Long-term financial assets

What it means

Long-term financial assets are financial investments a company holds for more than a year. Most often they are stakes in subsidiaries and associates, debt securities held to maturity, long-term loans to other companies and other shares and securities not intended for short-term trading.

On the balance sheet they form a separate group of fixed assets alongside tangible and intangible assets. They are not depreciated because they do not wear out. They are measured at acquisition cost including incidental costs, and stakes in subsidiaries and associates may also be carried under the equity method.

If an investment’s value temporarily falls below its carrying amount, an impairment allowance is made. Some securities are remeasured to fair value at the balance sheet date, and the difference goes to profit or loss or to equity depending on their type.

How it works in practice

In holding structures long-term financial assets are often the parent company’s main item. When preparing the financial statements, we check that the carrying amount of the stakes matches the subsidiaries’ equity and whether loss-making subsidiaries require an allowance.

Loans to related companies with maturities over a year belong here too, and they raise the question of interest. Interest between related parties must be at the usual market level under transfer pricing rules, or the tax office will adjust the tax base.

For tax, the sale of a stake is assessed separately. For a legal entity, income from selling an interest in an s.r.o. or shares is usually part of the tax base, and the acquisition cost becomes deductible only on sale, not over time. An impairment allowance on stakes is not deductible.

What to watch out for

A common mistake is reporting a loan to a shareholder or sister company as a long-term financial asset with no contract, no interest and no actual repayments. At an audit such a loan is treated as a hidden withdrawal of money from the company, with tax consequences.

The second risk is an overstated stake in a loss-making subsidiary. If the subsidiary has lost money for years and its equity is negative, carrying the stake at cost overstates the parent’s assets and distorts its picture for the bank and creditors.