{"id":830,"date":"2025-04-21T05:43:31","date_gmt":"2025-04-21T05:43:31","guid":{"rendered":"https:\/\/vishalkoirala.com\/?p=830"},"modified":"2026-06-17T15:44:21","modified_gmt":"2026-06-17T09:59:21","slug":"long-term-investment","status":"publish","type":"post","link":"https:\/\/vishalkoirala.com\/blog\/long-term-investment\/","title":{"rendered":"What is Long-Term Investment? Definition and Examples"},"content":{"rendered":"\n<p>Any resources which qualify to be called as <a href=\"https:\/\/vishalkoirala.com\/blog\/asset\/\">assets<\/a> but are also intended to be held for more than a year, either by <a href=\"https:\/\/vishalkoirala.com\/blog\/assets-personal-vs-business-assets\/\">individuals or businesses<\/a> is known as long-term investment.<\/p>\n<h2>What are Long-Term Investments?<\/h2>\n<p>Long-term investment is an asset (as usual) but these assets are meant to be held for more than a year by individuals or business. Unlike, <b>short-term investment<\/b>, these investment are done with some strategic goals in mind, which can be:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Generating income over extended period of time (through dividends or interest),<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Achieving capital appreciation (the investment increasing in value),<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Building strategic relationship or to influence other companies,<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Diversifying the company\u2019s asset base.<\/li>\n<\/ul>\n<p>In simple terms, the only difference is the intent of investment. For example: if you are investing in Apple\u2019s share just to trade it next week or if you are investing in Apple\u2019s share just to hold it for more than a year, the only difference here is about intent of investing in Apple\u2019s share.<\/p>\n<h2>Types of Long-Term Investments<\/h2>\n<p>Investment can be made in various forms, some common categories are:<\/p>\n<h3>Equity Securities<\/h3>\n<p>One of the long-term investments a company or individual can make by doing investment on share (stock), which represents owning a piece of another entity. Investing in Equity can be done for different purposes, an individual can invest on shares for getting yearly return via dividends, whereas, a company may invest on shares to take control over the company\u2019s operations.<\/p>\n<h4>Types of Equity Securities<\/h4>\n<h5>Fair Value Method<\/h5>\n<p>This method of accounting is used when an investing company holds a small stake (less than 20% of ownership) and doesn\u2019t have any significant influence. These investments are recorded in current market rate (fair value) on the balance sheet, where changes of value are often recorded in net income or other comprehensive income.<\/p>\n<h5><b>Case Study: How Small Business Owner Investing for Long-term Affected Her Business Income<\/b><\/h5>\n<p>Nita runs \u201cNita\u2019s Craft Shop.\u201d Her business has been okay, and she has $1000 in the shop\u2019s bank account that she doesn&#8217;t need for day-to-day operations. So, Nita purchased 10 shares of Big Retail Co, at $100 each on July 1, 2025, and hoped to make some money.<\/p>\n<p>On December 1, 2025, Big Retail Co, decided to pay out some profit to its shareholders, as Nita had invested in shares, she received $2 for each share she owned, which made $20 that goes into her shop\u2019s bank account.<\/p>\n<p>Now at year end, December 31, 2025, Nita checked the stock market price for Big Retail Co shares and she found that the price of shares had gone up and now it is worth $110 each. As the value of shares has increased she should now consider this also as income for accounting purposes.<\/p>\n<h5>How investing in equity changes the Income Statement in the Fair Value Method?<\/h5>\n<h6>Impact on Profit (Income Statement of year ended Dec 31, 2025)<\/h6>\n<table>\n<thead>\n<tr>\n<th>Items<\/th>\n<th>Amount ($)<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td colspan=\"2\" style=\"background-color: #f9f9f9; font-weight: bold;\">Income<\/td>\n<\/tr>\n<tr>\n<td>Income from Dividend<\/td>\n<td style=\"text-align: right;\">$20<\/td>\n<\/tr>\n<tr>\n<td>Income from Value Increase<\/td>\n<td style=\"text-align: right;\">$100<\/td>\n<\/tr>\n<tr>\n<td style=\"font-weight: bold;\">Income from Investment<\/td>\n<td style=\"text-align: right; font-weight: bold;\">$120<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>As, on one side, she received $20 from dividend and also, the value of the shares increased, she made $120 on profit at the end of the year.<\/p>\n<hr style=\"margin: 30px 0; border: 0; border-top: 1px solid #eee;\">\n<h5>How investing in Equity changes the balance sheet in the Fair Value Method?<\/h5>\n<h6>Balance sheet of year ended Dec 31, 2025<\/h6>\n<table>\n<thead>\n<tr>\n<th>Items<\/th>\n<th>Amount ($)<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td colspan=\"2\" style=\"background-color: #f9f9f9; font-weight: bold;\">Assets<\/td>\n<\/tr>\n<tr>\n<td>Long-term Investments<\/td>\n<td style=\"text-align: right;\">1100<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<style>\n  .financial-table {\n    width: 100%; \/* Or set a specific width like 400px *\/\n    border-collapse: collapse;\n    margin-top: 15px;\n    margin-bottom: 25px;\n    border: 1px solid #ccc;\n    font-size: 14px; \/* Adjust font size as needed *\/\n  }\n  .financial-table th,\n  .financial-table td {\n    border: 1px solid #ddd;\n    padding: 8px 12px;\n    text-align: left;\n    vertical-align: top; \/* Align content to top of cell *\/\n  }\n  .financial-table th {\n    background-color: #f2f2f2;\n    font-weight: bold;\n    text-align: center;\n  }\n  \/* Style for rows acting as sub-category headers *\/\n  .financial-table td[colspan=\"2\"] {\n      background-color: #f9f9f9;\n      font-weight: bold;\n  }\n  \/* Style for the total row in the income statement *\/\n  .income-statement-table .total-row td {\n    border-top: 2px solid #aaa; \/* Add a thicker line above totals *\/\n    font-weight: bold;\n  }\n  \/* Right-align numerical values (applied inline above, but can be done here) *\/\n  .financial-table td:last-child,\n  .financial-table th:last-child {\n     \/* text-align: right; *\/ \/* Applied inline for this example *\/\n  }\n<\/style>\n<h5><a href=\"https:\/\/www.ifrs.org\/issued-standards\/list-of-standards\/ias-28-investments-in-associates-and-joint-ventures\/\">Equity Method<\/a><\/h5>\n<p>This method is used when an investing company holds between 20% to 50% of shares and has significant control over the investee company. In this method, the initial investment is recorded at cost, then they are adjusted each period for the investor\u2019s share of the investee\u2019s profits or losses and reduced by dividends received.<\/p>\n<h6>Equity Method Example &#038; Calculations<\/h6>\n<h6>Example Scenario:<\/h6>\n<p>Your company invests $10,000 cash to buy 30% of Partner Co. on Jan 1, 2025.<\/p>\n<p>During 2025, Partner Co. reports a total profit of $5,000.<\/p>\n<p>During 2025, Partner Co. pays dividends, and your company receives its 30% share = $300 cash.<\/p>\n<h6>Equity Method Calculations:<\/h6>\n<p><strong>Your share of Partner Co\u2019s profit:<\/strong> 30% of $5,000 = <strong>$1,500<\/strong> (This increases the investment account and is recognized as income)<\/p>\n<p><strong>Cash dividend received:<\/strong> <strong>$300<\/strong> (This increases cash but decreases the investment account; it&#8217;s a return *of* investment, not income under the equity method)<\/p>\n<p><strong>Net change in investment account value during 2025:<\/strong> +$1,500 (profit share) &#8211; $300 (dividend) = <strong>+$1,200<\/strong><\/p>\n<p><strong>Investment account value at Dec 31, 2025:<\/strong> $10,000 (initial cost) + $1,200 (net change) = <strong>$11,200<\/strong><\/p>\n<hr style=\"margin: 25px 0;\">\n<h6>Impact on Your Company&#8217;s Financials (Year 2025)<\/h6>\n<table>\n<caption>Impact on Statement of Income (Year 2025)<\/caption>\n<thead>\n<tr>\n<th>Line Item<\/th>\n<th>Amount ($)<\/th>\n<th>Effect on Total Profit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Income from Investment in Partner Co.<\/td>\n<td>1,500<\/td>\n<td>Increases Profit<\/td>\n<\/tr>\n<tr>\n<td><strong>Total Increase in Profit (from this investment)<\/strong><\/td>\n<td><strong>1,500<\/strong><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p style=\"font-size: 0.9em; font-style: italic;\">(Note: The $300 cash dividend received does not appear on the Income Statement as income under the equity method.)<\/p>\n<p><\/p>\n<table>\n<caption>Impact on Balance Sheet (Changes during Year 2025 related to this investment)<\/caption>\n<thead>\n<tr>\n<th>Category &#038; Line Item<\/th>\n<th>Change \/ End Value ($)<\/th>\n<th>Explanation<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><strong>Assets (What You Own)<\/strong><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash<\/td>\n<td>&#8211; 9,700 (Net Change)<\/td>\n<td>Result of $10,000 paid for investment and $300 dividend received.<\/td>\n<\/tr>\n<tr>\n<td>Investment in Partner Co.<\/td>\n<td>11,200 (Ending Value)<\/td>\n<td>Calculated using the equity method ($10k + $1.5k profit share &#8211; $0.3k dividend).<\/td>\n<\/tr>\n<tr>\n<td><strong>Total Net Change in Assets (from this)<\/strong><\/td>\n<td><strong>+ 1,500<\/strong><\/td>\n<td>Overall increase from the investment activities (-$9.7k Cash + $11.2k Investment).<\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\">&nbsp;<\/td>\n<\/tr>\n<tr>\n<td><strong>Equity (Business Worth)<\/strong><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Retained Earnings<\/td>\n<td>+ 1,500 (Increase)<\/td>\n<td>The $1,500 income earned increases Retained Earnings.<\/td>\n<\/tr>\n<tr>\n<td><strong>Total Change in Equity (from this)<\/strong><\/td>\n<td><strong>+ 1,500<\/strong><\/td>\n<td>Matches the profit recognized.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<style>\n  .financial-statement {\n    width: 100%;\n    max-width: 700px; \/* Adjusted width for 3 columns *\/\n    border-collapse: collapse;\n    margin-bottom: 20px; \/* Space below table *\/\n    font-family: sans-serif; \/* Basic font *\/\n    font-size: 14px;\n  }\n  .financial-statement caption {\n    caption-side: top;\n    text-align: center;\n    font-weight: bold;\n    font-size: 1.1em;\n    margin-bottom: 10px;\n    line-height: 1.4;\n  }\n  .financial-statement th, \n  .financial-statement td {\n    border: 1px solid #eee; \/* Light border for structure *\/\n    padding: 6px 8px;\n    text-align: left;\n    vertical-align: top; \n  }\n  .financial-statement th {\n    border-bottom: 2px solid black; \/* Header underline *\/\n    background-color: #f8f8f8;\n    font-weight: bold;\n  }\n  .financial-statement td.amount {\n    text-align: right;\n  }\n  .financial-statement td.indent-1 { padding-left: 20px; }\n  .financial-statement td.indent-2 { padding-left: 40px; }\n  .financial-statement td.indent-3 { padding-left: 60px; }\n  .financial-statement .total-line {\n    border-top: 1px solid black;\n    font-weight: bold;\n  }\n   \/* Style for spacer row *\/\n  .financial-statement tr:has(td[colspan=\"3\"]) {\n     height: 10px; \n     border: none;\n  }\n   .financial-statement td[colspan=\"3\"] {\n     padding: 0;\n     border: none;\n   }\n   \/* Highlight row style (if needed, currently not applied in HTML) *\/\n  .financial-statement tr.highlight-row td { \n    background-color: #fcf8e3; \n    \/* font-weight: bold; *\/ \n  }\n<\/style>\n<h3>Debt Securities<\/h3>\n<h4>What is Debt Securities?<\/h4>\n<p>When you basically lend money to another entity or invest on the debt instruments of other companies, such as corporate or government bonds, long-term notes are called debt securities.<\/p>\n<h4>What is the purpose of Debt Securities?<\/h4>\n<p>The primary purpose of investing in debt securities is to earn interest over the life of the security and receive principal back at the maturity. Investors can also profit from capital gains if the bond\u2019s market value increases.<\/p>\n<h4>What are the accounting methods of calculating Debt Securities?<\/h4>\n<p>There are two methods by which you can calculate and show debt securities in books of your company:<\/p>\n<h5>Held-to-Maturity (HTM)<br \/>\n<\/h5>\n<p>If a company has positive intent and ability to hold the debt security until the date of maturity, then only this method is used by the company. In this method, investments are recorded at amortized cost on the balance sheet and interest is recognized over a period of time.<\/p>\n<h6>Example: Accounting for Held-to-Maturity (HTM) Debt Securities<\/h6>\n<h6>Scenario:<\/h6>\n<p>A company purchased $100,000 face value of government bonds on January 1, 2025. The bonds mature in 5 years and pay 5% annual interest ($5,000) every December 31. The company has the positive intention and the ability to hold these securities until their maturity date.<\/p>\n<h6>Accounting Treatment &#038; Journal Entries:<\/h6>\n<h6>At Purchase (Jan 1, 2025):<\/h6>\n<p><em>(To record the purchase of bonds at face value)<\/em><\/p>\n<pre><code>Dr. Investment in HTM Securities    $100,000\n    Cr. Cash                        $100,000<\/code><\/pre>\n<h6>At Year-End (e.g., Dec 31, 2025):<\/h6>\n<p><em>(To record the receipt of annual interest income)<\/em><\/p>\n<pre><code>Dr. Cash                          $5,000\n    Cr. Interest Income             $5,000<\/code><\/pre>\n<p>(This entry is repeated each year from 2025 through 2029 when interest is received).<\/p>\n<h6>At Maturity (Dec 31, 2029):<\/h6>\n<p><em>(To record the repayment of the bond principal)<\/em><\/p>\n<pre><code>Dr. Cash                          $100,000\n    Cr. Investment in HTM Securities    $100,000<\/code><\/pre>\n<hr style=\"margin: 25px 0;\">\n<h6>Financial Statement Impact Over Time<\/h6>\n<table>\n<caption>Statement of Income (Selected Items related to HTM Investment)<\/caption>\n<thead>\n<tr>\n<th>Line Item<\/th>\n<th>2025 ($)<\/th>\n<th>2026 ($)<\/th>\n<th>2027 ($)<\/th>\n<th>2028 ($)<\/th>\n<th>2029 ($)<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Interest Income<\/td>\n<td>5,000<\/td>\n<td>5,000<\/td>\n<td>5,000<\/td>\n<td>5,000<\/td>\n<td>5,000<\/td>\n<\/tr>\n<tr>\n<td><strong>Total Revenue (from this)<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>Net Income (Impact from this)<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><\/p>\n<table>\n<caption>Statement of Balance Sheet (Selected Items &#8211; End of Year Balances)<\/caption>\n<thead>\n<tr>\n<th>Line Item<\/th>\n<th>Dec 31, 2025 ($)<\/th>\n<th>Dec 31, 2026 ($)<\/th>\n<th>Dec 31, 2027 ($)<\/th>\n<th>Dec 31, 2028 ($)<\/th>\n<th>Dec 31, 2029 ($)<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><strong>Assets<\/strong><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash (Cumulative effect*)<\/td>\n<td>(95,000)<\/td>\n<td>(90,000)<\/td>\n<td>(85,000)<\/td>\n<td>(80,000)<\/td>\n<td>25,000<\/td>\n<\/tr>\n<tr>\n<td>Investment in HTM (at Cost)<\/td>\n<td>100,000<\/td>\n<td>100,000<\/td>\n<td>100,000<\/td>\n<td>100,000<\/td>\n<td>0<\/td>\n<\/tr>\n<tr>\n<td><strong>Total Assets (Net effect*)<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>10,000<\/strong><\/td>\n<td><strong>15,000<\/strong><\/td>\n<td><strong>20,000<\/strong><\/td>\n<td><strong>25,000<\/strong><\/td>\n<\/tr>\n<tr>\n<td colspan=\"6\" style=\"padding: 5px;\">&nbsp;<\/td>\n<\/tr>\n<tr>\n<td><strong>Equity<\/strong><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Owner\u2019s Equity \/ Capital (Assumed unchanged by this*)<\/td>\n<td>0<\/td>\n<td>0<\/td>\n<td>0<\/td>\n<td>0<\/td>\n<td>0<\/td>\n<\/tr>\n<tr>\n<td>Retained Earnings (Cumulative effect from this*)<\/td>\n<td>5,000<\/td>\n<td>10,000<\/td>\n<td>15,000<\/td>\n<td>20,000<\/td>\n<td>25,000<\/td>\n<\/tr>\n<tr>\n<td><strong>Total Equity (Net effect*)<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>10,000<\/strong><\/td>\n<td><strong>15,000<\/strong><\/td>\n<td><strong>20,000<\/strong><\/td>\n<td><strong>25,000<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p style=\"font-size: 0.9em; font-style: italic;\">*Note: These Balance Sheet figures show only the <strong>cumulative net effect<\/strong> on each account arising solely from the initial $100,000 investment outflow and the subsequent interest\/principal inflows related to this HTM security, assuming a starting balance of $0 for simplicity. Actual company balances would include other activities.<\/p>\n<hr style=\"margin: 25px 0;\">\n<h6>Keynotes on HTM Accounting:<\/h6>\n<ul>\n<li>Interest income is recognized each year ($5,000 in this case), increasing both Cash and Retained Earnings.<\/li>\n<li>The Investment account on the Balance Sheet is carried at its amortized cost (in this simple case, the initial cost of $100,000, as there&#8217;s no premium or discount).<\/li>\n<li>The investment account is only reduced when the principal is repaid at maturity.<\/li>\n<li>Fluctuations in the bond&#8217;s market price (fair value) during the holding period do not affect the Income Statement or the carrying value on the Balance Sheet.<\/li>\n<\/ul>\n<style>\n  .financial-statement {\n    width: 100%;\n    \/* max-width: 800px; *\/ \/* Wider for more columns *\/\n    border-collapse: collapse;\n    margin-bottom: 20px; \n    font-family: sans-serif; \n    font-size: 13px; \/* Slightly smaller for more columns *\/\n  }\n  .financial-statement caption {\n    caption-side: top;\n    text-align: center;\n    font-weight: bold;\n    font-size: 1.1em;\n    margin-bottom: 10px;\n    line-height: 1.4;\n  }\n  .financial-statement th, \n  .financial-statement td {\n    border: 1px solid #eee; \n    padding: 5px 6px; \/* Adjust padding *\/\n    text-align: left;\n    vertical-align: top; \n  }\n  .financial-statement th {\n    border-bottom: 2px solid black; \n    background-color: #f8f8f8;\n    font-weight: bold;\n    text-align: center; \/* Center align column headers *\/\n  }\n   .financial-statement th:first-child {\n      text-align: left; \/* Keep first header left aligned *\/\n   }\n  .financial-statement td.amount {\n    text-align: right;\n  }\n  .financial-statement td.indent-1 { padding-left: 20px; }\n  .financial-statement .total-line {\n    border-top: 1px solid black;\n    font-weight: bold;\n  }\n  .financial-statement .double-underline {\n     border-top: 1px solid black;\n     border-bottom: 3px double black;\n     font-weight: bold;\n  }\n   \/* Style for JE *\/\n   pre {\n     background-color: #f9f9f9;\n     border: 1px solid #ddd;\n     padding: 10px;\n     margin: 10px 0;\n     font-family: monospace;\n     white-space: pre-wrap; \/* Allow wrapping *\/\n   }\n   code.language-plaintext {\n       display: block; \/* Ensure block display for formatting *\/\n   }\n    \/* Style for keynotes list *\/\n    ul {\n        margin-left: 20px;\n        list-style-type: disc;\n    }\n    li {\n        margin-bottom: 8px;\n    }\n<\/style>\n<h5>Available-for-Sale (AFS)<br \/>\n<\/h5>\n<p>When you purchase any debt securities for short term or for trading purposes and your intent is not to hold it up to its date of maturity, then it is called available-for-sale (AFS). Primarily this category of debt securities are not classified as HTM or trading securities (trading securities are typically <a href=\"https:\/\/vishalkoirala.com\/blog\/assets-current-assets\/\">current assets<\/a>.) AFS securities are booked at fair value on the balance sheet. Changes in the fair value (unrealized gains and losses) are usually recorded in \u201cOther Comprehensive Income\u201d within equity, not directly in net income, until the security is sold.<\/p>\n<h6>Example: Available-for-Sale (AFS) Debt Securities<\/h6>\n<h6>Scenario:<\/h6>\n<p>On January 1, 2025, a company purchased $100,000 face value of corporate bonds for $100,000 cash. The bonds pay 5% annual interest ($5,000) every December 31 and mature in 5 years. The company classifies these bonds as Available-for-Sale (AFS) because, while they don&#8217;t plan to actively trade them, they may sell them before maturity if needed.<\/p>\n<p>Market conditions cause the fair value of these bonds to fluctuate. For example, at December 31, 2025, the fair market value is $98,000.<\/p>\n<h6>Accounting Treatment &#038; Journal Entries (Illustrative for Year 2025):<\/h6>\n<h6>At Purchase (Jan 1, 2025):<\/h6>\n<p><em>(To record the purchase of AFS bonds at cost)<\/em><\/p>\n<pre><code>Dr. Investment in AFS Securities    $100,000\n    Cr. Cash                        $100,000<\/code><\/pre>\n<h6>Receipt of Interest (Dec 31, 2025):<\/h6>\n<p><em>(To record receipt of annual interest income)<\/em><\/p>\n<pre><code>Dr. Cash                          $5,000\n    Cr. Interest Income             $5,000<\/code><\/pre>\n<h6>Fair Value Adjustment (Dec 31, 2025):<\/h6>\n<p><em>(To adjust the investment to its fair value and record the unrealized loss in OCI)<\/em><br \/>Fair Value = $98,000; Carrying Amount (Cost) = $100,000; Unrealized Loss = $2,000<\/p>\n<pre><code>Dr. Other Comprehensive Income (OCI)  $2,000  (Debit reflects a loss\/decrease in Equity)\n    Cr. Fair Value Adjustment - AFS   $2,000<\/code><\/pre>\n<p>(The Fair Value Adjustment is typically netted with the Investment account on the Balance Sheet to report the investment at fair value).<\/p>\n<hr style=\"margin: 25px 0;\">\n<h6>Financial Statement Impact Over Time<\/h6>\n<table>\n<caption>Statement of Income (Selected Items related to AFS Investment)<\/caption>\n<thead>\n<tr>\n<th>Line Item<\/th>\n<th>2025 ($)<\/th>\n<th>2026 ($)<\/th>\n<th>2027 ($)<\/th>\n<th>2028 ($)<\/th>\n<th>2029 ($)<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Interest Income<\/td>\n<td>5,000<\/td>\n<td>5,000<\/td>\n<td>5,000<\/td>\n<td>5,000<\/td>\n<td>5,000<\/td>\n<\/tr>\n<tr>\n<td><strong>Net Income (Impact from this)<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<td><strong>5,000<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p style=\"font-size: 0.9em; font-style: italic;\">Note: Only recognized interest income affects Net Income. Unrealized gains\/losses on AFS securities flow through Other Comprehensive Income (OCI), bypassing Net Income.<\/p>\n<p><\/p>\n<h6>Fair Value Changes and OCI Impact:<\/h6>\n<table>\n<caption>Tracking Fair Value and Accumulated OCI<\/caption>\n<thead>\n<tr>\n<th>Year End<\/th>\n<th>Fair Value ($)<\/th>\n<th>Unrealized Gain \/ (Loss) for the Year ($)<\/th>\n<th>Accumulated OCI (AOCI) Balance ($)<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Dec 31, 2025<\/td>\n<td>98,000<\/td>\n<td>(2,000)<\/td>\n<td>(2,000)<\/td>\n<\/tr>\n<tr>\n<td>Dec 31, 2026<\/td>\n<td>101,000<\/td>\n<td>3,000<\/td>\n<td>1,000<\/td>\n<\/tr>\n<tr>\n<td>Dec 31, 2027<\/td>\n<td>102,500<\/td>\n<td>1,500<\/td>\n<td>2,500<\/td>\n<\/tr>\n<tr>\n<td>Dec 31, 2028<\/td>\n<td>99,000<\/td>\n<td>(3,500)<\/td>\n<td>(1,000)<\/td>\n<\/tr>\n<tr>\n<td>Dec 31, 2029 (Maturity\/Sale at Par)<\/td>\n<td>100,000<\/td>\n<td>1,000<\/td>\n<td>0<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><\/p>\n<table>\n<caption>Statement of Balance Sheet (Selected Items &#8211; End of Year Balances)<\/caption>\n<thead>\n<tr>\n<th>Line Item<\/th>\n<th>Dec 31, 2025 ($)<\/th>\n<th>Dec 31, 2026 ($)<\/th>\n<th>Dec 31, 2027 ($)<\/th>\n<th>Dec 31, 2028 ($)<\/th>\n<th>Dec 31, 2029 ($)<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><strong>Assets<\/strong><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash (Cumulative effect*)<\/td>\n<td>(95,000)<\/td>\n<td>(90,000)<\/td>\n<td>(85,000)<\/td>\n<td>(80,000)<\/td>\n<td>25,000<\/td>\n<\/tr>\n<tr>\n<td>Investment in AFS (at Fair Value)<\/td>\n<td>98,000<\/td>\n<td>101,000<\/td>\n<td>102,500<\/td>\n<td>99,000<\/td>\n<td>0<\/td>\n<\/tr>\n<tr>\n<td><strong>Total Assets (Net effect*)<\/strong><\/td>\n<td><strong>3,000<\/strong><\/td>\n<td><strong>11,000<\/strong><\/td>\n<td><strong>17,500<\/strong><\/td>\n<td><strong>19,000<\/strong><\/td>\n<td><strong>25,000<\/strong><\/td>\n<\/tr>\n<tr>\n<td colspan=\"6\" style=\"padding: 5px;\">&nbsp;<\/td>\n<\/tr>\n<tr>\n<td><strong>Equity<\/strong><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Retained Earnings (Cumulative effect from interest*)<\/td>\n<td>5,000<\/td>\n<td>10,000<\/td>\n<td>15,000<\/td>\n<td>20,000<\/td>\n<td>25,000<\/td>\n<\/tr>\n<tr>\n<td>Accumulated Other Comprehensive Income (AOCI)<\/td>\n<td>(2,000)<\/td>\n<td>1,000<\/td>\n<td>2,500<\/td>\n<td>(1,000)<\/td>\n<td>0<\/td>\n<\/tr>\n<tr>\n<td><strong>Total Equity (Net effect*)<\/strong><\/td>\n<td><strong>3,000<\/strong><\/td>\n<td><strong>11,000<\/strong><\/td>\n<td><strong>17,500<\/strong><\/td>\n<td><strong>19,000<\/strong><\/td>\n<td><strong>25,000<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p style=\"font-size: 0.9em; font-style: italic;\">*Note: These Balance Sheet figures show only the <strong>cumulative net effect<\/strong> on each account arising solely from the initial $100,000 investment outflow and the subsequent interest\/principal inflows &#038; fair value adjustments related to this AFS security, assuming a starting balance of $0 for simplicity. Actual company balances would include other activities.<\/p>\n<hr style=\"margin: 25px 0;\">\n<h6>Keynotes on AFS Accounting:<\/h6>\n<ul>\n<li>Interest income ($5,000 per year in this example) is recognized in Net Income and increases Retained Earnings.<\/li>\n<li>AFS investments are reported on the Balance Sheet at their current Fair Value.<\/li>\n<li>Yearly changes in Fair Value create Unrealized Gains or Losses. These are reported in Other Comprehensive Income (OCI), which is separate from Net Income.<\/li>\n<li>The cumulative total of OCI related to AFS securities still held is reported in the Equity section of the Balance Sheet as Accumulated Other Comprehensive Income (AOCI). AOCI can be positive (cumulative gain) or negative (cumulative loss).<\/li>\n<li>When the AFS security matures or is sold, the investment account is removed from the Balance Sheet, cash is adjusted, and the related AOCI balance is reversed (cleared to zero). Any difference between the cash received and the original cost, adjusted for any previous write-downs, may result in a Realized Gain or Loss reported in Net Income at that time.<\/li>\n<\/ul>\n<style>\n  .financial-statement, .data-table {\n    width: 100%;\n    \/* max-width: 800px; *\/ \n    border-collapse: collapse;\n    margin-bottom: 20px; \n    font-family: sans-serif; \n    font-size: 13px; \n  }\n  .financial-statement caption, .data-table caption {\n    caption-side: top;\n    text-align: center;\n    font-weight: bold;\n    font-size: 1.1em;\n    margin-bottom: 10px;\n    line-height: 1.4;\n  }\n  .financial-statement th, \n  .financial-statement td,\n  .data-table th,\n  .data-table td {\n    border: 1px solid #eee; \n    padding: 5px 6px; \n    text-align: left;\n    vertical-align: top; \n  }\n  .financial-statement th,\n  .data-table th {\n    border-bottom: 2px solid black; \n    background-color: #f8f8f8;\n    font-weight: bold;\n    text-align: center; \n  }\n   .financial-statement th:first-child,\n   .data-table th:first-child {\n      text-align: left; \n   }\n  .financial-statement td.amount,\n  .data-table td.amount {\n    text-align: right;\n  }\n  .financial-statement td.indent-1 { padding-left: 20px; }\n  .financial-statement .total-line {\n    border-top: 1px solid black;\n    font-weight: bold;\n  }\n  .financial-statement .double-underline {\n     border-top: 1px solid black;\n     border-bottom: 3px double black;\n     font-weight: bold;\n  }\n   \/* Style for JE *\/\n   pre {\n     background-color: #f9f9f9;\n     border: 1px solid #ddd;\n     padding: 10px;\n     margin: 10px 0;\n     font-family: monospace;\n     white-space: pre-wrap; \n   }\n   code.language-plaintext {\n       display: block; \n   }\n    \/* Style for keynotes list *\/\n    ul {\n        margin-left: 20px;\n        list-style-type: disc;\n        padding-left: 20px; \/* Ensure padding for list items *\/\n    }\n    li {\n        margin-bottom: 8px;\n        line-height: 1.5; \/* Improve readability *\/\n    }\n<\/style>\n<section>\n<h3>Equity vs. Debt Investments: Understanding the Key Differences<\/h3>\n<p>\n    When considering how to grow your capital, two fundamental approaches stand out: equity and debt investments. While both aim to generate returns, they operate on distinct principles and carry different implications for investors. Let&#8217;s break down their key differences:\n  <\/p>\n<table>\n<thead>\n<tr>\n<th>Feature<\/th>\n<th>Equity Investment<\/th>\n<th>Debt Investment<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><strong>Represents<\/strong><\/td>\n<td>Ownership stake in another company<\/td>\n<td>Lending money to another entity (Creditor)<\/td>\n<\/tr>\n<tr>\n<td><strong>Income Type<\/strong><\/td>\n<td>Dividends (if declared), Capital Gains<\/td>\n<td>Interest payments, Principal repayment<\/td>\n<\/tr>\n<tr>\n<td><strong>Primary Goal<\/strong><\/td>\n<td>Potential for high growth, Influence<\/td>\n<td>Stable income stream, Capital preservation<\/td>\n<\/tr>\n<tr>\n<td><strong>Risk Level<\/strong><\/td>\n<td>Generally higher (market volatility)<\/td>\n<td>Generally lower (subject to credit\/interest risk)<\/td>\n<\/tr>\n<tr>\n<td><strong>Control<\/strong><\/td>\n<td>Can confer voting rights\/influence<\/td>\n<td>No ownership control<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>\n    Understanding these core distinctions is crucial for aligning your investment strategy with your financial goals and risk tolerance. Whether you seek high-growth potential through ownership or prefer the stability of fixed income, both equity and debt investments play vital roles in a well-diversified portfolio.\n  <\/p>\n<\/section>\n<h3>Other Long-Term Investments<br \/>\n<\/h3>\n<p>There are other assets which are held for strategic, or long-term purposes which includes:<\/p>\n<h4><b>Real Estate<\/b><\/h4>\n<p>Property such as land and buildings, or <a href=\"https:\/\/vishalkoirala.com\/blog\/property-plant-equipment\/\">any property plant and equipment (PPE)<\/a> which are not used by the company for primary operations but are held by the company for capital appreciation, rental income or for future use.<\/p>\n<h4><b>Special Funds<\/b><\/h4>\n<p>Funds which are set aside for specific long-term purposes like pensions funds or funds for future expansion, if managed as investments.<\/p>\n<h4><b>Intangible Assets<\/b><\/h4>\n<p>Assets like, <b>patents<\/b>, <b>trademarks<\/b>, <b>copyrights<\/b> that offer a long-term strategic value.<\/p>\n<p><a href=\"https:\/\/vishalkoirala.com\/blog\/intangible-assets\/\">Intangible Assets Explained<\/a><\/p>\n<h2>How Long-Term Investments are Accounted on Financial Statement<\/h2>\n<p>As we already discussed and found out from examples above that different kinds of investment have different nature and are shown differently on financial statements.<\/p>\n<h3><b>How Long-Term Investment is shown on the Balance Sheet?<\/b><\/h3>\n<p>Long-term investments are listed under the <b>non-current assets<\/b> section of balance sheet, where:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Equity investments (Fair value method) are reported at current market value.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Equity investments (Equity method) are reported at initial cost adjusted for earnings\/ losses and dividends.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Debt investment (HTM) is reported at amortized cost.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Debt investment (AFS) are reported at fair value.<\/li>\n<\/ul>\n<h3><b>How Long-Term Investment is shown on Income Statement?<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Dividend income (from equity) and interest income (from debt) are typically reported here.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Realized gains or losses from selling investments are reported.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">For equity investments under the equity method, the investor\u2019s share of the investee\u2019s net income\/loss is reported.<\/li>\n<\/ul>\n<h3><b>How Long-Term Investment is shown on Statement of Comprehensive Income?<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Unrealized gains and losses on AFS debt securities are reported in Other Comprehensive income (OCI) until realized.<\/li>\n<\/ul>\n<h2>Risk and Return of Long-Term Investment<\/h2>\n<p>Investing in long-term assets is like inviting both risk and potential return.<\/p>\n<h3><b>High Potential Return<\/b><\/h3>\n<p>When a company holds investments for a long period of time, it allows them to ignore short-term market fluctuations and potentially benefit from compounding returns and economic growth. Equity investments often offer higher potential returns than debt investments over the period of long term.<\/p>\n<h3><b>What are risks associated with Long-Term Investment?<\/b><\/h3>\n<h4><b>Market Risk<\/b><\/h4>\n<p>Value of equity investment can fluctuate according to the market.<\/p>\n<h4><b>Interest Rate Risk<\/b><\/h4>\n<p>When market interest rates of debt securities (especially fixed rate bonds) changes it can risk the return of the company which comes from interest.<\/p>\n<h4><b>Credit Risk (Default Risk)<\/b><\/h4>\n<p>Issuers of debt security can fail to make interest or principal payments to the company which can lead to losing all the investment.<\/p>\n<h4><b>Liquidity Risk<\/b><\/h4>\n<p>There can be a condition in future when a company wants to sell long-term investments quickly, but it may have to take a loss while selling as there may not be a market demand.<\/p>\n<p>Though, investment is all about risk and return, companies should carefully manage these risks through diversification and strategic selection aligned with their risk tolerance and financial goals.<\/p>\n<h2>What are the Real-World Examples of Long-Term Investments?<br \/>\n<\/h2>\n<p>Long-term investment is all about long-term strategy. So many big corporations utilize them in same way:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Tech Giants:<\/b> Companies like Google (Alphabet) or Apple generally invest in smaller tech startups or acquire stakes in businesses, who are aiming for innovation, market access, or future growth engines.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Conglomerates: <\/b>Berkshire Hathway is famous for its investment of established companies across various sectors. It normally holds the large equity stakes and is more interested in dividends and capital appreciation.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Insurance Companies: <\/b>These companies strategically hold long-term investment to match their long-term payouts (insurance).<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b style=\"font-style: inherit;\">Manufacturing Companies: <\/b>Large manufacturing companies invest in their key suppliers to ensure a stable supply chain.<\/li>\n<\/ul>\n<h2>Frequently Asked Questions (FAQ)<\/h2>\n<h2>What is the main difference between long-term and short-term investments?<\/h2>\n<p>                The major difference between long-term and short-term investment is the holding period and intent of investment to that specific asset. As, when a company invests on long-term investment, it has an intent to hold those assets for more than one year.            <\/p>\n<h2>Why do companies make long-term investments instead of just reinvesting in their own company?<\/h2>\n<p>                Long-term investments are made with several reasons such as diversification, accessing new technology, and market by investing in other firms or to get earning returns, building strategic partnerships.            <\/p>\n<h2>Are all long-term investments risky?<\/h2>\n<p>                Investment comes with risk, but every asset has its own degree of risk. Government bonds which are held to maturity are generally considered low-risk investment, while equity investments can be volatile sectors or carry higher risk.            <\/p>\n<h2>How do long-term investments relate to non-current assets?<\/h2>\n<p>                Long\u2013term investments are a specific category within non-current assets. Non-current assets include all assets of the company which are expected to be held for more than a year, including property, plant &amp; equipment (PPE), intangible assets and long-term investments.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Any resources which qualify to be called as assets but are also intended to be held for more than a year, either by individuals or businesses is known as long-term investment.<\/p>\n","protected":false},"author":1,"featured_media":832,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8,10],"tags":[],"class_list":["post-830","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting","category-assets"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.8 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What is Long-Term Investment? 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