Long Term Investments

boeing888Long term investments are acquired by companies to provide benefits for periods of time usually extending beyond one year. Examples of long term investments would include things like; long-term notes receivable and investments in land, debt and equity securities, life insurance, and special funds for specific purposes.

The notes Receivable account of a company includes receivables that are evidenced by promissory notes.  Promissory notes are legally enforceable  contracts/documents that state the face value of the receivables.  These documents will formally outline the date when the face value is due, and the periodic interest payments to be made while the note is outstanding.  The date when a receivable is due is called the maturity date.  With long term investments the maturity date is often beyond one year, so the account should be listed in the long-term investment section of the balance sheet.  However, if the maturity date of a note receivable is within one year, it should be disclosed as a current asset.

Notes receivable often arise because companies receive notes in exchange for the sale of an expensive items.  For example, the Boeing Company, a major aircraft manufacturer, often receives notes in payment for sold aircraft. Alternatively, such notes can result from direct company loans to employees and others.  It also happens that customers with large, overdue accounts are asked to sign promissory notes.  Like accounts receivable, an estimate (often subjective)  for uncollectibles must be provided for notes receivable.

In addition to notes receivable, the long-term investment section of the balance sheet can include a number of other investments. Investments in debt and equity securities that are not intended to be sold in the near future represent other examples that are not intended to be sold in the near future.  Most major U.S. companies have made a significant investments in the equity securities of other smaller companies, with the intent to exert long-term influence over their management.  An example of this would be, Scott Paper Company, who reportedly invested  $53 million in a smaller company which owned a pulp mill, forestland, and a tree plantation in Chile.  This would be listed in the long-term investment section of its balance sheet.  Users should learn as much as possible about such investments, usually by reading the footnotes, because they signal areas where management has chosen to devote considerable attention.

The cash value of life insurance, the amount for which ordinary insurance policies held on the lives of company officers can be cashed in, and the assets of investment funds designed to finance future events, like plant expansions and debt payments, also appear in this section of the balance sheet.  The dollar amounts in these accounts, which are relatively small for most major U.S. Companies, normally equal to the costs of acquiring them.