Definition: Long-term investments are non-current assets that are not used in operating activities to generate revenues. In other words, LT investments are assets that are held for more than one year or accounting period and are used to create other income outside of the normal operations of the company.
What Does Long Term Investments Mean?
Notes receivable, stocks, and bonds are typically considered to be long-term investments if management plans to keep them for more than one year. None of these assets are traditionally used in operating activities. For example a company doesn’t typically purchase bonds as part of its operations unless it’s an investment firm. A purchase of bonds would be considered an investment for a manufacturer.
Companies can also invest in assets that could be used in operations but are held as an investment.
Example
Land is a good example of a long-term investment. Land, in and of itself, is a long term asset that is typically used in a company’s operations, but it doesn’t have to be. For instance a manufacturer that is looking to expand its factory might purchase a 300 acres of land. It uses 100 acres to build out the factory buildings and parking lots.
The manufacturer holds onto the other 200 of the land and waits to sell it to another business looking to get purchase space in the industry park. This land is considered an investment and is not used in the operations of the company. Thus, it’s classified as a long term investment and not a long term asset. The 100 acres that were used to build the factory on is classified a long term asset.
Traditionally, a classified balance sheet splits total non-current assets into long-term investments, plant assets or fixed assets, and intangible assets. This way investors can see how much the company is investing in its operations compared with other activities.
