Long Term Assets

What Are Long Term Assets?

In accounting and finance, long term assets are most important for businesses across various industries. These assets represent resources companies acquire to generate revenue and support their operations over an extended period - more than a year. 

Understanding long term assets and their intrinsic role within a company is of utmost significance to investors and management. These assets support operations, generate revenue, are used for growth and expansion, and sometimes even as collateral for securing financing arrangements.

Beyond these functional dimensions, long term assets also contribute to the company's long-term stability and provide investors with information about its financial health and growth potential.

Long term assets are divided into two types - tangible and intangible. The difference is that tangible assets are physical and can be touched, while intangible assets lack a physical manifestation. An example of a tangible asset is machinery,  while an intangible asset could be exemplified by goodwill.
 
On the Balance Sheet, long term assets have their own place and are usually written as non-current assets. Within this financial statement, assets are methodically arranged based on their liquidity, with the least liquid assets typically positioned at the top.

This article will dive deeper into long term assets, their applications, and their portrayal on the balance sheet.

Long-Term Asset Terminology

Long term assets, referred to as non-current or fixed assets, are tangible and intangible resources a company uses to support its operations and produce goods or services. These assets are held for over a year to ensure the company’s long-term sustainability and competitiveness.

Similar to other segments within the Balance Sheet, long term assets can be further divided into two main categories based on their form - physical or non-physical.

These two main types are: 

1. Tangible assets have a physical form and depreciate over time. Recognizing them is simple, as you can see them and touch them. Companies use them in their day-to-day business activities to generate revenue and increase their value. 
2. Intangible assets lack physical presence but still hold value for a business or individual. They are considered valuable because they provide future economic benefits or competitive advantages.

Both these types hold enormous importance to a company; however, different companies tend to focus more on different types, given their industry and strategic preferences.

For example, while a manufacturing company pays more attention to its PP&E because it requires a lot of machinery and equipment to operate, a software company focuses more on its intellectual properties, such as pieces of code.

Tangible Assets

Tangible assets are physical assets with a measurable value that can be touched or seen. Here are some common types of tangible assets:

1. Property, Plant, and Equipment (PP&E) 

Property, Plant, and Equipment (PP&E) represent the assets owned and used by a business to support its core operations. This encompassing category comprises:

• Buildings
• Machinery
• Vehicles
• Land
• Other related assets

PP&E are also known as fixed assets or capital assets. They are not intended to be resold and have a useful life of more than one accounting period, typically spanning several years.

2. Infrastructure

Infrastructure, one of the most important components of functioning economies, allows communities and organizations to operate on a daily basis. 

Here, assets are typically large-scale, long-term investments and serve as the foundation for economic development, transportation systems, communication networks, and public services. 

Assets owned by a company that falls under this category are:

• Roads
• Bridges
• Utilities

Infrastructure plays a crucial role in easing an economy’s functioning and growth and improving its residents’ quality of life.

3. Natural Resources

Natural resources are inherent in the environment and possess economic value for society. These resources are essential for human survival, economic activities, and overall development. 

These resources can be classified into two main categories based on their origin: 

• Renewable natural resources
• Nonrenewable natural resources

Companies, for example, in mining and timber industries, may own resources like oil or timberland. 

4. Long-term Investments

Long-term investments are financial assets acquired with the intention of holding onto them for an extended period, typically five years or more, to generate returns and achieve the company’s financial goals.

These investments are often characterized by low volatility and the potential for growth and compounding over time. They provide the potential for significant gains through capital appreciation and reinvested dividends. Common examples include:

• Stocks
• Bonds
• Real estate properties
• Mutual funds. 

With a diversified approach, long-term investments can serve as one of the components of a strong financial strategy, allowing the company to prosper and grow in the future.

Intangible Assets

Unlike tangible assets like buildings, machinery, or inventory, intangible assets cannot be seen or touched, but they play a crucial role in driving a company's success and overall worth. Some common examples of intangible assets include:

1. Intellectual Property 

Intellectual property (IP) encompasses the products of human creativity that gain recognition and protection under legal frameworks. These creations encompass a spectrum of forms, including

• Inventions
• Designs
• Symbols
• Names
• Images
• Trade secrets

Intellectual property exists to provide individuals and businesses with exclusive rights and control over their innovations so that they can capitalize on their efforts.

2. Goodwill 

Goodwill represents the value of a business beyond the measurable value of its tangible assets. It can include:

• Reputation
• Brand image
• Customer loyalty
• Other intangible factors 

It is created when a company is acquired for a price higher than the fair market value. The excess amount paid is recorded as goodwill on the acquiring company's balance sheet.

3. Brand Value 

Brand value, also known as brand equity, is the monetary value or intangible asset associated with a brand name, logo, symbol, or other elements that identify and differentiate a product, service, or company in the market.

It reflects the brand’s perception, recognition, and reputation among consumers and stakeholders. Brand value is a critical component of a company's overall worth and plays a significant role in its success and competitive advantage.

The Functions Of Long Term Assets

Long term assets are crucial for the stability and growth of a company. By investing in them, companies can ensure sustainable growth, bolster their competitive advantage, and provide long-term value to shareholders.

1. Supporting Operations: Long term assets are the bedrock of operations. For instance, manufacturing companies would not be able to function without machinery and equipment, and technology companies depend on intellectual property.
2. Revenue Generation: They are an important revenue source for a company. For example, real estate developers generate income from rental properties, and software companies earn revenues from licensing their products.
3. Future Growth and Expansion: Investing in long term assets positions a company for future growth and expansion. Acquiring new technology, expanding production capacities, or entering new markets are common strategies long term assets enable.
4. Collateral for Financing: Long term assets can be used as collateral to secure loans and financing for a company. Lenders often consider these assets as valuable security due to their long-term nature and the potential to generate future income.
5. Enhancing Competitive Advantage: These assets, ranging from tangible infrastructure to intangible branding, form the basis for crafting a distinct market identity.

By leveraging and strategically managing these assets, management can establish a competitive edge, fostering unique offerings and solidifying their position in the market landscape.

Importance of Long term Assets

Other than the functions above, long term assets are important for a company for multiple other reasons.

1. Long-term Stability: Long term assets contribute to a company's stability in the foreseeable future. They provide the necessary tools for a business to function efficiently over an extended period.
2. Investment Decision-Making: For investors, these assets are essential indicators of a company's financial health and potential for growth, as they consider a company with substantial tangible and intangible assets to be a more stable and attractive investment.
3. Basis for Borrowing and Creditworthiness: As mentioned above, long term assets serve as collateral for borrowing, allowing companies to secure loans at favorable terms. Lenders and creditors also assess a company's long term assets base to determine its creditworthiness and ability to repay loans.
4. Valuation and Financial Reporting: They play a vital role in financial reporting and valuation. Accurate reporting of these assets gives stakeholders a transparent overview of a company's financial position and performance.
5. Strategic Decision-Making: These assets empower organizations to innovate, expand, and compete effectively. By astutely managing and allocating these resources, management can shape the company's trajectory, ensuring long-term viability and strategic success.
6. Wealth Accumulation and Growth: Long term assets play a pivotal role in wealth accumulation and growth for management. They serve as the cornerstone for generating consistent revenue and enhancing the financial standing of an organization. 

Through strategically utilizing and nurturing these assets, management can foster sustainable growth, capitalize on investment opportunities, and bolster the organization's overall wealth over time.

Long term Assets on the Balance Sheet

Balance Sheet is a financial statement that offers investors and management a snapshot of a company's assets, liabilities, and equity at a specific point in time. Long-term can be found under the Asset section and are crucial for the above reasons.

Long term assets are typically listed in descending order of liquidity, with the least liquid assets on top. The presentation format may vary, but the following items are quite common:1. Property,

1. Plant, and Equipment (PP&E) 
2. Intangible Assets 
3. Long-term Investments 
4. Other Long term Assets

Things to consider while recording entries in the balance sheet are:

1. Depreciation of Long term Assets

Depreciation is a critical accounting concept related to long term assets, especially tangible assets. As these assets have a finite useful life, their costs are allocated over time through depreciation. 

Depreciation aims to match the asset's cost with the revenues it generates over its useful life. Various methods, such as straight-line depreciation, declining balance method, and sum-of-the-years-digits, are used to calculate depreciation in accordance with the asset's characteristics.

2. Impairment of Long term Assets

Impairment occurs when the asset’s carrying amount exceeds its recoverable amount, indicating a decline in its value. In such cases, the asset's value is written down on the balance sheet, reflecting its reduced worth.

Intangible assets, including goodwill, are tested at least once per annum, sometimes even more often, to ensure their carrying value reflects their economic value. 

Example of Real Life Long term Assets

For investors and financial analysts, analyzing a company's long term assets is crucial for understanding its financial health and prospects. Key metrics, such as the fixed asset turnover ratio, are used to assess operational efficiency. 

Moreover, valuable intangible assets like patents and trademarks indicate strong market positioning and competitive advantage.

Conclusion

Long term assets are one of the essential parts of a company's success. They support its operations, revenue generation, and future growth. 

Understanding their different types, their portrayal on the balance sheet, and the accounting principles governing them is essential for investors, analysts, and businesses. 

It must be mentioned that they alone can’t provide full insight into the company’s operations. To truly understand the company, you must look at other parts of the Balance Sheet and other financial statements, such as the Income and Cash Flow Statement.

However, grasping their significance and impact on financial performance helps the management make more informed decisions and ensure sustainable growth and profitability of the company.

So next time you research or analyze a company and stumble across long term assets, try to understand how their presence in the company influences the big picture.

Researched & Authored by Martin Belavy | LinkedIn

Reviewed and edited by Parul Gupta | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

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