What is a non-current asset?
Non-current assets are a company’s long-term investments for which the full value will not be realized within the accounting year. They are typically highly illiquid, meaning these assets cannot easily be converted into cash. They are required for the long-term needs of a business and include things like land and heavy equipment.
Examples of non-current assets include investments, intellectual property, real estate, and equipment. Non-current assets appear on a company’s balance sheet.
Non-current assets are reported on the balance sheet at the price a company paid for them, which is adjusted for depreciation and amortization and is subject to being re-evaluated whenever the market price decreases compared to the book price.
Related: What is the Current Asset?
Non-current assets may be subdivided into tangible and intangible assets—such as fixed and intangible assets.
Fixed assets include property, plant, and equipment because they are tangible, meaning that they are physical in nature; we may touch them. A company cannot liquidate its PP&E easily. For example, an auto manufacturer’s production facility would be labeled a non-current asset.
Intangible assets are nonphysical assets, such as patents and copyrights. They are considered non-current assets because they provide value to a company but cannot be readily converted to cash within a year. Long-term investments, such as bonds and notes, are also considered non-current assets because a company usually holds these assets on its balance sheet for more than a year.
Related: What is Asset?
Types of Non-Current Assets
The following are the key categories of non-current assets:
1. Tangible Assets
Tangible assets refer to assets with a physical form or property that are owned by a company and are central to its core operations. The recorded value of a tangible asset is its original acquisition cost less any accumulated depreciation.
However, not all physical assets are depreciated. Assets, such as land, are held at a cost even though they tend to appreciate in value. Depreciation is a non-cash notation that reduces the value of an asset over time.
2. Intangible Assets
Intangible are assets that lack a physical form but offer economic value to the company. Examples of such assets include goodwill and intellectual property, such as trademarks, patents, and copyrights.
A company can acquire intangible assets from another entity or create them from within the business. The assets created by the business lack a recorded book value and are, therefore, not recorded on the balance sheet.
Intangible assets can be definite or indefinite. An example of an indefinite intangible asset is brand recognition, which remains for as long as the company stays afloat. On the other hand, a definite intangible asset comes with a limited life, and it only stays with the company for the duration of a contract or agreement.
An example of a definite intangible asset is a legal agreement to operate the patents of another entity. The company is required to operate the patent for an agreed period of time, and the creator of the patent remains the owner of the patent. Even though an intangible asset lacks physical value, it can significantly contribute to the long-term success of a company.
3. Natural Resources
Natural resources are the assets that occur naturally, and they are derived from the earth. Examples of natural resources include timber, fossil fuels, oil fields, and minerals. Natural resources are also called wasting assets because they are used up when they are consumed. The assets must be consumed through extraction from the natural setting.
For example, natural gas is an example of a natural resource that must be extracted in order to be used. It means that the asset must be mined or pumped out of the ground for it to be used. Natural assets are recorded on the balance sheet at the cost of acquisition plus exploration and development costs and less accumulated depletion.
Examples of Non-Current Assets
The following are some examples of non-current assets:
1. Property, Plant and Equipment (PP&E)
PP&E are long-term physical assets that are an important part of a company’s core operations, and they are used in the production process or sale of other assets. The assets come in a physical form, and they are not easily converted to cash or liquidated.
The total value of PP&E is equal to the total value of property, plant, and equipment recorded on the balance sheet less accumulated depreciation. Accumulated depreciation is the total depreciation expense charged to an asset since it was put into use. Investments in PP&E show there is potential future growth and a positive outlook for the company.
Goodwill is an intangible asset that is created when one company purchases another entity. It is generated when the price paid for the company exceeds the fair value of all identifiable assets and liabilities assumed in the transaction.
The goodwill purchased is for intangible assets such as the reputation of the company, brand name, good customer relations, solid customer base, and the quality of the employees.
3. Long-term Investments
Long-term investments include assets such as bonds, stocks, and notes that investors buy in the financial markets with the hope that they will appreciate in value and earn a good return in the future. These assets are also recorded in the company’s balance sheet.
How Are Non-current Assets Accounted For?
Non-current assets are capitalized rather than expensed. This means that the company allocates the cost of the asset over the number of years for which the asset will be in use instead of allocating the entire cost to the accounting year in which the asset was purchased. Depending on the type of asset, it may be depreciated, amortized, or depleted. They appear on a company’s balance sheet under the following categories: investment; property, plant, and equipment (PP&E); intangible assets; or other assets.
What Is the Difference Between Current and Non-current Assets?
- Equal to cash or will be converted into cash within a year
- Used to fund immediate or current needs
- Items like cash and cash equivalents, short term investments, accounts receivables, inventories
- Valued at market prices
- Tax implications: Selling current assets results in the profit from trading activities
- Current assets generally not subject to revaluation—though in certain cases, inventories subject to revaluation
Related: What is a Current Asset?
- Will not be converted into cash within one year
- Used to fund long-term or future needs
- Items like long term investments, PP&E, goodwill, depreciation and amortization, long-term deferred taxes assets
- Valued at cost less depreciation
- Tax implications: Selling assets results in capital gains and capital gains tax is applied
- Common revaluation of PP&E—for instance, when the market value of a tangible asset decreases compared to the book value, a firm needs to revalue that asset