What is a Long-Term Asset?
A long-term asset is an asset that a company expects to sell or otherwise recognize the economic value of after more than one year.
How Does a Long-Term Asset Work?
An asset is anything that has commercial or exchange value. According to the Financial Accounting Standards Board, an asset must provide reasonably estimable future economic benefits, must be controlled by the owner, and must be the result of a prior event or transaction (such as a purchase).
For example, let’s assume that XYZ Company intends to purchase an office building for $10 million. When the company executes a legal purchase agreement with the seller, XYZ Company will have a place from which to conduct its business operations over the next 10 years, and it will control what happens to the building from that point forward. Thus, XYZ Company acquired a $10 million asset and should reflect this asset on its balance sheet as a long-term asset.
Assets are presented on the balance sheet in order of their liquidity. If a company expects to sell or otherwise recognize the economic value of an asset within one year, the asset is generally classified as a current asset on the balance sheet. Cash on hand is a common current asset. Property, plant and equipment (such as the office building above) are common long-term assets.
Most long-term assets lose value as they age -- they depreciate (amortization is the term used when referring to intangible assets). The rate at which a company chooses to depreciate its long-term assets may result in a book value that differs from the current market value of the assets.
Why Does a Long-Term Asset Matter?
Information about a company’s long-term assets is a key component of accurate financial reporting, business valuation, and thorough financial analysis. Although the Financial Accounting Standards Board, the Securities and Exchange Commission, and other regulatory bodies define how and when a company’s assets are reported, companies may employ a variety of accepted methods for recording, depreciating and disposing of assets, which is why analysts must also carefully study the notes to a company’s financial statements.
