PERMANENT INVESTMENTS
Nature of Permanent Investments
As distinguished from the type of investment discussed in the
preceding chapter, investments of a more or less permanent character
will next claim our attention. These may be permanent in the sense
that at the date of the balance sheet they have a long term to run
before they mature and the expectation is they will be held for a
considerable period of time; or permanency may be indicated because
ownership of the investment is necessary or, at least, a valuable
requisite to operation. Ease of conversion into cash may or may
not be a characteristic of such investments, and certainly it is
not a determining test for valuation as is the case with temporary
investments, discussed in Chapter XIV.
The necessary test is always the condition in which the company would
be placed, viewed from the standpoint of efficient operation, if the
investment were disposed of. If its efficiency or its contracted or
moral obligations would not be impaired, the investment may be said
to be of a temporary character. Examples were given in the previous
chapter. If, however, its efficiency would be materially affected,
or its continuance as a business be hampered or threatened, then the
investment must be considered as of a permanent character. This latter
type of permanent investment will be discussed first, followed by a
consideration of the long-term securities (bonds, stocks, and land)
held as investments for certain funds (such as the building fund, bond
and redemption fund, etc.).
Permanent Investments as an Aid to Operation
These permanent investments may take the form of ownership of the stock
or bonds of other corporations, as in the case of the holding company.
They may represent interests, active or silent, in partnerships; or
they may take the form of advances of working capital or funds to
other concerns. Whatever the form may be, and whether evidenced by
formal securities, collateral, or merely by open book accounts, they
serve the purpose of securing some essential facility without which
operation could not be successfully carried on. A newspaper may secure
full or controlling interest in a paper mill to insure its supply of
print paper; a railway may become a heavy owner in a terminal company
in order to give it terminal facilities; a refinery may purchase a
controlling interest in an oil production company in order to give it a
sure supply of crude oil; etc. Thus, the permanent or fixed investment
is always a means of bringing about the efficient operation of a
business. It may be effected in any one of three ways, viz.: