with changes recognized in net income.
• Equity-method investments: holdings that give significant influence, usually 20 to 50 percent of voting shares. The investor records its share of the investee's profit or loss and reduces the investment for dividends received.
• Controlled subsidiaries: holdings above 50 percent are not shown as investments in group accounts but are combined line by line in consolidated financial statements.

IFRS 9 uses a different structure based on the business model and the cash flows of each asset, with categories of amortized cost, fair value through other comprehensive income, and fair value through profit or loss.

A manufacturer buys 30 percent of a supplier for $6,000,000, giving it significant influence. During the year the supplier earns $2,000,000 and pays dividends of $500,000. The investor records its 30 percent share of profit, $600,000, as investment income and increases the investment account by the same amount. It records its share of dividends, $150,000, as cash received and a reduction in the investment. At year end the investment is carried at $6,000,000 plus $600,000 minus $150,000, which is $6,450,000. Under this method, dividends are not income; they are treated as a partial return of the investment.

A company holds 100,000 shares of a listed company, bought at $25 each for $2,500,000, as a long-term investment without significant influence. At year end the shares trade at $28. Under US GAAP it raises the carrying amount to $2,800,000 and reports an unrealized gain of $300,000 in net income. Fair values for listed shares fall in level 1 of the fair value hierarchy; unlisted holdings rely on models and are less reliable.

Purchases and sales of long-term investments appear in the investing section of the statement of cash flows. Income from them, such as interest, dividends and equity-method profits, is usually reported outside operating income, among investment revenues or other income. Analysts often separate investment income from operating results to judge the core business, and look at the notes to see how much of a company's value depends on securities whose prices can move sharply. Insurers, banks and companies with large cash reserves often hold substantial portfolios of long-term bonds, while conglomerates hold large equity stakes in associates. Impairment of an investment below its carrying amount, where a decline is not temporary or credit losses are expected, is recognized as a loss and reduces both the asset and earnings.