The balance sheet is an important financial statement that classifies assets into different categories based on their nature and intended use. Three key asset classifications are held for investment, held for sale, and fair value. Understanding the differences between these categories provides insight into a company’s operations and financial position.
Held for investment focuses on long-term returns
Assets held for investment are not intended to be sold in the near future. Instead, they are held to generate long-term investment returns through factors like price appreciation or dividend payments. For example, a company may classify an equity investment or real estate property as held for investment on its balance sheet. The valuation and reporting treatment for these assets focuses on the long-term.
Held for sale indicates near-term disposals
In contrast, assets held for sale are specifically intended to be sold relatively soon, usually within one year. The company is likely more focused on an asset’s current net realizable value rather than long-term returns. Examples could include idle manufacturing equipment a company no longer needs or real estate being actively marketed. Held for sale assets use different valuation methods on the balance sheet.
Fair value links asset worth to current prices
Fair value classification measures certain balance sheet assets based on their worth in current market prices. It moves away from historical cost valuation used for many non-current assets. Fair value gives investors a sense of what the assets could be liquidated for. It is commonly applied to readily marketable items like trading securities or derivatives contracts.
In summary, classification as held for investment, held for sale, or fair value provides insight into a company’s intentions and focus for specific balance sheet assets, as well as their potential realizable value.