What are Non-Current Assets?
An asset is something which has an economic value and held by an organization for benefit in present and future. Assets are broadly classified into two categories based on the time period within which they are expected to be converted into cash or used in the business:
- Current Assets: Assets which are likely to be converted into cash or used up within one year are classified under this category. In other words, such assets are converted back into cash within one year period. These Assets reveal information about the operating activities of a company. Examples: Cash, Inventory, Prepaid Expenses, Accounts Receivables, Marketable Securities, Other Current Assets etc.
- Non-Current Assets: Such Assets are not owned for the purpose of converting them into cash within a year. Non-Current Assets are basically long-term assets having bought with the intention of using them in the business and their benefits are likely to accrue for a number of years. These Assets reveal information about the investing activities of a company. Non-Current Asset can be either Tangible or Intangible. Examples: Fixed Assets such as Property, Plant, Equipment, Land & Building, Long-term Investment in Bonds and Stocks, Goodwill, Patents, Trademark etc.
Non-Current Assets Definition
For an Organization to run effectively and generate a positive return for its stakeholders; requires investing in long-term assets either through internal sources (Share capital and reserves) or through external borrowing in the form of loans etc. Investments made by an organization in assets which are expected to be held by them for more than a year are referred to as Non-Current Assets (also known as Long Term Assets).
Such assets are used by the company to manufacture goods or render service for the smooth functioning of its day to day operations and such assets are capitalized rather than expensed. Capitalizing the cost of assets means that the cost of such assets are not completely expensed in the Income Statement in the year in which they are acquired instead allocated over the number of useful life (years) of the asset and deducted from the cost of the asset every year. Depending on the type of asset these are depreciated or amortized year on year basis as per the depreciation methods (namely Straight Line Depreciation Method, Double Declining Balance method).
Types of Non-Current Assets
Non-Current Assets are usually classified into three parts:
#1 – Tangible Assets
Assets which physically exist i.e. which can be touched. Tangible Non-Current Assets are usually valued at Cost Less Depreciation. Tangible Assets Examples include Land, Property, Machinery, Vehicles etc. However, it is worthwhile to note that not all Tangible Non-Current Assets depreciate in value. Non-Current Assets examples are like land are often revalued over a period of time in the Balance Sheet of the Company. Also, have a look at Net Tangible Assets
#2 – Natural Resources:
These assets have an economic value derived from Earth and used up over time. Examples include Oil fields, mines etc
#3 – Intangible Assets
Assets that do not physically exist but has economic value falls under this category. For an asset to be categorized as Intangible the following criteria must be satisfied:
- It must be Identifiable.
- The organization must have the means to obtain economic benefits from such an asset.
An intangible asset can either be generated internally by the business or it can be acquired by way of separate purchase (through mergers vs Acquisitions etc.). Intangible Assets Examples include Goodwill, Patent Trademark etc. Intangible Assets are recorded in the Balance Sheet according to the cost or Revaluation Model (Discussed in detail below). However, it is pertinent to note that Goodwill is not amortized but tested for impairment at least annually and an impairment loss is recognized in those cases where carrying value exceeds the fair value of the intangible asset.
List of Non-Current Assets (Examples)
Below is the list of Non-Current Assets (Examples) –
#1 – Property Plan and Equipment
Property, Plant and Equipment (PP&E) are long-lived non-current assets used in the production or sale of other assets.
Cost of PP&E includes all expenditure (transportation, insurance, installation, broker cost, search cost, legal cost) that are necessary to acquire and ready them for use. If the plant is constructed, all the material, labor cost, overheads, interest cost during construction included in the Cost of PP&E.
#2 – Natural Resources
These include natural resources like Oil and Gas, Metals like Gold, Silver, Bronze, Copper and more.
#3 – Intangible Assets like Patents, Copyrights etc
“Other intangible assets” examples primarily include corporate intellectual property such as patents, trademarks, copyrights & business methodologies. Intangible assets on the balance sheet are recognized only when they are bought from an external entity, not if they are developed internally. Note that “other intangible assets” are amortized.
source: Alphabet SEC Filings
As we note from above, Google’s non-current assets example include intangible assets worth $3847 million and $3307 million in 2015 and 2016, respectively.
#4 – Goodwill
When one company buys another company, it is buying more than just assets on a balance sheet. It’s also buying some intangibles, like the quality of the employees and client base, its reputation, or its brand name. This implies that the firm purchasing another business pays more than the fair market value of the business assets. If the excess purchase price cannot be attributed to patents, brands, copyrights or other intangible assets, it is recorded as Goodwill.
source: Amazon SEC Filings
We note from above that Amazon’s non-current assets example include Goodwill of $3759 million and $3784 million in 2015 and 2016, respectively.
#5 – Long Term Investments
When an investor buys securities in the financial in the financial markets, they purchase with a hope that they will appreciate in value and pay a return.
source: Alphabet SEC Filings
Alphabet’s non-current asset example of long-term investments includes non-marketable investments of $5,183 million and 5,878 million in 2015 and 2016, respectively.
Purchase of Debt Securities like loans or bonds
- The company records the purchase as an investment on its balance sheet
Purchase of Stock / Shares
- If shares of another company are purchased and have a controlling interest (this usually means owning more than 50%), then the company needs to consolidate (combine) its accounts with the other company
- If the company does not owns a controlling interest, then the company must include the shares as investments on its balance sheet
#6 – Other Long-Term Assets
In many financial statements, you will find this item, whose explanation is completely missing. You may need to know what is the proportion of “Other Assets” to “Total Assets”. If it is significant, then an analyst may want to clarify the same with the management.
source: Amazon SEC Filings
Reporting of Non-Current Assets in the Balance Sheet
|Non-Current Asset Example||IFRS||US GAAP|
|Property, Plant and Equipment||Cost Model or Revaluation Model||Cost Model|
|Intangible Assets||Cost Model or Revaluation Model. Research cost is expensed, development cost is capitalized||Both Research and Development Costs are Expensed|
Cost Model Approach for Non-Current Assets
Under this model, non-current asset is reported at amortized cost. Amortized Cost is computed by subtracting Accumulated Depreciation, amortization from Historical Cost of the Asset. Historical Cost is the total cost of the asset including purchase price and any other cost incurred to get the asset ready for use such as installation.
Let’s understand the same through an non-current asset example:
- ABC purchased Plant and Machinery on 01.4.2017 for $100000 and spent Rs 5000 towards the installation of the same. Depreciation for the year is $9500. Under Cost Model, Plant and Machinery will be reported for $95500 (100000+5000-9500) on 31.03.2018.
Revaluation Model Approach for Non-Current Assets
Under this approach, an asset is reported at the Fair value less any accumulated depreciation. If initial Revaluation resulted in a loss, the initial loss is recognized in the Income Statement and any subsequent Revaluation gain would be recognized in the Income Statement to the extent of previously reported loss and surplus revaluation gain beyond the initial loss is recognized in the Shareholder’s Equity as Revaluation Surplus.
Let’s understand the same through a non-current asset example:
ABC purchased Plant and Machinery on 01.4.2016 for Rs 800000. As on 31.03.2017 machinery had a fair value of Rs 720000. As on 31.03.2018 machinery had a fair value of Rs 810000. In such a case as per the Revaluation Model, Revaluation gain will be reported as follows:
Non-Current Assets are an integral part of any business. They act as the wheels for the smooth running of the business, however, the portion of asset base comprising of Non-Current Assets varies industry wise. Usually, Capital Intensive Industries such as Oil Production, Telecommunication and Automotive etc will have a higher composition of their asset base of Non-Current Assets compared to companies in the financial sector.
Video on Non-Current Assets
This has been a guide to Non-Current Assets. Here we discussed non-current assets definition, types and list of non-current assets examples (property, plant, and equipment, natural resources, goodwill, intangible, long-term investments and other assets. We also discuss reporting of non-current assets on balance sheet using cost model and revaluation model. You may also have a look at the following articles to learn more about basic accounting –
- What is Carrying Value of Bond?
- Alpha Formula
- What is the Straight Line Depreciation Method Formula?
- Current Assets Formula
- Steps to Calculate Capitalized Interest
- Account Receivable Factoring Benefits
- Share Capital Formula
- Current Assets
- Basic Examples of Accounting Equation
- Bonds Payable on Balance Sheet
- Consolidated Financial Statement
- What is Negative Goodwill?