Non-current assets represent long-term investments that are essential for a company’s operations and growth. These assets typically include properties, plants, equipment, intangible assets such as patents, and financial assets like long-term investments. Unlike current assets, non-current assets are not intended for immediate conversion into cash but rather contribute to the company's functionality over an extended period.
Their illiquid nature means they cannot be readily sold or converted to cash without potentially incurring losses. However, this illiquidity underscores their purpose: to support business activities, production, and service delivery, ensuring operational stability. For instance, machinery and equipment facilitate production, while intellectual properties drive innovation and competitiveness.
Despite being less flexible than current assets, non-current assets play a pivotal role in creating value. Their efficient management ensures businesses can sustain growth, maintain infrastructure, and respond to long-term strategic goals effectively, solidifying their foundational importance in any organisation.
This article will help you understand all the basics of non-current assets, their types, significance, and how they differ from current assets.
What are non-current assets?
Non-current assets, also known as fixed assets, are a company’s long-term investments. They are not expected to be turned into cash within the upcoming fiscal year.
These assets are crucial for the long-term sustainability of a business, as they typically include major capital assets that provide value for more than one year.
Non-current assets are recorded on the balance sheet and can include property, plant and equipment, intangible assets, and long-term investments. Their valuation is critical for assessing a company's overall health and investment potential.
Non-current assets are typically purchased for a longer duration. They require significant capital investment and are generally brought to carry out day-to-day operations for a sustained period.
From an accounting standpoint, these assets can be either amortised, depreciated or depleted based on their nature, use, and classification.
Types of non-current assets
Non-current assets can be majorly divided into three main types:
1. Tangible assets
Tangible assets are physical and can be seen and felt. Everything you see in an office or industry starting from land, furniture, machinery, and vehicles all are a part of tangible assets. It is through these assets that economic activities like manufacturing, production, logistics, research, and development can take place.
To determine the cost of a tangible asset, you need to subtract the depreciation of the asset for the given year from its cost. This depreciation accounts for the asset’s deterioration over time, influencing its book value and the company’s financial position.
However, the value of all tangible assets cannot be determined in the same manner. For example, land as a tangible asset does not depreciate but often appreciates.
2. Intangible assets
These non-current assets as the name suggests lack physical form but are equally important for a company. For example, consider a pharmaceutical company that develops a new highly effective formula for a medicine and claims it as a patent. Now the company can make money on this patent by licensing and selling it to other companies in the market.
Other examples of tangible assets include: trademarks, copyrights, and goodwill, all of which despite having no physical form, contribute significantly to a company’s balance sheet
3. Natural resources
Also known as wasting or exhaustible assets, these are assets a company derives from the earth. For example, a mining company capitalises on these resources by extracting and selling them. Other examples include oil, natural gas, minerals, and timber.
These assets are recorded in the balance sheet at the cost at which they are bought. They are accounted for using the depletion method - which spreads out the cost of the resource over its useful life, based on how much of it is extracted.
How to calculate non-current assets?
Let’s look at a balance sheet to understand how to place and treat non-current assets in an organisation’s financial reports.
Current assets in a balance sheet are placed at the top since they can be easily encashed within the next 12 months while non-current assets being long-term are placed below.
| Assets | Amount |
| Current assets | |
| Cash and cash equivalents | 50,000 |
| Short-term investments | 30,000 |
| Accounts receivables | 40,000 |
| Inventory | 20,000 |
| Non-current assets | |
| Long-term investments | 80,000 |
| Property, Plant, and Equipment (PP&E) | 200,000 |
| Goodwill | 50,000 |
| Accumulated Depreciation | -50,000 |
| Total Assets | 420,000 |
Non-current assets examples
Non-current assets are long-term investments or resources that a business holds for more than one year. They provide future economic benefits and are not easily converted into cash within a short period. These assets play a crucial role in supporting business operations and generating revenue over the long term.
Examples of non-current assets include:
- Property, Plant, and Equipment (PPE): Tangible assets such as land, buildings, machinery, and vehicles.
- Intangible assets: Non-physical assets like patents, trademarks, copyrights, and goodwill.
- Investments: Long-term investments in other companies, stocks, or bonds.
- Deferred tax assets: Tax benefits that a company can use in the future.
- Natural resources: Assets like oil, gas reserves, or timber.
Non-current assets are critical for a company’s sustainability and expansion. Their value is typically subject to depreciation or amortisation, depending on their nature, which impacts the financial statements over time.
Significance of non-current assets
Non-current assets are important for any organisation for several reasons:
- Long-term financial health: They represent a company’s investment in assets that will generate revenue over multiple years.
- Operational capacity: These assets are essential for the day-to-day operations and overall production capacity of a company.
- Investment valuation: Investors look at non-current assets to assess the potential future earnings and growth capacity of a business.
- Credit ratings: Higher value in non-current assets might affect a company's borrowing capacity and credit rating.
Financial ratios using non-current assets
Insight into a company’s operational and financial stability can be derived by studying the financial ratios that involve non-current assets.
Let’s take a look at some non-current assets formula:
1. Non-current asset turnover ratio
This ratio is a measure of the efficiency with which the fixed assets of a company are used to generate sales i.e. it helps us understand where a company’s net sales revenue stands with respect to the net book value of its total non-current assets.
This non-current assets formula can be calculated as follows:
Non-current asset turnover ratio = Total Sales Revenue / Net Book Value of Non-current Assets
If the non-current asset turnover ratio is low it is an indication that the non-current assets of the company are not being used optimally. A higher turnover ratio on the other hand indicates better utilisation of assets.
2. Non-current assets to net worth
This ratio is useful for understanding how much equity of a company is invested or used up in its long-term assets. Simply put, it shows the amount of shareholders’ equity which is being used to finance the company’s business operation.
This Non-current assets formula can be calculated as follows:
Non-current Assets to Net Worth = Non-current Assets / Total Net Worth
A higher ratio may indicate that a considerable portion of a company's long-term investments are financed through debt. For a more detailed analysis, it is essential to examine the balance sheet closely to identify which assets predominantly influence this calculation.
Difference between current and non current assets
Here are some of the most fundamental ways in which non-current assets differ from current assets.
| Current assets | Non-current assets |
| Are meant to be converted into cash within a year | Are held onto for the longer run, hence are not converted into cash |
| Current assets take care of the day-to-day or immediate liquidity requirements | Non-current assets are bought for the long term or in anticipation of future needs |
| Their value is determined at the current market price | Their value is determined by subtracting depreciation from cost |
| All current assets except inventories do not require to be re-evaluated | These assets require regular evaluation |
| Examples are cash, inventory, accounts receivable | Examples include property, plant, equipment, patents, IP, goodwill |
Advantages of non-current assets
- Long-term value creation: Non-current assets provide stability and are instrumental in generating revenue over the long term. They are essential for sustaining business operations and achieving growth objectives.
- Support operational efficiency: Tangible non-current assets like machinery, buildings, and equipment enable businesses to produce goods and services effectively, streamlining workflows and reducing dependence on external resources.
- Enhance organisational credibility: Ownership of significant non-current assets, such as property or patents, enhances a company's market value and reputation, showcasing financial stability to investors and stakeholders.
- Tax benefits: Depreciation on tangible non-current assets and amortisation of intangible assets can be claimed as expenses, reducing taxable income and providing financial relief.
- Barrier to competition: Patents, trademarks, and other intangible assets act as competitive differentiators, safeguarding innovations and ensuring a unique market position.
- Potential for appreciation: Some non-current assets, like land and long-term investments, may appreciate over time, providing opportunities for increased future value and profitability.
- Facilitate borrowing: Non-current assets can serve as collateral for securing loans, offering companies a means to access funds for operational or expansion needs.
Disadvantages of non-current assets
- Illiquidity: Non-current assets are challenging to convert into cash quickly, making them less useful in addressing immediate financial needs or emergencies.
- High initial investment: Acquiring non-current assets often requires substantial capital, which can strain financial resources, especially for smaller businesses.
- Depreciation and obsolescence: Tangible non-current assets lose value over time due to wear and tear or technological advancements, potentially necessitating costly upgrades or replacements.
- High maintenance costs: Certain non-current assets, such as machinery or buildings, involve ongoing expenses for repairs, maintenance, and upkeep, increasing operational costs.
- Tied-up capital: Significant funds invested in non-current assets cannot be used elsewhere, limiting a company’s financial flexibility for short-term opportunities or challenges.
- Limited adaptability: Long-term investments in specific non-current assets may restrict a company’s ability to pivot or adapt quickly to market changes.
- Risk of impairment: Market conditions or internal factors may reduce the value of non-current assets, resulting in impairment losses and affecting financial statements.
- Dependency on external financing: For businesses unable to fund non-current asset acquisitions internally, reliance on loans or investors can increase debt levels or dilute ownership.
Reporting non-current assets
Non-current assets are recorded on the balance sheet under the section for long-term assets. Companies must report these assets at their historical cost, which includes the purchase price and any related costs incurred to bring them into operational use. Over time, non-current assets may depreciate or amortise, and these adjustments are also reported to reflect the asset's declining value.
In financial reporting, companies often provide detailed notes explaining the nature, valuation methods, and depreciation schedules of non-current assets. This transparency allows investors and stakeholders to assess the company’s financial health and future prospects. Non-current assets that appreciate, such as land, may also be revalued, but such adjustments are typically disclosed separately to avoid misleading the readers of the financial statements.
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How are noncurrent assets accounted for?
Non-current assets are accounted for by recording their acquisition cost, including purchase price and related expenses like transportation or installation, in the balance sheet. Over time, tangible assets like machinery and buildings are depreciated, spreading their cost across their useful life, while intangible assets are amortised. Impairment testing ensures that the asset’s book value does not exceed its recoverable amount. Revaluation may be applied to certain assets, adjusting their carrying value to reflect fair market prices. Disposal of non-current assets requires recognising any gain or loss in the financial statements based on the difference between sale proceeds and book value.
Key takeaways
- Non-current assets, also known as fixed assets, are long-term investments crucial for sustaining operations and fostering growth, not intended for conversion into cash within a fiscal year.
- They include tangible assets (e.g., property, equipment), intangible assets (e.g., patents, trademarks), natural resources (e.g., oil, minerals), and long-term investments, each supporting strategic goals.
- These assets are recorded at historical cost on the balance sheet, with adjustments for depreciation, amortisation, or depletion to reflect their value over time.
- Non-current assets enhance financial health, operational efficiency, and creditworthiness, impacting borrowing capacity and stability.
- Ratios such as non-current asset turnover and non-current assets to net worth provide critical insights into the efficiency of asset utilisation and equity allocation.
Conclusion
Non-current assets are important to gauge the overall efficiency and profitability of any given business. Learning how to calculate their value and their impact on a business can help determine the financial stability and future growth potential of an organisation.
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