The balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time. How certain assets like investments are presented on the balance sheet depends on factors like the company’s intent and ability to sell them. This article explores key differences between held for investment, held for sale, and fair value designations and how they impact balance sheet reporting.
Held for investment assets kept to generate income
Assets held for investment are those a company intends to keep long-term to generate investment income. These are strategic, longer-term assets that are not intended to be sold in the near future. On the balance sheet, held for investment assets are reported at amortized cost or cost less impairment. Examples include stocks and bonds a company plans to hold indefinitely.
Held for sale assets actively marketed for near-term sale
Held for sale assets are those a company intends to sell in the near term, usually within one year. They are being actively marketed and have a high likelihood of being sold. On the balance sheet, held for sale assets are reclassified as current assets and reported at the lower of carrying value or fair value less costs to sell.
Fair value based on current exit price
Fair value reflects the price that would be received to sell an asset in an orderly transaction between market participants. Some financial assets like trading securities must be reported at fair value on the balance sheet. Fair value is often based on active market prices but can involve valuation models and estimates for assets lacking observable prices.
In summary, balance sheet classification and measurement of investments depends on management’s intent and ability to sell them. Held for investment assets are kept long-term to generate returns. Held for sale assets are being actively marketed for near-term sale. Some assets must be reported at fair value, which aims to reflect current exit values.