If you own or operate a business, you may have a number of assets that you created, own, or benefit from. You may even have valuable assets that are not physically present but would constitute an excellent long-term investment if realised. It is critical to recognise all of your non-current assets, including tangible and intangible assets. So, what exactly are non-current assets? More information on the definition and examples of non-current assets can be found in this guide.
What are Non-Current Assets?
Non-current assets are assets whose advantages will be realised over a period of time greater than a year and cannot be immediately turned into cash. Property, plant and equipment, intellectual property, intangible assets, and other long-term assets are all reported on the balance sheet at acquisition cost.
Fixed assets like land, buildings, motor vehicles, and so on are referred to as property, plant, and equipment (PP&E), whereas intangible assets are those that do not have a physical form.
Non-current assets are capitalised rather than expensed, and their value is deducted and allocated throughout the asset’s useful life. Companies buy non-current assets with the intention of utilising them in the business since their benefits will last longer than a year. Depending on the nature of the asset, it may be amortised or depreciated.
Understanding Noncurrent Assets
On a balance sheet, a company’s assets are separated into two categories: noncurrent and current assets. Noncurrent assets, often known as long-term assets, are capitalised instead of expensed. This means that instead of allocating the total cost to the accounting year in which the asset was purchased, the corporation allocates the cost of the item over the number of years for which the asset will be in use. The asset may be depreciated, amortised, or depleted, depending on its type.
The balance sheet’s assets column is divided into categories based on the type of asset. The first section is “current assets,” which are short-term assets that can be converted into cash in less than a year or one operating cycle. Cash, accounts receivable, and inventory are examples of current assets. On the balance sheet, noncurrent assets are always classified under one of the following headings:
- Investments
- Property, plant, and equipment
- Intangible assets
- Other assets
Property, plant, and equipment (also known as fixed assets) include land, buildings, and machinery (including vehicles).
Types of Non-Current Assets
Non-current assets are classified into the following categories:
#1. Tangible Assets
Tangible assets are assets with a tangible shape or property that a firm owns and that are essential to its fundamental operations. A tangible asset’s reported value is its initial acquisition cost less any accrued depreciation.
Not all physical assets, however, are depreciated. Even though assets like land tend to rise in value, they are held at cost. Depreciation is a non-cash notation that shows how the value of an asset decreases over time.
#2. Intangible Assets
Intangible assets are those that do not have a physical form but provide economic value to the organisation. Goodwill and intellectual property, such as trademarks, patents, and copyrights, are examples of such assets.
Intangible assets can be acquired from another firm or created within the organisation. The assets developed by the business do not have a documented book value and so do not appear on the balance sheet.
Intangible assets can be either definite or indefinite in nature. Brand recognition is an example of an intangible asset that will last as long as the firm exists. A definite intangible asset, on the other hand, has a limited life and only remains with the corporation for the term of a contract or agreement.
A legal agreement to run another entity’s patents is an example of a definite intangible asset. The corporation is compelled to use the patent for an agreed-upon period of time, and the patent author retains ownership of the patent. Even though an intangible asset has no physical worth, it can greatly contribute to a company’s long-term success.
#3. Natural Resources
Natural resources are assets that are found in nature and are derived from the earth. Timber, fossil fuels, oil reserves, and minerals are examples of natural resources. Natural resources are sometimes known as waste assets since they are depleted when consumed. The assets must be consumed by extracting them from their natural environment.
Natural gas, for example, is an example of a natural resource that must be extracted before it can be used. It denotes that the asset must be mined or pumped from the ground before it can be utilised. Natural assets are valued on the balance sheet at their acquisition cost plus exploration and development costs, less accumulated depletion. Let’s see some examples of Non-current assets.
Examples of Non Current Assets
Here are some examples of non-current assets:
#2. Property, Plant, and Equipment (PP&E)
PP&E are long-term physical assets that are essential to a company’s fundamental operations and are employed in the manufacturing process or the sale of other assets. The assets are physical, and they cannot be simply converted to cash or liquidated.
The entire value of PP&E is equal to the total value of balance-sheet property, plant, and equipment less accumulated depreciation. Accumulated depreciation is the entire amount of depreciation charged to an asset since it was placed in service. Investments in PP&E indicate that the company has the potential for future expansion and a healthy outlook.
#2. Goodwill
When one firm buys another, it creates goodwill, which is an intangible asset. When the price paid for the company exceeds the fair value of all identifiable assets and liabilities assumed in the transaction, it generates.
The goodwill purchased is for intangible assets such as the company’s reputation, brand name, outstanding customer relations, stable customer base, and employee quality.
#3. Long-Term Investments
Long-term investments are assets such as bonds, stocks, and notes that investors purchase in the financial markets in the belief that their value will rise and they will earn a good return in the future. These assets are also documented on the company’s balance sheet.
#4. Patents
A sort of intellectual property that protects an invention is a patent. Nobody can sell, distribute, or reproduce a patented innovation. Your invention’s exclusivity and distinctiveness add value.
#5. Trademarks
Because of their economic importance, trademarks are considered non-current assets.
#6. Client and mailing lists
Client and mailing lists are valuable to a business because of the high return on investment that direct interaction, B2C marketing, and communication can provide. A company’s contact database or mailing list may contain engaged subscribers who can aid in increasing brand recognition, building trust, and generating money. As a result, client and mailing lists are classified as assets and would be included in the asset part of a client list.
Types of Non current assets metrics
Although not the only criterion, analysing a company’s non-current assets can provide analysts with a good indication of its future health. Non-current assets are measured using a variety of approaches.
#1. Capital-to-Expense Ratio
The capex ratio, which derives its name from capital expenditure, compares the cost of investing in non-current assets to firm sales. An increase in the ratio implies that the company is growing, and in this case, additional investment should result in higher sales. If continual revenue reinvestment is rewarded with greater sales, it will generate corporate value and expansion.
Another possibility is maintenance capex, in which investment in non-current assets does not fuel growth but just maintains operations at the current level.
Capital expenditures/sales = Capex ratio
#2. PP&E’s average age
This approach computes the average lifespan of a company’s property, plant, and equipment assets. It is calculated by comparing the total depreciation of all of these assets to their original cost. A high ratio indicates that assets will need to be replaced soon, a necessary expense that will have an influence on retained income. Given the high cost of these assets, this kind of asset analysis can be extremely beneficial to enterprises.
Average age ratio = depreciation accumulated / gross PP&E
#3. Reinvestment percentage
This ratio, also known as the replenishment ratio, compares capital expenditure to depreciation to determine whether non-current assets are replaced on schedule. A financially successful corporation would prefer to see a number greater than one when stated as a multiple.
As a result of inflation, assets purchased in the past will generally cost more to buy now. However, depreciation is estimated using previous data. As a result, a reinvestment ratio of nearly one would imply that the company is not replacing assets quickly enough.
Capital expenditure/depreciation = reinvestment ratio
Non current Assets: How Are They Accounted For?
Noncurrent assets are capitalised as opposed to expenses. This means that instead of allocating the total cost to the accounting year in which the asset was purchased, the corporation allocates the cost of the item over the number of years for which the asset will be in use. The asset may be depreciated, amortised, or depleted, depending on its type. They are classified as investment, property, plant, and equipment (PP&E), intangible assets, or other assets on a company’s balance sheet.
Noncurrent Assets Reporting
Noncurrent assets are bundled into many balance-sheet line items and are listed after all current assets but before liabilities and equity.
What Is the Distinction Between Current and Non Current Assets?
Current assets are considered short-term assets since they are typically convertible to cash during a company’s fiscal year and are the resources required to run day-to-day operations. They are typically reported on the balance sheet at their current or market value. Noncurrent assets are investments required for a company’s long-term purposes, the full worth of which will not be recognised within the fiscal year. They are often highly illiquid, which means they cannot be quickly turned into cash and must be capitalised for accounting purposes.
IMPORTANT TAKEAWAYS
- Noncurrent assets are long-term investments made by a corporation that are not easily converted to cash or are not expected to be converted to cash within an accounting year.
- Their costs are assigned across the number of years the asset is used and appear on a company’s balance sheet. They are also known as long-term assets.
- Noncurrent assets are classified into three types: tangible assets, intangible assets, and natural resources.
- Investments, intellectual property, real estate, and equipment are examples of noncurrent assets.
Non Current Assets FAQs
What are intangible non current assets?
Intangible assets, such as patents and copyrights, are nonphysical assets. They are classified as noncurrent assets because they add value to a business but cannot be converted to cash within a year.
What is the difference between tangible and intangible non current assets?
Tangible assets are usually physical assets or property that a corporation owns, such as equipment, buildings, and inventory. Non-physical assets with monetary value, because they represent potential revenue, are referred to as intangible assets.
What are the 5 intangible assets?
Goodwill, brand equity, intellectual properties (trade secrets, patents, trademarks, and copywrites), licencing, customer lists, and R&D are the most common types of intangible assets.
What are the three major types of intangible assets?
Patents, copyrights, and the firm’s brand image are the three key categories of intangible assets.
