Long-term assets

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Parker Conrad

Long-term assets are assets that cannot be converted to cash easily and hence are not used to fund everyday operations. Examples include: company cars, computers and investment in another company. Long term assets are one of two broad categories of assets reported on companies' balance sheets; the other is current asset.

Long-term assets are of three types:

Fixed assets

Fixed assets, also known as property, plant & equipment (PP&E), are used to produce the goods or services of the company and cannot easily be converted to cash. Fixed assets include equipment such as production machinery, computers, and motor vehicles, as well as land and buildings. These assets are referred to as "fixed" since they remain unchanged in the course of production -- unlike cash, which is used to buy raw materials, which in turn is used to produce finished products. Normally, fixed assets are subject to depreciation and/or amortization.

Often, fixed assets are tailored to be production specific and have little resale value. Oil rigs, for example, are built on site and are not reused after the oil well is depleted. They can be sold as scrap metal, but it is highly unlikely that a company can resell these rigs for the value of new rigs. However, companies record the value of these assets on their balance sheets at the purchase price (including the cost of installation) rather than at resale value. Similarly, computers decrease in value quickly and can only be resold at a fraction of their original purchase price.

On the other hand, land and buildings can increase or decrease in value depending on local real-estate conditions, but, in most cases, the principle of prudence only allows devaluation to be recognized in the balance sheet.

Fixed assets are treated as investments (instead of expenses) by companies and are depreciated over the course of their useful life.

Long-term investments

Any investment which has a horizon of one year or more is considered a long-term investment. Long-term investments are investments made by a company in order to secure an additional income stream or a strategic goal. Such investments can range from anything from buying a minority stake at another company to long-run hedges against oil prices. Berkshire Hathaway 's investment in Coca-Cola and Southwest Airlines' hedge against high oil prices are good examples of long-term investments.

In this case too, the company needs to exercise prudence in reporting the value of the investment. They are reported at the lower of purchase price or market value. Any gains from these investments are only recorded after the sale of the position. These gains are subject to capital gains taxes rather than income taxes.

Intangible assets

Intangible assets are assets which cannot be physically seen. Capitalized research expenses, goodwill, trademarks, copyrights, patents, brand recognition are all intangibles. Even though intangibles are not present physically, they are often more valuable than fixed assets. For example, Coca-cola and Apple would not be as valuable without their brands.

However, not all intangible assets appear on the balance sheet. In fact, in most cases, GAAP does not allow internally generated intangibles to show up on the balance sheet. On the other hand, if a company pays more than the book value to acquire another company, the difference would show up as goodwill in the acquirer's balance sheet. Also, research-based companies, such as drug-manufacturers, often capitalize their research and development expenses -- since, in theory, research can provides value long after it has been completed.

Generally, intangibles are amortized on a straight-line basis over their useful life (e.g. franchising agreement would be amortized over the life of the franchising contract). Amortization provides the companies with tax benefits since it is considered to be an expense (and thus reduces taxable income). However FASB rule 142 allows US companies to keep intangibles with indefinite life on their balance sheet.^[1]