Financial Reports: How to Read the Balance Sheet for Long-Term Assets
Assets that a company plans to hold for more than one year belong in the long-term assets section of the balance sheet. For financial reporting, this section shows you the assets that a company has to build its products and sell its goods.
Land and buildings
Companies list any buildings they own on the balance sheet’s land and buildings line. Companies must depreciate (show that the asset is gradually being used up by deducting a portion of its value) the value of their buildings each year, but the land portion of ownership isn’t depreciated.
Many people believe that depreciating the value of a building actually results in undervaluing a company’s assets. The IRS allows 39 years for depreciation of a building; after that time, the building is considered valueless.
That fact may be true in many cases, such as with factories that need to be updated to current-day production methods, but a well-maintained office building usually lasts longer. A company that has owned a building for 20 or more years may, in fact, show the value of that building depreciated below its market value.
Real estate over the past 20 years has appreciated greatly in most areas of the country. So a building’s value may actually increase because of market appreciation. You can’t figure out this appreciation by looking at the financial reports, though. You have to find research reports written by analysts or the financial press to determine the true value of these assets.
Sometimes you see an indication that a company holds hidden assets — they’re hidden from your view when you read the financial reports because you have no idea what the true marketable value of the buildings and land may be.
Whenever a company takes possession of or constructs a building by using a lease agreement that contains an option to purchase that property at some point in the future, you see a line item on the balance sheet called capitalized leases. It means that, at some point in the future, the company may likely own the property and then can add the property’s value to its total assets owned.
Companies track improvements to property they lease and don’t own in the leasehold improvements account on the balance sheet. These items are depreciated because the improvements will likely lose value as they age.
Machinery and equipment
Companies track and summarize all machinery and equipment used in their facilities or by their employees in the machinery and equipment accounts on the balance sheet. These assets depreciate just like buildings, but for shorter periods of time, depending on the company’s estimate of their useful life.
Furniture and fixtures
Some companies have a line item for furniture and fixtures, whereas others group these items in machinery and equipment or other assets. You’re more likely to find furniture and fixture line items on the balance sheet of major retail chains that hold significant furniture and fixture assets in their retail outlets than on the balance sheet for manufacturing companies that don’t have retail outlets.
Tools, dies, and molds
You find tools, dies, and molds on the balance sheet of manufacturing companies, but not on the balance sheet of businesses that don’t manufacture their own products. Tools, dies, and molds that are unique and are developed specifically by or for a company can have significant value. This value is amortized, which is similar to the depreciation of other tangible assets.
Any assets that aren’t physical — such as patents, copyrights, trademarks, and goodwill — are considered intangible assets. Patents, copyrights, and trademarks are actually registered with the government, and a company holds exclusive rights to these items. If another company wants to use something that’s patented, copyrighted, or trademarked, it must pay a fee to use that asset.
Patents give companies the right to dominate the market for a particular product. For example, pharmaceutical companies can be the sole source for a drug that’s still under patent. Copyrights also give companies exclusive rights for sale. Copyrighted books can be printed only by the publisher or individual who owns that copyright, or by someone who has bought the rights from the copyright owner.
Goodwill is a different type of asset, reflecting the value of a company’s locations, customer base, or consumer loyalty, for example. Firms essentially purchase goodwill when they buy another company for a price that’s higher than the value of the company’s tangible assets or market value. The premium that’s paid for the company is kept in an account called Goodwill that’s shown on the balance sheet.
Other assets is a catchall line item for items that don’t fit into one of the balance sheet’s other asset categories. The items shown in this category vary by company; some firms group both tangible and intangible assets here.
Other companies may put unconsolidated subsidiaries or affiliates in this category. Whenever a company owns less than a controlling share of another company but more than 20 percent, it must list the ownership as an unconsolidated subsidiary (a subsidiary that’s partially but not fully owned) or an affiliate (a company that’s associated with the corporation but not fully owned).
Ownership of less than 20 percent of another company’s stock is tracked as a marketable security. Long before a firm reaches even the 20 percent mark, you usually find discussion of its buying habits in the financial press or in analysts’ reports. Talk of a possible merger or acquisition often begins when a company reaches the 20 percent mark.
You usually don’t find more than a line item that totals all unconsolidated subsidiaries or affiliates. Sometimes the notes to the financial statements or the management’s discussion and analysis sections mention more detail, but you often can’t tell by reading the financial reports and looking at this category what other businesses the company owns. You have to read the financial press or analyst reports to find out the details.