What is considered a long term asset?

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.

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.

The value of a company’s assets minus accumulated depreciation. These are not current assets. Long-term assets are the assets a company anticipates it will use for more than twelve months. Examples of long term assets are land, equipment, and patents.

Accounting divides your company assets into two classes: current and long-term. Current assets include cash and anything you use up or convert to cash over the next 12 months. Typical examples are supplies or accounts receivable. Anything you plan to keep beyond a year is a long-term asset.

Tip

There are several kinds of asset in the long-term asset category, such as long-term investments, fixed assets and intangible assets.

Property, Plant and Equipment

Fixed assets are things you buy for your company's internal use rather than resale. Examples in this accounting category include land, buildings, cars, machinery and computers. The category is also known in accounting as "property, plants and equipment." The fixed-asset entry doesn't include assets such as office supplies or raw materials that you'll use up within a year. You record fixed assets on your company's balance sheet at the purchase price, marked down over time for depreciation.

Assets You Cannot See

Intangible assets are a different kettle of fish. They include such non-physical property as domain names, copyrights, trademarks, employment contracts, noncompete agreements and customer lists. They also include goodwill – the intangible benefits of having a positive reputation.

You only record the value of intangible assets when you buy them. Suppose rather than starting your own plumbing business, you buy an established local company. Part of the purchase price goes to intangibles, such as the company's goodwill and trademarks. If you start your own plumbing business and create your own trademarks, you don't assign them any value as assets.

Investments Held For More than One Year

Long-term investments are those you're going to hang onto for more than 12 months. A house you buy to flip in a few months wouldn't count, but if you plan to wait a few years it would qualify. Stocks and bonds your company plans to keep for more than a year fit this category too. This class of assets doesn't include things you use in your business operations. Land you buy for a new factory is a fixed asset, for instance, but it's not a long-term investment. These investments go on the balance sheet separately from other long-term assets.

Payments Made in Advance

A deferred charge is a payment in advance. This can include anything from paying your supplier before delivery to paying a lump sum to your insurer to cover the next 12 months. If the period covered is long enough, the deferred charge qualifies as a long-term asset. Typical deferred charges include prepaid rent, prepaid insurance and prepaid advertising.

You record the initial payment as an asset on the balance sheet. If you pay $60,000 in rent for the next two years, that's an asset because it guarantees you the use of the premises. Each month, you reduce the asset account and record that month's rent as an expense on the income statement. Otherwise, the huge expense of the initial payment would make your business look much worse off financially than it really is.

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