When a company holds assets, it can categorize them in different ways for accounting purposes. Two common categorizations are held for investment and held for sale. There are key differences in how these types of assets are accounted for on the financial statements. This article will explore the definitions, accounting treatments, and examples of assets held for investment versus assets held for sale.
Assets held for investment focus on earning returns
Assets held for investment are those a company intends to hold for the long-term to generate investment returns. These could include stocks, bonds, real estate properties, or other assets that are expected to appreciate in value or produce investment income over time. Companies report these on the balance sheet at cost or fair value. Unrealized gains and losses flow through other comprehensive income on the income statement.
Assets held for sale aim to be sold in the near term
In contrast, assets held for sale are those a company plans to sell in the near future, usually within one year. The company no longer intends to use these assets as part of normal operations. Examples could include real estate, factories, divisions, or subsidiaries that will be divested. Companies record these assets at the lower of carrying value or fair value less costs to sell. Declines in fair value result in impairment charges on the income statement.
Held for sale classification has strict requirements
For an asset to qualify as held for sale, management must have committed to a formal sale plan and expect the sale to close within one year. The asset also needs to be actively marketed at a reasonable price compared to its fair value. If the sale process takes longer than initially expected, the company may need to reclassify the asset back to held for investment.
Different accounting can impact financial ratios
Since assets held for sale may result in impairment charges, while those held for investment see fair value changes run through OCI, the accounting treatment can significantly impact key financial metrics. For example, return on assets and profit margins could look worse in years where major impairments hit the income statement. However, price to book ratios would reflect those write-downs. Understanding these accounting nuances provides more insight when analyzing financial statements.
In summary, whether assets are treated as held for investment or held for sale has meaningful implications for financial reporting and analysis. The former focuses on long-term appreciation while the latter targets near-term divestiture. Their accounting reflects these differing intents.