Long-Term Investments Explained

A common form of long-term investing occurs when company A invests

largely in company B and gains significant influence over company B without
having a majority of the voting shares. In this case, the purchase price would
be shown as a long-term investment.

When a holding company or other firm purchases bonds or shares of

common stock as investments, the decision about whether to classify it as
short-term or long-term has some fairly important implications for the way
those assets are valued on the balance sheet. Short-term investments are
marked to market, and any declines in value are recognized as a loss.

However, increases in value are not recognized until the item is sold.
Therefore, the balance sheet classification of investment – whether it is long-
term or short-term – has a direct impact on the net income that is reported
on the income statement.

Held to Maturity Investments

If an entity intends to keep an investment until it has matured and the
company can demonstrate the ability to do so, the investment is noted as
being "held to maturity." The investment is recorded at cost, although any
premiums or discounts are amortized over the life of the investment.

For example, a classic held to maturity investment was the purchase of

PayPal by eBay in 2002. Once PayPal had significantly grown its
infrastructure and user base, it was then spun out as its own company in
2015 with a five-year agreement to continue processing payments for eBay.
This investment helped PayPal grow and at the same time allowed eBay the
benefit of owning a world-class payment processing solution for nearly two
decades.

The long-term investment may be written down to properly reflect an impaired

value. However, there may not be any adjustment for temporary market
fluctuations. Since investments must have an end date, equity securities may
be not be classified as held to maturity.

Available for Sale and Trading Investments

Investments held with the intention of resale within a year, for the purpose of
garnering a short-term profit, are classified as current investments. A trading
investment may not be a long-term investment. However, a company may
hold an investment with the intention to sell in the future.

These investments are classified as "available for sale" as long as the

anticipated sale date is not within the next 12 months. Available for sale long-
term investments are recorded at cost when purchased and subsequently
adjusted to reflect their fair values at the end of the reporting
period. Unrealized holding gains or losses are kept as "other comprehensive
income" until the long-term investment has been sold.

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